When NAFTA turns into USMCA

When NAFTA turns into USMCA

By Louis Rumao:

The recently signed US Mexico Canada Agreement (USMCA), which replaces the North American Free Trade Agreement (NAFTA) is expected to impact US auto and tyre industries. Starting in 2020, to qualify for zero tariffs, a car or truck must have 75 per cent of its components manufactured in Canada, Mexico or the United States, a substantial boost from the current 62.5 per cent requirement under NAFTA. Seventy percent of the steel and aluminum used in vehicles will have to come from the US, Canada or Mexico


On January 1, 1994, an agreement was signed by Canada, Mexico, and the United States, creating a trilateral trade bloc known as North American Free Trade Agreement (NAFTA). The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico, effecting immediate elimination of tariffs on more than one-half of Mexico’s exports to the US and more than one-third of US exports to Mexico
A 2014 study on the effects of NAFTA on US trade jobs and investment found that between 1993 and 2013, the US trade deficit with Mexico and Canada increased from $17 billion to $177 billion, displacing some 851,000 US jobs. Presidential candidate Donald Trump was one among the many critics of the NAFTA deal. “We need to get rid of NAFTA,” insisted Trump. “It’s been a disaster for the United States. It’s caused us tremendous amounts of unemployment and losses to industry and everything else.” So, in October 2018, 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, designated the US Mexico Canada Agreement (USMCA) to replace the NAFTA.
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 possible renewal after that for another 16 years.
President Donald Trump tweeted that the deal represented “one of the most important, and largest, Trade Deals in US and World History.” The USMCA will account for more than $1.2 trillion in trade in one of the world’s largest free trade zones.

Auto industry affected

While the USMCA covers trade in multitude sectors, such as dairy, agricultural, lumber and other goods and services, the auto industry will be significantly affected. The goal of the new deal, based on the country of origin rules, is to have more cars and trucks made in North America. Starting in 2020, to qualify for zero tariffs, a car or truck must have 75 per cent of its components manufactured in Canada, Mexico or the United States, a substantial boost from the current 62.5 per cent requirement under NAFTA. Seventy percent of the steel and aluminum used in vehicles will have to come from the US, Canada or Mexico.
Under its labour provisions, starting in 2020, auto parts and vehicle manufacturing should have at least 30 per cent of the content of an exported product must be done by employees earning at least $16 an hour, about three times what the typical Mexican autoworker makes at present. That gradually moves up to 45 per cent of the content be produced by employees earning at least $16 per hour by 2023. No doubt, production costs in Mexico will rise sharply, discouraging outsourcing from USA and Canada to Mexico. Mexico has also agreed to allow workers the right to union representation, extending labour protections to migrant workers, and protecting women from discrimination. No wonder, the Canadian and American labour unions are pleased with USMCA deal. The American Federation of Labor (AFL-CIO) is cautiously optimistic that this truly is a better deal for US and Canadian workers in terms of keeping jobs from going to lower-paying Mexico or to Asia, although labor is looking carefully at how the new rules will be enforced. It’s possible this could accelerate automation, but that would take time. Concerning the environmental issues, the USMCA stipulates that Mexican trucks that cross the border into the United States must meet higher safety and emissions standards.

Tyre industry

The US Tire Manufacturers Association (USTMA) has described the new agreement as a “positive step, which reconfirms the importance of free and fair trade among the three countries. We look forward to the next steps in this process.”
However, the United Steelworkers Union (USW) said the USMCA still needs revision if it is to safeguard US jobs and labour rights. “The signing is an important milestone, but it is only another step in the process to reform NAFTA,” the USW had said in November.
USW, the largest trade union in the USA has been vehemently opposing NAFTA. “NAFTA and implementing legislation must reverse the corporate incentives to outsource production and instead promote investments in plants, equipment and people domestically,” it had said.
Retread Instead, the retreading advocacy group, said it is waiting for permanent solution to the issue of cheap Chinese imports. It said the campaign against the import of non-retreadable Chinese truck tyres will continue.

The bottom line

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. “I’ll be terminating NAFTA within a relatively short period of time and get rid of it” Trump said, to force Congress into passing the new deal. But the American ratification just got more difficult, as Democrats won control of the House of Representatives in the November 2018 elections.
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 small cars in North America, relying on cheap Mexican labour, to export to China and elsewhere overseas because costs would be higher in the USMCA region than making the vehicles in Asia.
Anyway, NAFTA will be still around for a while more!

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