October 2018

By Daniel P. Erikson and Gabriella Ippolito

When the North American Free Trade Agreement (NAFTA) came into force between the United States, Canada and Mexico on January 1, 1994, it created the world’s largest free trade area of 444 million people that now produces $17 trillion worth of goods and services. Canada is presently the United States’ second largest trading partner and Mexico is the third largest. U.S. trade with its NAFTA partners stands at $1.2 trillion and the two countries buy one-third of U.S. exports.

President Donald J. Trump placed NAFTA and its discontents at the center of his presidential campaign and has criticized the deal, which he has described as “horrible,” relentlessly throughout his presidency, threatening to unilaterally withdraw while holding out the prospect that his administration would try to negotiate a better alternative. In August, the efforts to renegotiate NAFTA led to a possible preliminary agreement with Mexico and on Sunday, September 30, after another month of negotiations, Canada agreed to join.

In 2017 we first described NAFTA as “in the cross-hairs” in September, while in October we wrote that NAFTA was “still on the brink,” and in November we warned of “turbulence ahead.”  In May 2018, we asked whether the NAFTA negotiations were in “overtime or sudden death?” and in September assessed whether there was a “deal or no deal.” Now it appears that NAFTA could become the USMCA (US-Mexico-Canada Agreement) if the three nations’ governments ratify the deal. 

What’s happening now?

On Sunday, September 30, Canada was added to the preliminary trade deal between the United States and Mexico that was previously announced at the end of August. This was the last possible date a deal could be agreed upon that could be signed by outgoing Mexican President Enrique Peña Nieto before he leaves office on December 1, to be succeeded by the populist president-elect Andres Manuel Lopez Obrador. Peña Nieto and Trump have presented the agreement to their nations’ respective Congresses.

The U.S. focus on “rules of origin” for the automotive sector led to an agreement that 75 percent of vehicle components must be made in North America (up from 62.5 percent) by 2020. In addition, by 2020 at least 30 percent of the automobiles must be made by workers earning $16 an hour or more, and 40 percent must be by 2023. These provisions were intended to reduce the competitive advantage presented by Mexico’s lower wages. 

Once the preliminary deal with Mexico was concluded, the U.S. negotiators focused on Canada’s dairy industry as a point of major contention. In the end, Canada did make some concessions such that the U.S. will be able to export more products (particularly protein concentrate, skim milk powder and infant formula). This is equivalent to access to about 3.6 percent of Canada’s dairy market, slightly above the 3.45 percent negotiated by the Obama administration in the Trans-Pacific Partnership. 

In return for the dairy concessions, Chapter 19, the special dispute resolution process for anti-dumping and countervailing duties, which Canada has invoked in its softwood lumber dispute with the U.S., stayed intact although it is now in Chapter 10. However, investor-state dispute settlement (ISDS) will be phased out for Canada and will be restricted to four areas of investment in Mexico: oil and gas, power generation, telecommunication, transportation and the ownership or management of infrastructure.

In addition, a new Intellectual Property (IP) chapter which many business leaders believe is necessary, was drafted. The chapter contains more-stringent protections for patents and trademarks, including for biotech, financial services and other related industries. U.S. pharmaceutical companies also will now be able to sell pharmaceuticals in Canada for 10 years before facing competition from generic medications, an increase from the current standard of 8 years. 

Notably, USMCA also has a provision in Chapter 32 that requires a country to inform the other two trading partners if it engages in trade negotiations with a “non-market economy” (think China) and presents an option to withdraw from USMCA if such a trade agreement is signed. This could mean that the U.S. could walk away from USMCA if either Canada of Mexico signs a trade deal with China, which could be an important source of leverage in the future.

What are people saying?

  • On Monday October 1, President Trump called the re-worked agreement "the most important trade deal we've ever made by far." He added that it is "truly historic news for our nation and indeed the world . . . It is my great honor to announce that we have successful completed negotiations on a brand new deal to terminate and replace NAFTA . . . with an incredible new U.S.- Mexico-Canada Agreement called the USMCA. It sort of, just, works. USMCA. That'll be the name that 99 percent of the time that we'll be hearing." Trump added, “It has a good ring to it.”
  • In a press conference on October 1, Canadian Prime Minister Justin Trudeau said, “Like any important negotiation, we had to make compromises . . . Today is a good day for Canada.”
  • In a joint statement, U.S. Trade Representative Robert Lighthizer and Canadian Minister of Foreign Affairs Minister Chrystia Freeland said that the new deal 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.”
  • Senator Orrin Hatch, chairman of the Senate Finance Committee, said, “I look forward to reviewing this deal to confirm it meets the high standards of Trade Promotion Authority.”

What’s next?

A formal vote in the U.S. Congress won’t be held until 2019, and Congressional support is not assured. Republican members of Congress say they want to read closely the final details regarding the dispute settlement and intellectual property issues and Democrats want to examine the agreement’s labor and environmental standards.

In addition, this agreement does not cover all of the trade issues the three nations have. Other issues will be negotiated on “separate tracks” including the Trump administration’s tariffs on Canadian and Mexican steel.

Though the announcement that NAFTA would be replaced by the USMCA was the most significant step yet in the year-old negotiations, the USMCA’s future is not yet assured. We will continue monitoring the agreement as it moves through the U.S. Congress.