United States / Analyst Insights
USMCA: How a New Deal Affects Industries
by Jonathan Hadad Analyst
Oct 22 2018

In his presidential campaign, US president Donald Trump made clear his stance that the North American Free Trade Agreement (NAFTA) , a 25-year-old trade agreement between the United States, Mexico and Canada,  harms the US economy and average citizen. Then-candidate Trump threatened to leave the agreement and, upon becoming president, made it a priority to renegotiate the deal. The renegotiation commenced in 2017 and just a few weeks ago yielded a new trade deal between the three countries. Upon the assumed ratification of the deal by each country, NAFTA will be replaced by the United States-Mexico-Canada Agreement or, more simply, USMCA.

As NAFTA had been, the USMCA will be of significant importance to the United States. To say that the US is heavily involved in trade with Canada and Mexico would be a vast understatement. As of 2017, the two countries combined account for more than $1.0 trillion of trade, or 28.4% of the US total; the value of US and Canada-Mexico trade is 65.4% higher than the US’ total trade with China and only slightly less than that of the European Union (a collection of 28 countries). NAFTA contributed tremendously to North American trade, and while critics feared the administration would set trade relations back to pre-NAFTA days, the USMCA is expected to preserve strong trade relations between the three countries. In many areas, the new deal is primarily a modernization of rules to coincide with new technology, which focuses on services and intellectual property. In fact, only automotive and dairy industries are expected to see significant changes in terms of trade restrictions on goods as a result of the deal.  

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Automotive industries

US automotive industries were transformed as a result of NAFTA, as the agreement helped US companies expand into Mexico, and to a lesser extent, Canada. For US automakers, this was a welcomed change, as Mexico offered to make production significantly more affordable. For example, the Mexican minimum wage in 1994 (at the time of NAFTA’s signing) was as low as $4.15 per day, compared to a federal minimum of $4.25 per hour in the US at the time. In more than 25 years since the signing of NAFTA, Mexico’s minimum wage has increased only slightly, to about $4.70 per day in 2018, while auto workers have seen their pay increase at a significantly slower rate than that of other countries. Mexico, for this reason and its proximity to the US, is a strongly desired location for manufacturers of all types, specifically automakers, and has directly contributed to the decline of the domestic industry.

The USMCA is expected to help ease this pain. By 2023, the agreement stipulates that between 40.0% and 45.0% of workers involved in auto production must earn at least $16 per hour. This is specifically targeted at Mexico, as the country offers wage laws are extremely loose compared to the US or Canada. This, in theory, could help bring jobs back to the United States. But automakers, already investing heavily in automation, may see this as good reason to increase investment in robotic technology to avoid higher wage expenses. Should this happen, auto manufacturing employment in USMCA countries would decline or at least decelerate; but should the status quo prevail, automakers will be faced with higher costs, which, as usual, will be passed down to the consumer.

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Dairy industries

Another noticeable change stemming from the deal is set to benefit US dairy farmers, who will gain increased access to sell in Canada. Canada is extremely protective of dairy sales, including milk, cheese and eggs, and strongly regulates trade of such products. The new deal has angered Canadian farmers, as the Canadian industry is significantly smaller than the US’, and the trade balance between the two countries is strongly in the US’ favor. The USMCA is expected to widen the imbalance, as it provides US companies with access to up to 3.6% of the Canadian market. But dairy experts say this will not have a significant effect on the dairy industry in either country, as US dairy farmers will only increase exports marginally and import penetration in Canada will remain at or near current levels. In fact, in the end Canadian officials could breathe a sigh of relief, as the strong rhetoric coming from their neighbors to the south resulted in only minor changes to a heavily protected industry, with many of these protections being left unchanged.  

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An updated agreement

The USMCA should not be mistaken as a revolutionary new trade deal. Pundits have dubbed it “NAFTA 2.0” for a reason; apart from the ease of pronunciation, this deal is simply an updated version of NAFTA. Only a handful of US industries will see noticeable changes, while most will conduct business as usual. While the changes in North America are not tremendous, reaching a deal in the area will add new dimensions to the ongoing trade spat with China. Article 32.10 in the USMCA creates rules against negotiating with nonmarket economies. This has the potential to dictate how negotiations with China work for the US, China and Mexico.

Editor: Taylor Feuss