The New Mexico-US-Canada Agreement
Written by Alfonso Elizondo
The new North American trade agreement, formerly called NAFTA, changed its name to USMCA, (United States-Mexico-Canada Agreement) at the trilateral meeting on Monday. Very important adjustments were reported in several key areas of the trade relationship of the three North American countries.
It establishes new rules for car manufacturing that are intended to encourage the production of cars and light trucks in countries that pay higher wages. It also reduces barriers against US milk producers who sell cheese, milk and other products to Canada, while retaining a court to resolve trade disputes that the US had tried to eliminate.
It also guarantees Canadian and Mexican manufacturers greater access to the US car and light truck markets. However, it leaves many doubts about its ability to avoid tariffs on exports of steel and aluminium to the United States.
The old NAFTA required automakers to manufacture 62.5% of a vehicle in the US in order to qualify for ‘zero’ tariff. And the new agreement raises that level to 75%, which means forcing car manufacturers to obtain fewer parts for a car that has been assembled in Mexico, Canada, Germany, Japan, South Korea or China.
The new agreement also stipulates that an increasing percentage of parts for any tariff-free vehicle that will reach 40% in 2023 must come from the so-called ‘high-wage’ factories which must pay a minimum average wage of US$16 to the production workers. This means close to triple the average of a Mexican factory, so they hope that this provision will force automakers to change suppliers from Mexico to Canada or the United States.
Some experts believe that there are many risks associated with this change, as it could have a detrimental effect on Americans by increasing costs for their buyers and boosting production in low-cost countries such as China. At the same time, it could also be ineffective to change production, since it is not indexed to inflation, so that an average salary of US$16 per hour will be less in 2023 dollars than it is at present.
Perhaps the biggest sticking point in the negotiations for the new trade agreement over the last month was Canada’s protection of its dairy market, including the limits imposed on dairy products imported from the US, and the government support that gives Canadian producers an advantage over Americans in international markets.
Those were reasons why last Monday Trump said that “the dairy industry had been a decisive factor” since the new agreement gives the US a win on both fronts by gradually opening the Canadian market to the most exported US dairy products, such as liquid milk, cream, butter, skimmed milk powder and other dairy products. Canada also agreed to eliminate a program that helps sellers of certain dairy products both at home and abroad.
The new trade agreement also creates a list of names of cheeses that Mexico and the United States have agreed to market without restrictions in their respective countries, and it forces British Columbia grocery stores to suspend the sale of their exclusive wines on shelves where there may also be American wines.
Regarding the mechanisms for the settlement of disputes, the US sought to eliminate the Chapter 19 provision that gives the three North American countries a kind of neutral playing field, with a panel of representatives of the three countries which will challenge mutual impositions and other controversial actions.
In the revised agreement Canada won the fight. It was agreed to eliminate that mechanism between the US and Canada that allows investors to demand relief measures in foreign countries. So the new agreement establishes that mechanism for disputes between Mexico and the United States, leaving out Canada.
Among other minor but important points of the new trade agreement is a measure to pressure Mexico to make it easier for its workers to form and join unions. This is in addition to granting licenses to US financial services companies so they can have better access to Canadian and Mexican markets, as well as a provision to extend the intellectual property of US pharmaceutical companies that sell prescription drugs in Canada.
This provision will provide longer protections for US biologics against similar biological competitors and it is likely that the profits of those drug manufacturers will be increased by selling to Canada.
Addendum: Although Trump’s Messianism, misogyny and blindness make him see this event as a victory for his country, the truth is that this trade agreement will benefit Mexico especially, just at the time it was most needed, when the social and political disaster of Central and South America is at its worst moment in history.