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Goodbye NAFTA, Hello USMCA

The United States-Mexico-Canada Agreement (USMCA) could give the U.S. economy and jobs numbers a modest boost, but its most significant effects will come in other ways.

​The newest trade deal among North American countries could give the U.S. economy and jobs numbers a modest boost. But its most significant effects will come in other ways—by preventing the disruption of key trade relationships among Mexico, Canada and the U.S. and by modernizing rules that predate the digital revolution.

The United States-Mexico-Canada Agreement (USMCA), which went into effect on July 1, replaced another mouthful of an acronym, the North American Free Trade Agreement (NAFTA).

Increased trade under the new deal is expected to create a $68.5 billion bump to the U.S. economy—which amounts to 0.35 percent of the nation’s gross domestic product—according to the U.S. International Trade Commission (ITC). And it could increase the number of U.S. jobs by 176,000, or 0.12 percent. (The disruption brought on by the coronavirus pandemic makes it difficult to know what sort of economic impact the USMCA will actually have in the short run, however.)

‘In the absence of an agreement, we’d have rising tariffs and that would have put sand in the wheels of the economy.’ - Raymond Robertson

While hardly turbocharging the economy, the USMCA is a welcome relief to business leaders who were holding their breath to see if the North American free-trade framework would be disrupted, especially in light of President Donald Trump consistently complaining about NAFTA and threatening to abolish it.

“That sword was hanging over our heads,” says Scott McCandless, principal in the national tax practice at professional services firm PwC. McCandless notes that the free-trade arrangement under NAFTA had caused the economies of the three countries to become intertwined. “If that had been turned off, it would have been disruptive,” he says.

Adds Ken Monahan, senior director of international economic affairs at the trade group National Association of Manufacturers: “Manufacturers in America need trade certainty to invest in our communities.”

Share of Trade with Major US Trading Partners

The populations of Mexico (129 million) and Canada (38 million) may be far less than the United States’ 330 million, but the nations are heavy trading partners with the U.S., which means many domestic companies rely on duty-free trade under the USMCA (and formerly under NAFTA) to sell their goods and buy supplies.

Nearly one-fourth of the value of what U.S. manufacturers make is exported to Mexico or Canada. That’s more than the next 11 trade partners combined, Monahan says. Two million manufacturing jobs alone depend on North American trade, he adds.

NAFTA had largely eliminated tariffs on trade between the three North American countries, and the USMCA not only preserves free trade but also updates the rules to accommodate changes in the world since NAFTA went into effect in 1994. In the past, manufacturers built cars and other items in one country, but now the supply chains in North American are braided together. A car, for instance, might contain some parts built in one country and others made elsewhere and be put together yet somewhere else. The idea of untangling that complicated braid had spooked businesses.

“They create parts and we create parts that go into the same goods,” says Raymond Robertson, director of the Mosbacher Institute for Trade, Economics and Public Policy and a professor at the Bush School of Government and Public Service at Southern Methodist University. “We’re all in the same boat.”

The stability of having a new deal benefits everyone from workers to investors, McCandless says.

USMCA vs. NAFTA: Key Updates and Digital Transformations

The interconnectedness of the world and reliance on digital data has remade businesses since NAFTA was enacted. Without a new agreement, it would have been unclear how products that are delivered electronically, such as digital gaming, fit into traditional definitions of trade.

“There was no such thing as e-commerce when NAFTA was negotiated,” says John Murphy, senior vice president of international policy at the U.S. Chamber of Commerce. “All kinds of companies rely on the ability to move data across borders,” he says, citing banking, service providers and manufacturers.

Minimum Wage

An insurance company preparing a time-sensitive policy might assign people in different countries to work on it to take advantage of different time zones, for instance. A large manufacturer with facilities in all three North American nations might use a single HR information system administered in just one place for efficiency. And a used ski equipment company could leverage the Internet to reach customers in foreign markets, Murphy says.

The USMCA facilitates those types of situations by ensuring that cloud-connected data and other information flows smoothly. For instance, signatory countries can’t require a corporation to place data servers in each country where it operates. Monahan says the new rules are especially important to small and midsize businesses that can’t afford to have redundant services and contractors in each nation.

According to a report by the ITC, the free flow of digital data is important because “it facilitates the automation and monitoring of industrial production and agriculture, the operation of supply chains, and access to global marketplaces, among other uses.”

Murphy hopes the USMCA digital trade rules will be a model that will be used for future global trade deals as well.

‘This agreement contains strong, enforceable labor standards, which NAFTA did not.’ - Eric Gottwald

A narrower, but important, difference from NAFTA will impact the automotive industry. Under NAFTA, 62.5 percent of a car had to be manufactured in North America. The new rule requires 75 percent of a car’s components to be made in the three countries to enjoy free-trade benefits.

Another automotive provision requires that a certain portion of the materials in a vehicle (rising eventually to 40 percent for cars) must be made by workers earning at least $16 an hour. The new rule could raise wages in Mexico as well as in the U.S.

The $16 requirement will bring jobs to the U.S. in the short term by discouraging U.S. companies from operating in Mexico, but it could cost the U.S. jobs in the long run if car prices go up enough to make North American cars less competitive internationally, Robertson warns.

USMCA's Impact on Labor: Unions, Wages, and Worker Rights

One of the most striking provisions of the deal is the requirement that Mexico open its country to labor unions. Currently, according to Eric Gottwald, trade policy specialist at the AFL-CIO, Mexico has a system of “fake unions” (also known as “corrupt protection unions,” he says) that signed deals with companies opening plants in Mexico. The workers themselves had no say in the labor contracts, could not vote on them and often didn’t even know what was in the agreements.

Meanwhile, Mexican labor organizers have faced grave danger from entrenched corporate interests. “People trying to organize unions in Mexico get killed,” Robertson says. The new rights to organize can help improve livelihoods and spur the growth of the Mexican middle class, as unions did in the U.S. in the past century, he says.

The USMCA gives Mexican workers the right to collective bargaining, including the ability to vote on their contracts.

Mexico passed landmark labor reform last year and the U.S. government has pushed hard for the changes, Murphy says. That’s because higher wages for Mexican workers give U.S. companies less incentive to move plants or outsource jobs to Mexico.

New labor courts will settle disputes. “For workers, it means if there’s an issue in the factory and they want to raise it, it will be dealt with in a timely manner by a judge knowledgeable in labor matters,” Gottwald says. “The new system of labor courts is meant to improve access to justice. This is a huge opportunity for Mexican labor. They are going to be able to negotiate for higher wages and better working conditions.”

Gottwald gives the example of a GM worker in the U.S. making $27 an hour and doing the same job as a Mexican worker earning just $3 an hour. That gap will close, or at least narrow, when the difference in cost of living between the two countries is considered, he predicts.

More Exports, More Jobs

In addition, he continues, Mexican workers who earn more pay will be able to buy more goods, thereby boosting regional economies.

Mexico already has passed some key legislation to pave the way for worker protections but still has more work to do, Gottwald says. “It’s a big lift for them to take on these protection unions. The unions are benefiting from a sweet deal. They’re not going to want to go out without a fight.”

So far, progress has been slow, he says. Despite federal legislation in Mexico, some states haven’t updated their laws yet and the incumbent unions haven’t lost a ratification election, preserving their power. The Mexican and U.S. governments will need to use all the enforcement tools available to change the old ways of business, he notes.

One such enforcement mechanism is a rapid response panel of international experts that will have the power to investigate alleged problems and trigger enforcement of existing obligations. If companies in Mexico are found to be violating the new trade deal, such as by blocking collective bargaining, the U.S. can levy penalties on the goods they are selling or stop them from entering the country entirely.

“This agreement contains strong, enforceable labor standards, which NAFTA did not,” Gottwald says.

Evaluating the USMCA: Who Benefits and Who Faces Challenges

Business leaders expect the USMCA to produce mostly winners and few losers.

Manufacturers across the board will benefit from rules that allow their goods to easily cross national borders, Monahan says.

The U.S. agriculture industry will benefit from new openings in Canadian markets to sell dairy, poultry and other products. (Canada has historically placed considerable restrictions on dairy imports, McCandless notes.) According to Murphy, nearly one-third of all U.S. agricultural exports go to Canada and Mexico. The ITC estimates that U.S. agricultural and food exports will rise by 1.1 percent under the new trade agreement.

NAFTA did not address energy, but the USMCA will open Mexico’s energy markets, creating new opportunities to sell gas, oil and other products there.

The biggest loser under the USMCA, on the other hand, is expected to be the pharmaceuticals industry. These companies are intensely dependent on innovation and had sought better protections for the intellectual capital of their discoveries, but some of the provisions on intellectual property were taken out at the last minute during negotiations, Murphy says. The drug companies had wanted, for instance, a 10-year protection for new biologics before they had to compete with generics, but the provision was left out of the agreement. So now the drug industry will have to lobby each country individually to provide such protections. 

The Bipartisan Path of USMCA

With Washington crushed by gridlock, how did a trade deal manage to win overwhelming support from both parties? (The House approved the deal late last year by a 385-41 vote, with almost exactly as many votes from Republicans as from Democrats.) Notably, the agreement also had the support of both business and organized labor. (It was the first trade deal backed by the AFL-CIO since 2001, Gottwald notes.)

“The bipartisan nature of the agreement was remarkable,” Robertson says. “In the absence of an agreement, we’d have rising tariffs and that would have put sand in the wheels of the economy.”

President Trump made getting rid of NAFTA a centerpiece of his 2016 campaign, saying it was a bad deal for American workers. Some Republicans backed a new deal as a way to hand the president a victory; others supported it because their conservative ideology calls for free trade and limited government intervention. Democrats rejected the first version of the deal and pressed for stronger support for workers and the environment.

“You had this moment, this opportunity, to get changes that could get broad-based support,” Monahan says.

While the USMCA has been in effect since July, some details to create uniform rules between the U.S., Mexico and Canada are still being worked out.

With so many new rules, business leaders should think about how trade issues are handled within their corporate structure. “It’s easy to turn to your tax director and say, ‘What’s new with taxes?’ ” McCandless says. “There’s almost never a chief trade officer or trade director. You have to have the people internally who are on top of that.”

And that, he says, is a challenge—but it’s also an opportunity.

Tamara Lytle is a freelance writer in the Washington, D.C., area.

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