the impacts of the USMCA (the United States Mexico Canada Agreement) on Mexican and Canadian trade
This paper is meant to discuss the impacts of the USMCA (the United States Mexico Canada Agreement) on Mexican and Canadian trade. It has therefore been divided into introduction, data, methodology, body, and conclusion for a better understanding of the arguments. In the various sections, it can be noticed that even though this deal will have a lot of positive impacts on the economy and trade of the three countries, there are a few drawbacks as well. USMCA is an improvement of the North American Free Trade Agreement (NAFTA) during president Trump’s administration.
Many of NAFTA’s rules have been retained, but the administration changed some provisions which they saw to demean the industries and jobs in the United States. For instance, this new agreement imposed that to qualify for zero tariffs, 75% of automobile parts have to be manufactured within the three countries and not be cheaply imported from elsewhere, such as China or Vietnam. This is an increment from NAFTA’s 62.5%. Besides, USMCA contains labor provisions, and it stated that US farmers should get more access to the Canadian dairy market. It also offers a deal on digital trade and intellectual property as well as a sunset clause, which states that the agreement sunsets after sixteen years, after which United States, Mexico, and Canada can decide to extend USMCA.
Introduction
The United States Mexico Canada Agreement (USMCA) is a negotiation of the North American Free Trade Agreement (NAFTA) that was signed by President Donald Trump. It also offers an agreement on digital trade and intellectual property. USMCA contains the country of origin rules. For instance, it stated that to qualify for zero tariffs, that is, up to 62.5% under NAFTA, automobiles must have 75% of their components manufactured in Canada, Mexico, and the United States.
Objectives
The objectives of this research paper are to outline the aims of the USMCA, which was initially NAFTA. This is especially concerning international trade and marketing, as well as trade-in Mexico and Canada. Besides, the paper aims at discussing the pros and cons of the agreement to Canada and Mexico and other regions of the world whereby the pros outweigh the cons. For instance, how it will affect mining companies and suppliers. Lastly, this research paper will outline the various impacts that the USMCA will have on industries such as automotive, technology, agriculture, and dairy.
Data
NAFTA was a result of the negotiation of the governments of Canada, Mexico, and the United States. It focused majorly on liberalizing trade in automobile manufacturing, textile and agriculture. It, therefore, eliminated tariffs in these sectors that were traded between the three countries. This deal also aimed to implement environmental safeguards and labor, to establish mechanisms of conflict resolution and to protect intellectual property. Besides, NAFTA fundamentally reshaped the economic relations in North America. As a result, it has led to an unusual amalgamation of the developing economy of Mexico and the developed ones of the United States and Canada.
Moreover, under NAFTA, there was growth in cross-border investments between the three participating countries as well as tripling in the regional trade. However, President Donald Trump argued that NAFTA undermined manufacturing and jobs in the U.S and hence led his administration to complete an updated version of the pact uniting Mexico, Canada and U.S. This new pact is now known as USMCA (United States-Mexico Canada Agreement). USMCA has been expected to enter into force in 2020, and since its initiation, it has won broad bipartisan support on Capitol Hill.
NAFTA was begun in 1991 with the hop that freer trade as a result of the integration would lead to a steadier and more robust economic growth of Mexico. This would happen by discouraging illegal migration, providing opportunities for the growing workforce of Mexico, and by providing new jobs. Besides, Mexico and the United States saw Mexico as a low-cost investment location and a promising market for exports, thereby enhancing the competitiveness of Canadian and U.S companies. The addition of Mexico into the agreement was unprecedented since it is less developed, and the U.S and Canada have already completed a free trade agreement in 1988. Therefore, NAFTA ushered a new era of the free trade agreement.
Methodology
USMCA is an updated version of NAFTA. This agreement contains the country of origin rules. This states that to qualify for zero tariffs, 10% of automobile components have to be manufactured in the United States, Mexico, and Canada, which is an increase from NAFTA, which was 62.5 percent. Besides, the agreement contains labor provisions. Conversely, Mexico agreed to pass new labor laws to protect their workers, including women and immigrants. The main aim of these laws is to enhance the unity among workers. Moreover, this provision states that by 2023, only workers who will be earning at least $16 an hour will make 40 to 45 percent of automobile parts.
Furthermore, USMCA enabled the Canadian dairy market to be more easily accessed by the U.S farmers, which was a big issue for President Trump. The pact is also expected to protect intellectual property and digital trade primarily through copyright. This pact extends the terms of copyright to 70 years beyond the life of the author up to fifty years of age. Besides, it includes prohibiting duties on eBooks, music, among other provisions to deal with the digital economy. For instance, it protects internet companies from being responsible for the content posted or reacted to by their users. Lastly, there is a sunset clause, which means that the agreement ends after sixteen years unless the three countries decide to renew the deal. However, the agreement is subject to review every six years.
House Democrats had announced in December 2019 that they had reached a revised USMCA deal with Trump’s administration. This revision included most of the updates they wanted. One big update was a step to ensure that Mexico abides by the union rules, among other protections. This was through a rapid response mechanism that called for a multinational independent three-person panel. Even though other unions are still opposed, it has won the support of the largest federation of labor unions in the United States, which had also opposed the deal initially. Besides, the deal was good enough to obtain bipartisan support.
Body
USMCA is both good and bad news for Canadian and Mexican trade and hence the economy. According to Global Affairs Canada (GAC), USMCA will have economic impacts on Canada. For instance, it is expected to cause GDP gains of $6.8 billion, which is equivalent to 0.249% in five years. However, this agreement is also reported to lead to a decline in exports of motor vehicles to the United States due to the existence of more stringent rules of origin, which are likely to lead to higher costs of production. Besides, as a result of the agreement, markets in Canada thrived on the news of the agreement since it meant that President Trump would not continue with his threat to impose a 25% tariff on automobiles made in Canada. Even though the deal still needed ratification.
The part of the agreement involving automobiles is positive for Canada. This is because the agreement imposing a 75% restriction on all manufacturing of automobiles to be manufactured within the three countries meant that most car manufacturing would happen in Canada and the United States away from Mexico. It also meant that the number of cars made from spare parts from Vietnam, China, and Malaysia would reduce. However, some auto manufacturers can choose to disregard these rules on zero tariffs since they are so complicated and instead use those for World Trade Organization for 2.5% standard tariff for parts. This is because getting 75% may be so complicated to understand, and it may involve lawyers and even tracing issues that may make the companies prefer forgoing USMCA.
Moreover, Canada gained from Chapter 19 of NAFTA for the dispute resolution mechanism. This allows for a panel of experts from the three countries to unite and solve duty-related disputes, including anti-dumping disputes. The administration of Trump pushed for such disagreements to be handled by the United States Court of International laws. This is because the court is involved in the handling of cases concerned with the application of the U.S trade laws.
However, this agreement will cause a potential loss for Canadian farmers. This is mainly because the pact involved a requirement for Canada to open up its dairy market for the United States. Besides, the deal requires Canada to eliminate domestic pricing scheme for imported skim milk powder, ultra-filtered milk solids used to make cheese, “class 7” dairy products and infant formula. In contrast, this is a big win for dairy farmers from the United States chiefly from New York and Wisconsin since it gave them access to a new market of ultra-filtered milk processors from Canada. This pact could be a significant loss for dairy farmers from Ontario and Quebec even though the government of Canada is trying to figure out whether to compensate the farmers for their loss.
Besides, USMCA, just like NAFTA, is going to lead to an increase in imports from Canada into the United States as well as exports from the U.S into Canada. This is expected to lead to a growth of the Canadian trade and an increase in GDP. Moreover, in absolute terms, foreign direct investments between the United States and Canada are likely to increase substantially. Also, the Stock of U.S investment in Canada will steadily rise with USMCA in place. Also, since the initiation of NAFTA, which is now USMCA, foreign direct investment between Mexico and Canada has significantly grown. Canadian stock for direct investment in Mexico has also been reported to increase to $ 22.5 billion in 2018. It is expected to rise even more in the coming years with this new agreement.
Moreover, Mexico’s investment in Canada is expected to be more modest, leading to a growth in the trade between Canada and Mexico. Canada is also going to benefit from USMCA since it preserved some critical elements of NAFTA. Besides, the agreement modernized and led to support of Canada’s integration with the economy of North America. Hence providing outstanding stability to Canadian and Mexican trade as well as predictability to the tariff threat of section 232 of the U.S. However, businesses in Mexico have felt sidelined by the agreement due to the presence of conflicting information on how the deal will be imposed and lack of clarity on some info. Some of the business people complained that they were not there in enough numbers to air their views on the agreement.
Conversely, Gustavo Hoyos, the president of Coparmex, criticized the work of Mexican president saying that the government was a bad negotiator even though other leaders were more positive. Besides, the head of Mexico business council, Antonio del Valle, stated that even though they would have loved to see many other things in the agreement, they can conclude that generally, the deal will be beneficial for Mexico. This is because USMCA will bring investments into the country and also make the trade in North America to be more competitive hence improving Canadian and Mexican business. Graciela Marquez, the economy minister of Mexico, argued that the deal would most likely boost the flagging growth of Mexico once it is made into law.
Moreover, due to the change in USMCA, there will be an impact on Mexico in that they will be able to bring labor complaints against workplaces and companies in the United States. Also, each of the three countries would choose experts, including foreigners, and they will be able to penalize a plant that export goods without following the rules of the agreement. This is also because this new pact would lead to foreign inspectors in Mexican factories. Following repeated complaints, rapid panels for the inspection would be formed after three months.
Moreover, under the new deal, the burden of proof has been reversed for the counties that have been changed. This is to say that the country defending itself is guilty until proven otherwise. When a country fails to comply with the obligations stated in the agreement, it is presumed to be an offense since it is going to affect the investment and trade between the two parties unless the defending party proves otherwise. Moreover, the former Mexican USMCA negotiator claimed that this new agreement is an incentive to block trade. This is because the U.S will be able to accuse them of not complying with their labor laws and hence impose tariffs and close markets.
Conclusion
In conclusion, USMCA is a favorable deal for the countries involved. It is also a significant investment and trade agreement. Moreover, it involves rule changes that are industry-specific and it will enhance U.S trade into Canada and Mexico. As a result, USMCA is expected to lead to integration of trades of the three countries hence leading to increased growth of the economy and trade across boarders.
References
Burfisher, M. E., Lambert, F., & Matheson, M. T. D. (2019). NAFTA to USMCA: What is Gained?. International Monetary Fund.
Hong, P., & Park, Y. W. (2020). The United States-Mexico-Canada Agreement (USMCA) and Japanese Firms. In Rising Asia and American Hegemony (pp. 153-163). Springer, Singapore.
Nord-Américain, A. D. L. É. NAFTA GDP–2012: IMF–World Economic Outlook Databases (Oct 2013).
United States International Trade Commission. (2019). US-Mexico-Canada Trade Agreement: Likely Impact on the US Economy and on Specific Industry Sectors.