What Changed from NAFTA to USMCA?
Originally posted on North American Production Sharing (NAPS) Blog
The landmark United States-Mexico-Canada Agreement (USMCA) has come into effect as of July 1st, 2020. Having been ratified by all three nations, the USMCA replaced the former North American Free Trade Agreement (NAFTA), which had gone into effect in 1994.
And, like the old agreement, it ensures the prosperity and cooperation of all three countries.
Many have called the USMCA a new NAFTA, or NAFTA 2.0—and for good reason. The USMCA modernizes much of the work NAFTA set out to do. However, there are also important differences between the old and new deal. This guide walks through the changes between them and the pros and cons of the new agreement, breaking down what to expect moving forward.
USMCA vs NAFTA: Biggest Differences At a Glance
As noted above, the USMCA, is in many ways, a continuation of the original NAFTA. It seeks to promote and protect free trade between the three countries that make up North America. Many of its provisions are simply updates to rules over a quarter-century old.
That said, it does contain some major differences, like:
- Building labor protections in Mexico – Labor was and remains cheaper in Mexico than it is in the US. However, the USMCA levels the playing field with additional protections for workers in Mexico:
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- Violation of labor laws is punishable by the cancellation of shipments
- Products of forced labor are barred from importation
- Workers can organize and bargain collectively
- Reducing protections for drug companies – Under NAFTA, drug companies enjoyed protections for lucrative sub-divisions of the pharmaceutical industry. These protections have been removed, but this loss is balanced with gains elsewhere:
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- A 10-year protection against generic biologics has been removed
- Copyrights are now 70 years, up from 50 under NAFTA
- Increasing protections for technology firms – Technology and data companies now enjoy increased protections related to intellectual property and privacy concerns:
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- Governments can no longer request source code from tech companies
- Duties on electronic transmissions are prohibited
- Incentivizing North American Manufacturing – USMCA increases NAFTA’s efforts to keep production in North America rather than competing nations in Europe and Asia. Due to this, the U.S. backs the push for U.S. business owners to invest in industrial buildings in Mexico for their companies. This aspect of the trade agreement works to open up more market access for all three countries involved in the new trade deal. For example, to qualify for zero tariffs, automakers must:
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- Produce 75% of a vehicle’s content in North America, up from the 62.5% that had been required under NAFTA
- Utilize high-wage factories (min. $16 dollar per hour average salary) for at least 40-45% of the parts for a vehicle
- Ensure that 70% of the steel and aluminum used in a new vehicle must be melted and poured within North America.
- Dismantling a controversial arbitration system – One of the biggest but most obscure changes comes to the Investor-State Dispute System (ISDS), which enabled companies to sue governments over their right to conduct business in a given country:
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- No such mechanism now exists between the U.S. and Canada
- Specifications for Mexico-U.S. cases have been drastically restricted
Some of these regulations offer sharp contrast from existing NAFTA analogs. Others introduce concepts alien to NAFTA. But the spirit of the new agreement is the same as that of the old.
What do these changes look like in practice?
USMCA Pros and Cons
The changes outlined above are composites outlining the most significant of the many smaller-scale updates and revisions that USMCA offers. As with any change, compromise is involved, and benefits in one area are counterbalanced by costs in others.
So, let’s review some of the major pros and cons of the new agreement:
- USMCA pros – The pros of USMCA involve various boosts to productivity and trade within North America, as well as protections for vulnerable individuals and industries:
- Decreased or eliminated tariffs reduce costs of production and trade, which ultimately lowers retail prices for consumers and increases profits for companies.
- Increased protections for workers in Mexico mean increased opportunities for workers based in the US as wage gaps decrease. Strict labor laws set in place with the new deal ensure labor rights and fair pay for work, in particular in Mexico.
- Restructured protections for healthcare and data markets keep firms competitive while maintaining incentives for growth.
- USMCA cons – The cons of USMCA involve reduced protections for certain industries, as well as general costs involved with stronger labor protections:
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- Drug manufacturers can no longer enjoy monopolistic control over biologics
- Higher-wage factory regulations may entail modest increases to production costs
Overall, the pros of the USMCA come from restructured protections and incentives that will make production in North America more profitable and efficient. Simultaneously, these protections also maintain ethical boundaries and prevent the exploitation of our laborers.
These same protections may entail costs and other frictions, which can amount to cons. But these are a small price to pay for a sustainable manufacturing and trade future in North America.
On balance, the pros of the new agreement outweigh the cons.
With that in mind, the last question is:
Who Benefits from USMCA?
Everyone. We all benefit from rules that match the current free trade agreement.
While NAFTA offered many advantages earlier on in its lifespan, it needed updates to keep up with the times. Benefits are abundant in the new USMCA, for various stakeholders within North America and beyond.
To recap, some of the biggest beneficiaries include:
- Workers
- The environment
- North American manufacturing
- All data and healthcare stakeholders
In short: everyone. While some of the provisions in the USMCA may technically raise production costs in certain industries, the benefits of labor, environmental, and privacy protections far outweigh these costs. This goes for both the short- and long-terms of all three countries. With the implementation of the new agreement, this will change the course of global trade significantly and for the better.
Our modern era calls for modern trade agreements, and USMCA updates the original NAFTA to meet the moment. If you are thinking about manufacturing in Mexico, or you already do and want to learn more about how these changes might impact your business, contact us today!
Sources:
- The New York Times. Trump Just Signed the U.S.M.C.A. Here’s What’s in the New NAFTA. https://www.nytimes.com/2020/01/29/business/economy/usmca-deal.html
- United States Trade Representative. United States–Mexico–Canada Trade Fact Sheet: Modernizing NAFTA into a 21st Century Trade Agreement. https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/modernizing
