Negotiations between the US and Canada were hastily wrapped up this week as the two countries came to an agreement over what President Trump was keen to assert is a brand-new trade deal. The United States-Mexico-Canada Agreement is poised to replace the current North American Free Trade Agreement (NAFTA) if the three countries can pass it through congress in time. Mexico and the US had already agreed to terms back in September, and now that Canada have joined the party, all three members will be keen to press ahead with the agreement before President Enrique Peña Nieto leaves office on 1st December.
Peña Nieto said of the agreement that it will bring “continuity, certainty and stability to trade between the three countries and represents the start of a new era for economic relations in the region.” It should settle concerns for investors who had been worried that Trump’s aggressive position might have resulted in a breakdown in negotiations. As a result, we have already seen an increase in the value of the Mexican peso over the dollar. The agreement, which is certainly a step forward for relations and economic integration between the three countries, includes various changes to the existing one, but what are they?
The automotive industry received a lot of attention, as the US look to increase domestic production and limit imports from outside of North America. The USMCA asserts that 75% of the value of a vehicle be produced in North America in order to qualify for zero tariffs. This is an increase on the previous 62.5% requirement and is intended to force North American producers to source fewer parts from China, Japan, Germany or South Korea. It also demands that 40% of a vehicle’s value be produced in high-wage factories, with a wage of at least $16. This is significantly higher than the average wage in Mexico and the US will be hoping it might draw some production north of the border.
The agreement also includes tariff exemptions for Mexico and Canada for up to 2.6 million vehicles (more than both currently export), should the US look to impose auto tariffs in the future.
The deal also includes a Canadian compromise to allow the US to begin to export dairy products into what had previously been an extremely protected market. The US and Mexico also agreed to a list of cheese names that can be marketed without restrictions in their respective countries.
There was a win for Canada regarding Chapter 19 of the original NAFTA deal, regarding the dispute settlement system that the US had wanted to remove. This will remain in place in the new USMCA deal, meaning that the countries will be able to challenge each other’s impositions of tariffs, and had also been an important tool to challenge the US over antidumping legislation.
The USMCA deal will be in place for a minimum of 16 years, with a view to reviewing it every 5 years. This is a longer period than the US had originally wanted but provides some certainty and security for the region in these tumultuous times. Now though, the race is on to pass the agreement.