There is a lot to be done in the new trade agreement that the United States, Mexico and Canada have concluded on Sunday with deadlines, starting with a name change: if the new deal is adopted by all three countries, the North American Free Trade Agreement will give way to the agreement between the United States and Mexico-Canada or USMCA
It is a cosmetic change for an otherwise consistent set of revisions.
"It's not Nafta, it's a brand new deal," President Trump said Monday at the White House.
The text of the pact, which was released at the end of Sunday, contains important adjustments in several important areas of the trade relations of the countries. The agreement sets new rules for the production of cars, intended to stimulate the production of cars and trucks in countries that pay higher wages. It reduces barriers for American dairy farmers to sell cheese, milk and other products to Canada. It retains a tribunal for resolving trade disputes that the United States wished to lift.
It guarantees Canadian and Mexican manufacturers extensive access to a number of major American markets, such as automobiles and light trucks, but still leaves questions about their ability to avoid tariffs for steel and aluminum exports to the United States.
These are highlights from the text of the agreement and from the 12 "side letters" that the neighboring countries have submitted.
An attempt to send more car production to the United States
Nafta required car manufacturers to produce 62.5 percent of a vehicle's content in North America to qualify for zero rates. The new agreement increases this threshold to 75 percent over time. This is intended to force car manufacturers to purchase fewer parts for an "Assembled in America" (or Canada) car from Germany, Japan, South Korea or China.
For the first time, the new agreement also stipulates that an escalating percentage of parts for every tariff-free vehicle – with a top percentage of 40 per cent in 2023 – must come from a so-called "high wage factory". The agreement says that those factories have to pay a minimum of $ 16 per hour in average salaries for production workers. That's about three times the average wage in a Mexican factory at the moment, and government officials are hoping that the facility forces car manufacturers to move suppliers from Mexico to Canada or the United States.
There are risks for that change. Automotive analysts have warned that the provision may be harmful effect for Americans, by increasing the costs for American car buyers and encouraging car manufacturers to move production to low-wage countries outside the United States, like China.
Conversely, the final determination, as written, can prove to be relatively ineffective in the shift of production – because it is not indexed to inflation. An average wage of $ 16 per hour will be less restrictive in 2023 dollars than it is now.
Exemption of future car tariffs for Canada and Mexico
Mr. Trump has repeatedly threatened to set tariffs on imported cars during the past year. In a press conference last week, he suggested that Canada would receive such rates if it did not reach an agreement with the United States on a new trade agreement. The government of Mr Trump has launched an investigation that could lead to car fares, but it does not seem likely that this will soon come to an end. The threat of car tariffs has blurred the trade negotiations with several countries, including Japan and South Korea, which import car and car parts into America.
Canada and Mexico, however, do not have to sweat. The new agreement includes side letters granting exemptions from future US rates to 2.6 million imported passenger cars from each of these countries. That is slightly more vehicles than Mexico has exported to the United States last year and has exported almost 1 million more than Canada.
Wins for American cheese (and wine)
Perhaps the biggest bottleneck in recent months' talks was Canada's protection of its dairy market, including limits on imported dairy products from the United States and government support that gives Canadian products an advantage over international markets against American.
"Dairy was a deal breaker," Mr. Trump on Monday.
The new agreement provides the victories of the United States on both fronts. It gradually opens the Canadian market for more exported US dairy products, including "liquid milk, cream, butter, skimmed milk powder, cheese and other dairy products." Canada agreed to eliminate a program that helps Canadian sellers of certain dairy products at home and abroad.
A victory for Canada in dispute resolution
Trade agreements usually come with enforcement mechanisms. As part of the renegotiation efforts, the United States tried to eliminate one of those mechanisms in Nafta: the the so-called Chapter 19 provision, which gives the three countries a kind of neutral game site – a panel with representatives from each country – to challenge each other's tariffs and other actions.
Canada won the battle to keep that provision in the revised agreement. It did, however, agree to eliminate another form of enforcement between the United States and Canada, which would allow investors to file lawsuits for foreign aid. Consumer groups have long criticized this settlement mechanism because large corporations allow too much power to challenge environmental and other regulations. The new deal leaves that mechanism for disputes between the United States and Mexico, but not for Canada.
Goodies for trade unions, banks and pharmaceutical companies
Among the small but important items in the new agreement is a measure to encourage Mexico to make it easier for employees to form and join trade unions, steps to give US financial services companies better access to Canadian and Mexican markets, and provision to protect the intellectual property of US pharmaceutical companies that sell prescription drugs in Canada.
The latter provision will provide longer protection for US biologics, against biosimilar competitors, and it will likely increase the profits of those drug makers when they sell in Canada.