On NAFTA and the USMCA

As Mexico became the first nation to ratify the United States-Mexico-Canada Trade Agreement, let’s take a look at what NAFTA was and how the USMCA hopes to improve…

Since President Trump first hit the campaign trail for the 2016 presidential election the subject of international trade has never been far from his lips. While a good deal of Mr. Trump’s harshest rhetoric on trade has been directed at China, he has also made frequent criticism of trade relations between the United States and its two neighbors in North America- and, more specifically, the deal that governs trade between the three nations, the North American Free Trade Agreement (NAFTA). The President went so far as to single NAFTA out as the worst trade deal the United States ever agreed to during the campaign, and despite the fact that many challenges to free trade made on the campaign trail prove to be more bark than bite, the Trump administration has remained committed to setting up American trade relations in a way more in line with his understanding of putting “America First”.[1] Now in office, President Trump has submitted a new trade deal, known as the United States Mexico and Canada Agreement (USMCA) that is currently awaiting consideration by the American and Canadian legislative branches before going into effect.

While the consequences of the Trump administration’s moves on trade remain unclear (and probably will remain unclear for some time), any attempt to eventually draw lessons from the changes in America’s trade policy must first begin with actually understanding what those changes entail.

So, what exactly is NAFTA? The trade deal was signed in 1994 by then President Bill Clinton with the intention of reducing, and eventually eliminating all tariffs on trade between the North American countries. While it might sound mundane to readers living in a post-NAFTA world, it is important to remember that tariffs on goods passing the United States-Mexico border regularly reached 30%, and that the tariffs paid on American goods going into Mexico were reportedly up to 250% higher than those put on Mexican goods entering the United States.[2] In light of this context, the suggestion that the United States had more favorable trade relations with Mexico in the pre-NAFTA era than exists today seems dubious at best.

In addition to addressing startlingly high (and unevenly applied) tariffs, NAFTA took major strides towards establishing a common set of safety, labor, and environmental standards among each of its three member states. Beyond serving the direct purpose of assuring the safety of goods traveling in North America, these standards had the more subtle impact of working to curb some of the trade “advantages” that Mexico has compared to the United States and Canada (namely cheaper labor costs and less stringent environmental standards). The deal attempted to accomplish this by including provisions that insured that Mexico could not purposefully undercut its trade partners by slashing worker and environmental protections. These standards are often ignored in conversations about NAFTA’s impact, but they play a critical role in understanding where NAFTA fell short, and where the USMCA intends to build on NAFTA’s framework.

One of the most important things that led to growing dissatisfaction with NAFTA was that while tariff reduction was a success, the attempts to introduce regional labor and safety standards fell short. According to many of NAFTA’s critics the failure to fully implement these new standards across all three countries put American companies that adhered to the standards in a disadvantageous position compared to other companies that were able to ignore NAFTA’s regulations.[3] This problem was only exacerbated by the elimination of protective tariffs which, to NAFTA’s critics, only ensured that the United States could not protect its domestic manufacturing from cheaper international competition.

So, how does the proposed USMCA work to address these frustrations? The deal contains many of the same tariff reduction measures that were included in NAFTA, but it places a renewed emphasis on labor standards and strengthening regional manufacturing.

The USMCA provision that requires increased wages for auto-workers has been particularly interesting to many who follow North American trade relations, as it strikes a precarious balance between promoting the interest of workers in the region and all but forcing some manufacturing to leave Mexico as the $16 per hour wage stands well over the average wage earned by most Mexican auto-workers.[4] While some might suggest that this new standard will force Mexican manufacturing to pay workers higher wages, the more likely outcome appears to be that Mexican workers will lose jobs as a consequence of a policy that, at least on its face, had the intention of raising the standard of living for motor-vehicle manufacturers in all of the USMCA member states.

In addition, there are provisions that guarantee that roughly a third (a number that increases as the deal moves into future years) of the labor in motor-vehicle production must be done by workers who are from North America and meet the new labor standards. This was done to ensure that goods that benefit from the USMCA’s tariff reductions are, by in large, produced within the trade deal’s member states. It is interesting to see this sort of economic regionalism propping itself up in North America just as the same sorts of policies have begun to breakdown in Euro Zone.

The move to promote an increase in component goods purchased from within the trade zone should also have broad implications. In this instance, the main “losers” from the deal are likely to be manufacturers from outside of North America, in particular China, as car manufacturers might find that they can sell their finished products more cheaply by purchasing more expensive components from within North America in order to duck tariffs.[5] In theory, this sort of change should have benefits for all three member nations, as the demand for their products will be artificially inflated by the tariff measures, while ensuring that an increased amount of total spending on auto manufacturing and sales remains in the North American market.

While there is a good deal of debate over just how much of the shift in manufacturing from the United States to Mexico is a consequence of NAFTA as opposed to other factors like automation, the adjustments made from NAFTA to the USMCA seem to address many of NAFTA’s perceived shortcomings.[6] Where NAFTA’s labor standards measures fell short, the USMCA puts a renewed emphasis on protecting (or raising the price of, depending on your perspective) low wage laborers. The USMCA also works to address the concern that some of the goods that benefited from tariff reductions under NAFTA were not meaningfully produced in North America by increasing the amount of component parts that need to be sourced from the region.

Put more directly- the new trade deal meaningfully addresses many of the concerns brought up by NAFTA’s critics. The question remains, however, if NAFTA’s critics successfully diagnosed the issues at hand.

Peter Scaturro is the Director of Studies at the Foreign Policy Association.

[1] https://www.cnbc.com/video/2018/10/01/trump-nafta-was-worst-trade-deal-ever-made.html

[2] https://www.inc.com/encyclopedia/north-american-free-trade-agreement-nafta.html

[3] https://www.cfr.org/backgrounder/naftas-economic-impact

[4] https://www.inc.com/encyclopedia/north-american-free-trade-agreement-nafta.html

[5] https://www.scmp.com/week-asia/opinion/article/2167145/usmca-trade-pact-canada-and-mexico-throwing-china-under-bus-was-no

[6] https://money.cnn.com/2017/01/30/news/economy/jobs-china-mexico-automation/index.html