Understanding the USMCA: More than a NAFTA Name Change? | Red Arrow Logistics Transportation and Freight Forwarding

Understanding the USMCA: More than a NAFTA Name Change?

In the weeks since the U.S., Canada, and Mexico signed the USMCA trade deal, analysts around the world have begun to unpack how this new arrangement differs from NAFTA, and what it may portend for future negotiations with the U.S.. To be sure, the Trump Administration’s hard-line bargaining tactics secured some “wins” for American manufacturers, but lingering tariffs and heightened tensions between the U.S. and its neighbors mean that it’s too soon to say whether history will judge the USMCA as a triumph, a failure, or a glorified name-change.


Clearcut Winners

American negotiators didn’t get everything on their USMCA wishlists, but there were some significant victories on some of the deal’s most hard-fought issues. Canada reluctantly agreed to open its dairy market to certain types of U.S. milk exports, notably powdered milk concentrate and infant formula. American pharmaceutical companies are pleased with a provision that increases the protection of brand name drugs from generic competition in Canada, by extending “market protection” from eight years to ten years. Soybean farmers are relieved at being able to export to Canada and Mexico once more, especially as Chinese tariffs continue to deprive them of one of their largest markets. Organized labor is applauding rules that make it easier for Mexican workers to form unions, and a stipulation that 30 percent of all auto manufacturing work must be done by employees making at least $16 an hour.


Automotive Uncertainty

The automotive manufacturing “rules of origin” is perhaps the most highly-touted of the U.S.’s trade victories, but it is also the one that is most complicated by tariffs. USMCA negotiations nearly fell apart over American insistence that 75 percent of all vehicle parts (by value) originate in North American countries or else be subject to a 25 percent tariff. The deal exempts Canada and Mexico from billions of dollars of automotive parts and vehicle imports, but the tariffs against steel and aluminum remain in place. These are already punishing manufacturers, with Ford recently warning that the tariffs could cost it $1 billion in profits.

The legal framework that allows for these tariffs, known as Section 232, is of particular concern to manufacturers. The Commerce Department allowed the White House to impose tariffs after a Section 232 investigation concluded that steel imports posed a threat to national security. The Commerce Department has still not decided whether vehicles and parts meet that standard, and if so, foreign-owned manufacturers with U.S. plants could be hit with debilitating tariffs. Republican Senator Bob Corker of Tennessee addressed these worries, saying: “There continues to be serious bipartisan concern over the abuse of Section 232 tariffs, which is causing damage across the country and threatens the auto sector that is so important to Tennessee. If an acceptable Nafta deal is achieved and those tariffs stay in place, it is still very problematic.”


Trade Partners Take Note

A few key changes and updates aside, the USMCA is largely a continuation of NAFTA’s original design. Despite that, other nations are looking closely at the deal for clues as to America’s tactics and goals. In particular, Clause 32.10 allows any USMCA member nation to withdraw from the agreement if one of the others signs a new trade deal with a “non-market economy.” The economy in question is widely interpreted to mean China, and other Asian countries are concerned that the U.S. will attempt to include this clause in future trade deals. The USMCA also specifically includes provisions over currency manipulation, which is a first for a U.S.-signed trade deal. That is concerning to Japan, who the U.S. has accused of currency manipulation, and Treasury Secretary Steve Mnuchin has already hinted that he may push for similar language in future trade deals with Japan.

Finally, though there is palpable relief that a deal has been signed at last, it may have come at a cost to relations between the three member states. Furthermore, there remains some uncertainty over whether the deal will be ratified by all three countries. President Trump seemingly threatened to torpedo the deal and “close the southern border” if Mexico did not make greater efforts to prevent illegal immigration into the United States.

Meanwhile, Canada has attempted to paint the deal as a victory, since they were able to keep the Chapter 19 arbitration system and dodge President Trump’s threatened auto tariffs. But polling seems to suggest that Canadians, even members of the Prime Minister’s own party, feel that they gave up more than they got from negotiations. At a rally, Conservative Leader Andrew Scheer expressed this dissatisfaction, saying: “Justin Trudeau and the Liberals are measuring their success by what they managed to keep and hold on to, while the Americans are measuring their success in their victories and what they got from us.” It remains to be seen whether the tactics that won the U.S. gains in USMCA negotiations will serve our economic and diplomatic interests in the long-term.