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Replacing NAFTA: The USMCA Set to Go into Effect

January 1, 1970

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On March ??, 2020, Canadian Prime Minister Justin Trudeau signed the USMCA (U.S.-Mexico-Canada Agreement). His signature was the final hurdle to ratification of the new trade deal, which was signed by Mexico in June 2019 and President Trump on January 29, 2020.

Covering more than $1.3 trillion in commerce between the three countries, the USMCA replaces the North American Free Trade Agreement (NAFTA) and represents fulfillment of a campaign pledge President Trump made to revise what he called the “worst trade deal ever.”

NAFTA, which took effect in 1994, created a powerful regional trading bloc to compete with Europe and Asia. While NAFTA triggered a surge in trade between Canada, the U.S. and Mexico, many blamed the agreement for the loss of U.S. manufacturing jobs to lower-wage Mexico. President Trump billed the USMCA as an update to NAFTA that would modernize the treaty, address certain issues that weren’t part of the original agreement (such as digital trade) and return some of the U.S. jobs that were lost through NAFTA.

Though similar to NAFTA in many respects, the USMCA contains several notable changes, including:

  • Rules of origin. USMCA requires that 75% of automobile components be manufactured in the United States, Canada or Mexico (an increase from 62.5% under NAFTA).
  • Automotive steel requirements. The agreement also requires that 70% of carmakers’ steel and aluminum components originate in North America.
  • New labor provisions. The USMCA specifies that 40% of auto parts must be produced by workers earning at least $16 per hour by 2023. It also calls for additional labor reform measures that would make it easier for Mexican workers to unionize.
  • Greater access for U.S. farmers. The agreement provides greater access for U.S. farm goods in Canadian markets, including dairy products, wheat, poultry and eggs.
  • Intellectual property and digital trade. The USMCA provides for the extension of copyright protection to 70 years beyond the life of an author (up from 50 years in Canada). The agreement also prohibits customs or other charges on certain digital products, such as music, videos and e-books.
  • Trump card on China. The agreement states: “Entry by any Party into a free trade agreement with a non-market country shall allow the other Parties to terminate this Agreement on six-month notice.” A non-market economy is one that does not operate on market principles. This phrase is often used in U.S. anti-dumping laws to refer to China. While the USMCA does not mention China specifically, the intent is clear—the U.S. could terminate the USMCA if either Canada or Mexico enters into a separate trade agreement with China.
  • Sunset clause. The terms of the USMCA are set to expire after 16 years. The agreement is subject to review every six years, after which it can be extended if all parties agree.

The passage of the USMCA garnered rare and significant bipartisan support in both houses of Congress, passing by a vote of 385-41 in the House and 89-10 in the Senate. This support was largely achieved through changes Democrats were able to negotiate adding to the original version of the agreement, which bolstered labor and environmental protections. Those voting against the agreement felt the final version didn’t go far enough to protect American jobs or address the environment.

Now that all three partners–the U.S., Canada and Mexico–have ratified the agreement, the USMCA is slated to go into effect in 90 days.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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