USMCA: What Donald Trump’s Nafta replacement trade deal means and how it will work

Some win, some lose, and some steel tariffs are still in place 

Mythili Sampathkumar
New York
Monday 01 October 2018 20:24 EDT
trump rose garden

Donald Trump has announced the US-Mexico-Canada Agreement (USMCA) as a replacement to the 1994 North American Free Trade Agreement (Nafta).

The president, who campaigned on the promise to “cancel Nafta” as being “unfair” to the US, said the new deal will bring “hundreds of thousands” of American jobs.

Washington and Ottawa reach an agreement after more than a year of renegotiating the estimated $24.8 trillion Nafta agreement.

The goal, Mr Trump said, was to return the US to being a “manufacturing powerhouse”.

Speaking in Ottawa, Canadian Prime Minister Justin Trudeau said the pact removed the uncertainty of not having any kind of solid trade agreement but he admitted Canada had to make some difficult compromises.

Canada’s dairy sector, in particular, criticised Mr Trudeau for opening the market to American dairy farmers, particularly from farmers in the US state of Wisconsin where Mr Trump and Republicans hope to win key races in the upcoming November midterm elections.

How different is the USMCA from Nafta?

Eric Farnsworth, vice president of the Washington-based free trade advocacy Council of the Americas, told The Independent, the USMCA is like a “mash-up”.

“Compared to the existing Nafta, however, some provisions are a step back, while some are an advance, depending on the sector in question,” he noted.

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He said there are some legacy provisions from Nafta and “certain provisions from the aborted Trans-Pacific Partnership, with some new concepts thrown in”.

One of the new provisions is a clause which aims to raise wages in the Mexican auto sector, Mr Farnsworth said.

The main points are that Canada has opened its dairy sector “somewhat” and areas like “the digital economy, will see provisions more in line with global best practices”, Mr Farnsworth said.

Who are the winners?

Mr Trump can consider this a “win” since he campaigned on getting rid of Nafta. No doubt his team will now turn towards another favourite trade target of his: China.

He was able to get Canada and Mexico to not only ditch the name Nafta, which the president intensely disliked, and gained a few points with American farmers as voters go to the polls in less than five weeks.

Mr Trudeau may have lost favour with Canadian dairy farmers, but his negotiators were able to keep the dispute resolution clause in the agreement.

It is a win for the large Canadian lumber sector which has been facing decades of litigation in the US Department of Commerce.

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On a broader scale, both Canada and Mexico may have been able to fulfil their shared goal – to maintain some sort of trade order in Mr Trump’s chaotic renegotiations.

Mr Farnsworth said: “Compared to no NAFTA, it’s a better deal because it maintains trilateral supply chains and keeps the North American economic space organised by one prevailing document.”

Also, as The Washington Post reported, Mr Trump “went out of his way to criticise the Canadian negotiating team in the final days of deliberations, which Trudeau can play up as a sign of just how hard his staff fought on this deal”.

Labour unions in the auto sector, especially in Mexico, may also consider a “win” with the USMCA.

The agreement states at least 30 to 40 per cent of automobiles must be made by workers earning at least $16 per hour (£12.27), which is approximately triple the current wage for manufacturing workers in Mexico.

The agreement also makes it easier for workers to form labour unions in the country, which all means American and Canadian workers’ jobs may not make financial sense for companies to outsource to Mexico.

Who loses out?

A senior administration official said ahead of the announced the USMCA “has become a playbook for future trade deals”, which could signal trouble for China.

The president’s propensity to attack all existing bilateral and multilateral deals as inherently “unfair” to US workers may be a thorn in their side as the pair are also alternately butting heads and marginally cooperating on issues like North Korea and the South China Sea.

American car buyers may be one of the more tangible ‘losers’ on this deal. Since wages are going up for Mexican auto workers, overall industry costs may increase as well.

Selection may also decrease as some smaller models which are usually made south of the border may not be able to brought in once the deal goes into effect.

What about steel tariffs?

When Mr Trump slapped high steel and aluminium tariffs on Canada and Europe, Mr Trudeau called it “insulting” since the justification the US used was “national security” concerns.

After heavy lobbying, Canada and Mexico were exempt from the 25 per cent tariff on steel and 10 per cent import duty on aluminium.

Ottawa had wanted some protections from these so-called “Section 232 tariffs” in the USMCA but it received no guarantees from the US for any tariffs associated with automobiles.

Those will be dealt with in a separate set of negotiations, in which Canada may or may not be successful given the fervour with which the Trump administration is pursuing protection of US steel industry ahead of his own 2020 election.

In March of this year, Mr Trump tweeted: Trade wars are good and easy to win”.

The president took out the words “free trade” from the agreement, what does that mean?

Mr Farnsworth indicated if the USMCA passes through all three countries’ legislators it “removes Nafta from the lexicon as a political lightning rod and symbolic stand-in for all that ails economies in the global era”.

What happens now?

The deal is expected to take effect on 1 January 2020, but requires approval of all three governments.

The US Congress will not consider the deal until after the midterm elections to allow the new Congress to deliberate it in 2019.

Mr Trump said said he has no confidence Congress will actually approve it, adding: “Anything you submit to Congress is trouble no matter what”.

He predicted Democrats would say: “Trump likes it so we’re not going to approve it.”

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