What does USMCA stand for, and what is its purpose? (NAFTA 2.0)

If you have ever wondered what the USMCA is, and why it exists, you have come to the right place.

That’s because in this article we explain the US-Mexico-Canada Agreement (USMCA), its function and how it is increasing trade and improving the quality of life for the workforce and consumers.

What does USMCA stand for, and what is its purpose?
USMCA is an acronym for the US-Mexico-Canada Agreement. The purpose of this multilateral trade agreement is to improve the ease of trade and doing business for the small to medium sized businesses (SMEs) in US, Mexico and Canada.

Similar to the CAFTA-DR free trade agreement between the USA and countries of Central America (7 trading partners), the USMCA has 3 partners and is also a multilateral trade agreement. 

In fact, the USMCA is a replacement for NAFTA (North American Free Trade Agreement), which was agreed upon in 1994. People sometimes refer to the USMCA free trade agreement as NAFTA 2.0 because it mostly retains and contains updates of NAFTA’s provisions.

Let’s now get into some of the details and how the USMCA is performing.

USMCA origins

The USMCA originated from renegotiations with member countries in 2017. The negotiations centered on steel and aluminum tariffs, auto exports, and egg, dairy, and poultry markets.

People characterized the negotiations as tumultuous, but the countries came to an informal understanding in September 2018. The three parties formalized the understanding on October 1st.

President Donald Trump proposed and signed the USMCA at the G20 summit (2018). The Mexican president and Canadian prime minister signed the agreement at the summit. They made and ratified a revised version, with Canada being the last to ratify the agreement on March 13th, 2020.

The USMCA modernizes NAFTA’s provisions in various aspects, including digital trade and intellectual property. 

The agreement borrows language from the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), where Mexico and Canada were signatories.

Key changes in the agreement include working and environmental regulations, more access to Canada’s dairy market, greater incentives for vehicle production (with quotas for Mexican and Canadian automotive production), and increased duty-free limits for Canadians purchasing online goods from the US.

How does the USMCA benefit each country?

Canada in USMCA

Canada perceives the USMCA as a modernization of NAFTA, not a full revamp. For instance, the deal ensures certificates of origin are submitted electronically with a less strict format. This is vital when exporting SMEs or parties that want to participate in inter-continental supply chains since they’ll face less bureaucracy.

Additionally, digital trade and financial services that didn't exist in 1994 have been added to the treaty, boosting trade in associated industries. However, most people argue that the TPP, to which the US, Mexico, and Canada were signatories, should have covered this issue.

Canada’s automotive and various supply industries will get more protection from Mexico’s lower-wage competition. For example, content rules require that 75% of each vehicle be manufactured in North America to be tariff-free. Additionally, workers in the industry should be paid a $16/ hour minimum wage. This benefits the US and Canadian workers in the industry.

Aluminum and Steel also received 70% minimum content requirements. Additionally, The USMCA will protect Canada’s automotive industry from any future tariffs placed for national security reasons, as aluminum and steel were facing during negotiations. However, this doesn’t exempt re-imposition of tariffs on specific goods during instances of national security.

American producers will also be able to access the Canadian dairy industry by opening the quota system (3.6% of the market). Whether this is a win or loss depends on which parties you ask.

For instance, food product manufacturers consider it a gain, while dairy producers consider it a breach of the quota system’s stability.

Canada sees it as a gain since USMCA maintains a dispute resolution system that the Trump administration wanted to remove; however, it doesn’t change the status quo. The agreement’s real benefit is lifting the veil that brought uncertainty. The agreement has seen Canada’s economy grow faster than its initial forecast.

Mexico in USMCA

The USMCA has helped boost Mexico’s productive integration in North America. It’s helped Mexico benefit from opportunities by promoting investment and trade. These aspects are vital for job creation, economic growth and long-term income, and regional inequalities.

Mexico is part of North America, and its economy is intertwined with Canada’s and USA's economies. US, Canada, and Mexico produce and trade with both countries in the region and the rest of the world and is US’s fifth-largest trading partner. The US is Mexico’s 1st investment partner, while Canada ranks 3rd.

Conversely, Mexico is US’s 1st trading partner while Canada ranks third. These numbers indicate that the three countries complement each other's economies and have created an integrated production platform in various industries, including household appliances, electronics, etc.

USA in USMCA

The USMCA benefits the US’s farmers, workers, businesses, and ranchers in many ways. For instance, it creates reciprocal and balanced trade helping the US’s economy grow and supporting high-paying jobs. The agreement highlights include:

  • Creating a better and more level playing field for American workers. The improvements include the origin of trucks, automobiles, and other products. Additionally, it disciplines currency manipulation.
  • Additionally, it benefits American ranchers, farmers, and the agribusiness industry by strengthening and modernizing North America's agriculture and food trade.
  • Also, the agreement supports the 21st-century economy by protecting US’s intellectual property and providing trade opportunities for US services.
  • Some chapters cover anti-corruption, digital trade, and good regulatory practices. Also, there is a chapter dedicated to ensuring small and medium-sized enterprises benefit from the USMCA.

The impact of the USMCA on SMEs

The National Association of Manufacturers (NAM) report that the United States-Mexico-Canada Agreement levels the playing field for U.S. manufacturers by raising standards, improving transparency, ending anti-U.S. discrimination from foreign governments, and supporting the two million American manufacturing jobs and 40,000 small- and medium-sized businesses that rely on trade with Mexico and Canada.

The USMCA recognizes SMEs' importance and impact on the North American economy. For instance, the US exports most of its SME products to Mexico and Canada. As mentioned above, the USMCA dedicated various key provisions to supporting small and medium-sized businesses.

USMCA in General

The USMCA’s impact on the US has been positive, especially due to recent events. The agreement increased trade by 6%, which, if put in perspective, saw a record 75% of all Canadian imports come from the US. Additionally, Canada and Mexico are the US’s largest traders, accounting for more than twice US’s trade with China.

The agreement plays a positive role in boosting trade flow. It invigorated trilateral and bilateral flora in North America and boosted channels for importers, exporters, investors, governments, and non-governmental groups to resolve disputes and problems.

Additionally, the USMCA has helped wean off the US from its dependence on China for trade. This is beneficial since it prevents over-reliance on one trading partner and boosts economic growth in the North American region.

Conclusion: Measuring USMCA’s success

The period between the USMCA’s implementation to the current status has shown inclusivity, competitiveness, and sustainability in North American trade. 

All partners have enjoyed immense benefits, with calculations projecting a further increase in trade and relations. 

The USMCA has done way better than NAFTA and is likely to bring more benefits.

Sources

  1. https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/supporting#:~:text=The%20USMCA%20facilitates%20the%20participation,small%20and%20medium%2Dsized%20businesses.
  2. https://www.heritage.org/trade/report/analysis-the-united-states-mexico-canada-agreement
  3. https://www.wilsoncenter.org/article/usmca-two-how-measure-north-american-success#:~:text=Under%20USMCA%2C%20trade%20has%20bounced,the%20US's%20largest%20export%20markets.

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