NAFTA Versus the USMCA: What’s Different?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 22, 2020 12:41:56 PM

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NAFTAThe North American Free Trade Agreement (NAFTA) is just about to be formally replaced by the United States–Mexico–Canada Agreement (USMCA). This news has generated both headlines and optimism in recent weeks, as a sign that progress can be made on trade issues. With the approval of the agreement by both the House and the Senate here in the U.S., and the pending signature by President Trump, it looks like the USMCA will become the law of the land very soon. But what does this mean?

Political impact

This is a bipartisan agreement, passed with substantial support from both Democrats and Republicans (by a margin of 385–41 in the House and 89–10 in the Senate). This agreement is almost unique in modern political history, and it is a much stronger supporting vote than was the case for the original NAFTA. The support from Republicans is not a surprise, but the support from Democrats is.

The reason for that wider support can be found in one of the major changes from NAFTA to the USMCA: the implementation of significant labor protections. These were not included in the original version of the USMCA, but they were added in the yearlong negotiation process between Congress and the White House over the original form of the agreement. Notably, the new agreement includes a requirement that all three countries adopt labor laws set by the International Labour Organization. Also, it requires that auto manufacturers have at least 45 percent of parts made in factories that pay workers at least $16 per hour.

Other meaningful changes

Environmental protections in NAFTA were minimal, but they are included in the USMCA. Intellectual property is better protected, especially for biopharma and software. U.S. agriculture gets better access to Canadian markets. Autos with at least 75 percent of their content made in North America (up from 62.5 percent in NAFTA ) now qualify for zero tariffs.

In many respects, the USMCA is a real improvement on NAFTA, which, after all, was 25 years ago. The changes to the deal are better for business, are better for labor, and deserved the much wider support that it got in Congress.

What about the economy?

That being said, the effects on the economy as a whole, and on the average person, will be quite small. The real advantage here is what did not happen—a breakdown of the integrated North American economy. Many industries, notably automobiles, depend on factories located around the continent and on access to those markets. The USMCA takes away that risk, which substantially reduces uncertainty in the face of the other trade conflicts underway.

The agreement is not yet completely out of the woods. While the Mexican legislature has approved the deal, Canada has not. But this approval is likely to come soon, as the Canada-U.S. Free Trade Agreement remains in force. Although the drama is not yet completely over, the really tough part (i.e., U.S. approval) is—substantially reducing the economic uncertainty around the major U.S. trade partners.

The real takeaway

The Trump administration has been much more confrontational around trade than any other issue. But at least in this case, the actual results were for an improved agreement with substantial bipartisan support. NAFTA was a major win for its time, but the USMCA is a move forward for pretty much everyone. Calling it NAFTA 2.0 is not an insult. Rather, it is a recognition that the USMCA really is an updated and improved version of the original.

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