On Sunday night, President Trump got his wish for a significantly revised North American trade deal. After more than a year of intense negotiations, the United States, Canada and Mexico reached an agreement to update the North American Free Trade Agreement, the 1994 pact that governs more than $1.2 trillion worth of trade among the three nations.
The new deal won’t go into effect right away. Most of the key provisions don’t start until 2020 because leaders from the three countries have to sign it and then Congress and the legislatures in Canada and Mexico have to approve it, a process that is expected to take months.
Here’s a rundown of what’s in the “new NAFTA.”
New name. Goodbye NAFTA. The new deal will be known as the United States-Mexico-Canada Agreement, or USMCA. Trump, who had long disdained NAFTA, had suggested that he might call it the “USMC,” in honor of the U.S. Marine Corps, but in the end, USMCA won out.
Big changes for cars. The goal of the new deal is to have more cars and truck parts made in North America. Starting in 2020, to qualify for zero tariffs, a car or truck must have 75 percent of its components manufactured in Canada, Mexico or the United States, a substantial boost from the current 62.5 percent requirement.
There’s also a new rule that a significant percentage of the work done on the car must be completed by workers earning at least $16 an hour, or about three times what the typical Mexican autoworker makes. Starting in 2020, cars and trucks should have at least 30 percent of the work on the vehicle done by workers earning $16 an hour. That gradually moves up to 40 percent for cars by 2023.
While many economists think these new rules will help some North American workers, they also warn that car prices might rise and some small cars may no longer be made in North America because they would be too expensive under the new requirements. There are also concerns that automakers might not make as many cars in North America to export to China and elsewhere overseas because costs would be higher in the USMCA region than making the vehicles in Asia.
Trump’s victory: Canada opens up its milk market to U.S. farmers. Trump tweeted often about how unfair he thought it was that Canada charged such high tariffs on U.S. dairy products. Canada has a complex milk and dairy system. To ensure Canadian dairy farmers don’t go bankrupt, the Canadian government restricts how much dairy can be produced in the country and how much foreign dairy can enter to keep milk prices high. Trump didn’t like that, and dairy was a major sticking point in the negotiations.
In the end, Canada is keeping most of its complex system in place, but it is giving greater market share to U.S. dairy farmers. U.S. negotiators say they got a major victory by forcing Canada to eliminate the pricing scheme for what are known as Class 7 dairy products. That means U.S. dairy farmers can probably send a lot more milk protein concentrate, skim milk powder and infant formula to Canada (and those products are relatively easy to transport and store).
Canada’s victory: Chapter 19, allowing for a special dispute process, stays intact. Canadian Prime Minister Justin Trudeau said repeatedly that he wanted to keep Chapter 19 in place, and that’s exactly what happened. The U.S. side pushed hard to eliminate this chapter, but in the end, it stayed.
Chapter 19 allows Canada, Mexico and the United States to challenge one another’s anti-dumping and countervailing duties in front of a panel of representatives from each country. This is generally a much easier process than trying to challenge a trade practice in a U.S. court. Over the years, Canada has successfully used Chapter 19 to challenge the United States on its softwood lumber restrictions.
Mexico and Canada get assurance Trump won’t pound them with auto tariffs. Trump has repeatedly threatened to slap hefty tariffs on car and vehicle parts coming from overseas into the United States. Along with the new trade deal, his administration signed “side letters” allowing the two nations to mostly dodge Trump’s auto tariffs.
The side letters say Canada and Mexico can continue sending about the same vehicles and parts across the border free of charge, regardless of whether auto tariffs go into effect down the road. Only parts above that quota could face tariffs.
Trump’s steel tariffs stay in place (for now). Canada wanted Trump to stop his 25 percent tariffs on Canadian steel. That didn’t happen — yet. The two countries are still discussing lifting those tariffs, but a senior White House official said Sunday that process is on a “completely separate track.” Trudeau has called the steel tariffs “insulting and unacceptable” because the two nations are such close allies.
Improved labor and environmental rights. The USMCA makes a number of significant upgrades to environmental and labor regulations, especially regarding Mexico. For example, the USMCA stipulates that Mexican trucks that cross the border into the United States must meet higher safety regulations and that Mexican workers must have more ability to organize and form unions. Some of these provisions might be difficult to enforce, but the Trump administration says it is committed to ensuring these happen — a reason U.S. labor unions and some Democrats are cheering the new rules.
Increased intellectual property protections. The new IP chapter is 63 pages and contains more-stringent protections for patents and trademarks, including for biotech, financial services and even domain names. Many business leaders and legal experts believed these updates were necessary given that the original agreement was negotiated 25 years ago.
Big drug companies gain more footing in Canada. U.S. drug companies will now be able to sell pharmaceuticals in Canada for 10 years before facing generic competition. That’s up from eight years of so-called “market protection” now.
Deal must be reviewed after 6 years. The USMCA stipulates that the three nations will review the agreement after six years. If all parties agree it’s still good, then the deal will continue for the full 16 year period (with the ability to renew after that for another 16 years). This was a compromise provision: Trump wanted ability to renegotiate the deal frequently. Ultimately, there will be a review, but it won’t happen until after Trump leaves office.
Chapter 11, giving investors a special way to fight government decisions, is (mostly) gone. Chapter 11 is eliminated entirely for Canada and mostly for Mexico, except for some key industries such as energy and telecommunications. Chapter 11 gave companies and investors a special process to resolve disputes with one of the governments in NAFTA. The idea was that if investors put a lot of money into a project and then the government changed the rules, there was a clear dispute process — outside the court system — where investors could get their problem resolved.
Critics argue that Chapter 11 was mainly used as a way for big corporations to get taxpayer money, but businesses say it was necessary to ensure they weren’t harmed by sudden changes when new governments came into power in Mexico, Canada or the United States. In the end, Chapter 11 is mostly gone, except for a few key industries, such as oil, that lobbied hard to be able to challenge the Mexican government if it changes the rules and tries to nationalize its energy sector again.