Don't call it NAFTA: 5 big changes in the US-Mexico-Canada Agreement

In this June 8, 2018, photo, Canada's Prime Minister Justin Trudeau meets with U.S. President Donald Trump at the G7 leaders summit in La Malbaie, Quebec. (Justin Tang/The Canadian Press via AP)

President Donald Trump claimed Monday a trade agreement reached with officials from Mexico and Canada is “the most important trade deal we have ever made by far,” but experts say it may represent more of a political accomplishment than an economic one.

The deal, which would replace the North American Free Trade Agreement signed in 1993, still needs to be formally signed by the leaders of the three countries and approved by their legislatures. The United States Congress is not expected to vote on it until 2019.

In a joint statement late Sunday, U.S. Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland predicted the agreement will result in fairer trade, freer markets, and stronger economic growth.

“It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home,” they said.

At the White House Monday, Trump said the deal was based on “the principle of fairness and reciprocity,” and he framed it as a fulfillment of his campaign promise to renegotiate NAFTA to make it a better deal for American farmers and manufacturers.

Trade experts say it is far from the most important trade deal in U.S. history, but it is a notable political victory for Trump to tout as he travels the country campaigning for Republican candidates ahead of the midterm elections.

“They got it done,” said Gustavo Flores-Macias, an associate professor of government at Cornell University and former official for Mexico’s Consumer Protection Agency. “The Mexicans came on board first and now the Canadians. We gave a little and we got a little. We were the demander and he got a reasonable amount.”

The scope of the deal is ultimately smaller than the Trans-Pacific Partnership, a multilateral agreement between nearly a dozen nations on both sides of the Pacific Ocean that President Trump withdrew from soon after taking office.

“The TPP had 11 partner countries, not just twocertainly its less significant than TPP, which the president walked away from,” said Philip Levy, a senior fellow at the Chicago Council on Global Affairs and a White House economist under President George W. Bush.

Although Trump asserted Monday his tariffs helped broker the deal, dismissing “the babies out there” who criticized him, experts were hesitant to ascribe too much credit to his tactics.

“We have always been pretty successful in trade agreements when we negotiate in good faith and not with the threat of terminating an agreement or imposing tariffs on trading partners like we did with steel and aluminum and as we're threatening to do with auto imports,” said Clark Packard, trade policy counsel at the R Street Institute.

Levy observed that the crisis this agreement averted was one largely of President Trump’s making after he was the one who threatened the existence of NAFTA.

“He sets things on fire, manages to put them out with some damage but not too much, and then congratulates himself for being a hero,” he said.

Here are five big things that will change if the deal is enacted (and two that won’t):

The Name

Don’t call it NAFTA 2.0. The Trump administration insisted this new deal carry a different name to distinguish it from what the president claims is one of the worst agreements ever made.

So meet the United States-Mexico-Canada Agreement (USMCA).

“That will be the name that 99 percent of the time we will be hearing,” Trump said. “It has a great ring to it.”

Fairly or not, NAFTA has been maligned over the years as destroying the U.S. manufacturing industry and shipping off American jobs to Mexico. Rebranding could help distance this deal from that, even if the substantive changes are not revolutionary.

“The original NAFTA is still intact If NAFTA was a terrible agreement, this is going to be a terrible agreement too,” said Claude Barfield, a resident scholar at the American Enterprise Institute, adding that he does not agree with Trump that NAFTA was terrible.

According to Flores-Macias, the architecture of NAFTA has served as a model for many trade agreements over the last 25 years, including this latest one.

“This new trade agreement is very much built on the original NAFTA,” he said.

Negotiating partners seemed less concerned with nomenclature.

“If the boy has two legs, is going to walk and is in good health, it doesn't matter if he’s called Juan, Pepe or Pedro,” said Mexican Secretary of the Economy Ildefonso Guajardo in an interview with Televisa Monday.

Intellectual Property

Even vehement critics of President Trump’s trade policies generally agreed that a 25-year-old agreement needed to be modernized to account for industries and technologies that did not exist in the early 1990s. The USMCA attempts to address this with stricter controls on intellectual property and changes to e-commerce trade policies.

“We’re living now in a digitized world In a world where data needs to flow back and forth, that’s an important addition,” Barfield said.

A 63-page chunk of the proposed text of the deal outlines protections for patents and trademarks, including biotechnology and domain names. Biologic drugs would receive protection for two years longer than under previous policies.

Trump said Monday those provisions “will make North America a haven for medical innovation and development.”

The threshold for imposing duties and taxes on imported goods was increased, allowing Canadians to order $150 worth of goods in Canadian dollars online without paying customs duties and $40 worth of goods without paying taxes.

Dairy Markets

A frequent complaint from President Trump as tensions with Canada escalated in recent months has been the enormous markup faced by U.S. dairy farmers trying to sell their products in Canada.

“This new deal is an especially great victory for our farmers,” Trump said Monday. “Our farmers have gone through a lot over the years. They have been taken advantage of and prices have gone way down The agreement will give our farmers and ranchers far greater access to sell America-grown produce in Mexico and Canada.”

Under the USMCA, Canada agrees to open 3.6 of its dairy market to U.S. products. It also eliminates a pricing scheme for certain milk products like powders and concentrates.

“It was enough for Lighthizer and Trump to say he had a victory,” Barfield said.

While still a small fraction of a small industry, the concession represents an improvement upon the Trans-Pacific Partnership, which would have opened 3.25 percent of the Canadian dairy market to imports from the signatory countries.

“The Canadian dairy market issue is important, but not as important as it was made out to be by the United States and President Trump. Canada took steps to liberalize dairy market access in the TPP, which the Trump administration unwisely abandoned,” Packard said.

Still, Canadian farmers are already raising concerns about the implications.

“Today, the message sent to our passionate, proud and quality-conscious farmers and all the people who work in the dairy sector is clear: they are nothing more than a bargaining chip to satisfy President Trump,” said Pierre Lampron, president of Dairy Farmers of Canada, in a statement.

Rules of Origin

The auto sector could see the biggest changes resulting from the agreement. Under the deal, 75 percent of a vehicle must be made in North America to qualify for duty-free status, up from the current 62.5 percent. In addition, more work will need to be done by workers earning at least $16 an hour, several times more than many Mexican autoworkers currently make.

“This will incentivize billions of dollars of new purchases of U.S.-made automobiles. This will be a new dawn for the American worker,” Trump said.

The new rules are designed to encourage manufacturers to build cars in the U.S. and Canada, but experts are unsure if that will be the result. Requiring Mexican factories to pay higher wages and maintain better labor standards could drive up production costs to the point where making vehicles overseas becomes more cost-effective.

“It’s very possible that it might bring additional business to North America, but it also possible some companies might find this new provision too expensive coupled with the minimum wage provision,” Flores-Macias said.

In addition to the rules of origin changes, new labor and environmental regulations also target Mexican manufacturers, requiring them to meet higher safety standards and making it easier for workers to unionize. U.S. labor groups warn provisions regarding working conditions in private Mexican businesses will be difficult to enforce, though.

“The new Labor Chapter and the annex with Mexico contain obligations and protections that are superior to the original NAFTA, and also to the Trans-Pacific Partnership. However, until we are satisfied that those obligations will be subject to swift and sure enforcement, we cannot endorse this renegotiation,” Jim Hoffa, president of the Teamsters Union, said in a statement.

The AFL-CIO was also unwilling to embrace the agreement in the absence of more specific details.

“The many unanswered questions include whether, when and how Mexico will enact and implement labor law reform; whether, when and how labor monitoring and enforcement tools will be included in the agreement and any associated legislation; what the final auto rule of origin looks like; and whether Buy American will be strengthened or weakened,” AFL-CIO trade policy specialist Celeste Drake wrote in an analysis of the deal Monday.

Barfield noted the USMCA unionization requirements for Mexico go far beyond what is in place in the U.S. and would conflict with right-to-work laws that some states have enacted.

“We are trying to force others to agree to something we would not agree to ourselves,” he said.

Sunset Clause

President Trump had sought a provision that would require the agreement to be reauthorized every five years, but critics argued the benefits of a trade deal are dependent upon businesses having certainty that the rules will remain in place if they make new investments.

The solution agreed upon is a structure where the deal is established for 16 years, with a review after six years to address any problems and decide whether to extend it for six additional years. In theory, this will give the parties time to resolve differences without endangering the whole agreement, but Flores-Macias worries it will still discourage investment.

“It’s essentially still a sunset clause,” he said.

Not Changing

Dispute Resolution

The Trump administration had aimed to eliminate a dispute-resolution mechanism established by Chapter 19 of the original NAFTA, dealing with complaints over anti-dumping and countervailing duties.

“Canada did retain its special provisions about anti-dumping It doesn’t assure them a victory but it’s something they can use as an expedited process,” Barfield said.

Another provision of NAFTA, Chapter 11, which created a process for investors to raise disputes with governments, has been eliminated with regard to Canada. For Mexico, it remains in place only for the energy and telecommunications industries, partly to protect businesses if the new government there tries to nationalize its energy sector.

Tariffs

The agreement provides protection for Canadian and Mexican manufacturers if President Trump’s long-threatened auto tariffs are ever imposed, covering their current export levels plus growth of at least 40 percent.

“An awful lot depends on what the administration does with the rest of its trade policy,” Levy said.

However, the USMCA leaves unresolved the status of tariffs on steel and aluminum imported from the two countries. Officials say those are being negotiated on a separate track. That they are negotiable at all, though, casts doubt on the Trump administration’s assertion of national security to implement them without congressional approval.

“They’re willing to give concessions on these three sectors if somebody gives concessions on trade, which really has nothing to do with whether there’s a national security issue,” Barfield said.

***

None of this matters if the agreement is not approved by the legislatures of all three countries. Trump acknowledged Monday Democrats taking control of the House of Representatives in November could complicate that process.

“They might be willing to throw one of the great deals for people and the workersfor political purposes because frankly they’ll have 2020 in mind,” he said.

Experts agree the path forward is complicated, and the USMCA could easily fall prey to domestic politics.

“I think it's incredibly unlikely that this agreement will become the law of the land,” Packard said. “Odds are pretty good that Democrats will take control of the House of Representatives and I don't see them delivering a victory to the president on a signature issue heading into the 2020 presidential election.”

Republicans, many of whom have objected to Trump’s tariffs and defended NAFTA in the past, may not entirely be on board either.

“When you get somewhere next spring with Democrats possibly in control of the House, who’s going to love this agreement?” Levy asked. “They could find themselves in a no man’s land where they have just enough to annoy traditionalists and just enough to annoy organized labor and you end up with a very small group of Trump loyalists willing to support this thing.”

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