By Daniel P. Erikson and Willa Lerner
On Wednesday, July 1, 2020 the North American Free Trade Agreement (NAFTA) replacement process reached completion with the official implementation of the U.S.-Mexico-Canada Agreement (USMCA). The USMCA was ratified by Congress and signed into law by President Trump in January 2020, signaling the fulfillment of one of the Trump Administration’s key promises from the early days of the 2016 presidential campaign.
We began the “Spotlight on NAFTA” coverage in September 2017 when the first round of trade negotiations between the three countries kicked off. The intense pace of renegotiations continued throughout the fall of 2017, as we analyzed why NAFTA was still on the brink and warned of further turbulence ahead. By May 2018, NAFTA negotiations had blown through the initial deadline of December 2017 and headed to overtime. Following a “permanent round” of negotiations throughout the summer, September 2018 marked a turning point in the “deal or no deal” process as the U.S. indicated a plan to sign a trade deal with only Mexico. Shortly thereafter, Canada was added to the preliminary trade deal and the tides of the “horrible” NAFTA began to shift to the “historic” USMCA (October 2018). Then, in June 2019, we asked “Is the clock ticking for the USMCA?” as the Trump Administration began to submit the implementing legislation to Congress. By January 2020, the two years of intense negotiations culminated in the signing of the USMCA.
Where are we now?
As of May 2020, data from the U.S. Census Bureau shows that, for the year-to-date, Canada is the United States’ largest trading partner with 13.8 percent of total trade. Mexico falls just below in second place with 13.6 percent. 2020 U.S. trade with USMCA partners stands at $406.1 billion as Canada and Mexico buy just over one-third of U.S. exports. Prior to the COVID-19 pandemic, the U.S. Office of the Trade Representative stated that the USMCA was expected to raise real U.S. GDP by $68.2 billion (0.35% of total GDP) and generate up to 176,000 jobs. Additional developments have included:
- The Trump Administration released hundreds of pages of new industry guidance in June 2020, only weeks ahead of the USMCA July 1 implementation date. As a result, company executives, labor union leaders, and other government officials have been scrambling to make the necessary adjustments. Many of the provisions, particularly those related to labor rights, will need to be phased in over multiple years.
- Many large manufacturing companies have already faced significant supply chain and operation disruption as a result of the COVID-19 pandemic. In the auto industry, automakers requested and received an additional two years to complete their transition period for implementing the production and supply changes necessary for compliance.
- The U.S. Customs and Border Protection Agency has indicated that, for the next six months, the agency will focus on helping companies meet compliance rather than punishing for failures to abide by new rules.
- For additional information on how the USMCA differs from NAFTA, see our January 2020 Spotlight.
What are people saying?
- At a July 1 ceremony commemorating the launch of the USMCA, President Donald Trump described the deal as “the largest, fairest, and most balanced trade agreement ever negotiated” and “a tremendous victory for our manufacturers and autoworkers…”
- In response to domestic criticisms citing Mexico’s limited achievements in the USMCA and Mexican President Andrés Manuel López Obrador’s planned visit to the U.S. two days later, on July 6, President López Obrador stated “If we have a good relationship with the United States government, we’ll avoid ill treatment, and little by little we’ve achieved this…It’s not the same treatment as before.”
- On June 17, in testimony before the U.S. House Ways and Means Committee Hearing on Trade Policy, Robert E. Lighthizer, the United States Trade Representative, acknowledged that there are many issues within the trade agreement still to be resolved but that his agency would act “early and often” to combat violations.
- In response to Lighthizer’s comments, Canadian Deputy Prime Minister Chrystia Freeland stated later on June 17, “We are good at following the rules and we believe in doing that. And we’re also good at standing up for our national interest and we’ll do that, too.”
- On June 30, Senator Chuck Grassley (R-IA) also reiterated the need for compliance, stating “We must now monitor enforcement and compliance with both partners to ensure that they live up to their commitments. I’m sure they’re going to be monitoring the United States to make sure we live up to it.”
- A bilateral summit between President Trump and President López Obrador has been planned for July 8-9 to commemorate the implementation of the new trade deal. On July 6, Canadian Prime Minister Justin Trudeau, who appeared to have been invited as an afterthought, stated that he was declining the invitation in response to the ongoing COVID-19 pandemic and threats of new U.S. tariffs on aluminum. President López Obrador is expected to attend, making his first visit to the United States since taking office in December 2018.
- Last year, the Mexican government passed a broad labor regulation law to prepare for new compliance measures in the USMCA. These regulations have come under fire and are facing numerous legal challenges awaiting response in the Mexican Supreme Court. If the Court rules the labor law unconstitutional, the country could be in violation of a significant portion of the USMCA and could face retaliatory actions from the U.S. and Canada.
- The implementation process will continue to be enacted in the coming years. However, the sunset clause requires the countries to review status of the agreement after six years which means the next opportunity for a major readjustment likely will not be until 2026.
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