NAFTA Is Dead; All Hail the USMCA
Following some furious 11th hour bargaining, Canada reached an agreement with U.S. trade negotiators Sunday night, marking the end of the North American Free Trade Agreement (NAFTA) and the creation of its successor, the U.S.-Mexico-Canada Agreement. USMCA, for short.
While some of the finer details have yet to be released, the trilateral trade deal prevents the nightmare scenario of heavy tariffs levied on vehicles imported from Canada. To keep General Motors, Fiat Chrysler, Ford, Honda, and Toyota plants humming, officials in the Great White North reluctantly offered up some milk and cheese.
Calling it a “great deal for all three countries,” U.S. President Donald Trump tweeted that the USMCA corrects “deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world.”
Trump came up with the new acronym, which seems tailor-made for song lyrics, after complaining that NAFTA had “bad connotations.” The U.S. and Mexico first reached a deal in late August.
In a joint statement, U.S. Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland called the deal “a new, modernized trade agreement for the 21st Century” that “will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region.”
The U.S.-Mexico deal updated the existing rules of origin, with the required percentage of North American parts rising from 62.5 percent to 75 percent. Some 70 percent of the steel, aluminum, and glass sourced for use in auto manufacturing must now come from within the trading bloc. In the aim of placating U.S. officials worried about a southwards surge of jobs across the Rio Grande, Mexico agreed to a wage of $16 an hour for 40 to 45 percent percent of autoworkers involved in final assembly (the latter figure being for those working on trucks).
As for manufacturers north of the 49th parallel, the new deal remains somewhat murky However, we do know that Canada agreed to a cap on auto exports to the U.S., but nothing that would impact the existing cross-border flow. Media reports place the cap at around 40 percent above current levels. Above that level, only vehicles that fail to meet rules of origin requirements could be subject to unspecified new tariffs.
Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, tweeted that Canada and Mexico “negotiated exemptions from [import tariffs] at production levels that materially outpace* export growth models to the US over the next 5-10 years.”
“The cost of an automobile may increase if manufacturers are required to source more supplies from the US/CAN/MX than from the cheapest global sources,” Volpe wrote. “The benefit is more* investment in Ontario, Kentucky & Chihuahua & less* in places that sell to us but do not buy from us.”
Jerry Diaz, head of the union representing Detroit Three autoworkers in Canada, gave the deal a thumbs up.
“If you combine the moves made with Mexico as it relates to raising the wages of Mexican workers and increase of content of North American labour into a car in order for make it tariff free,” the Unifor president told reporters. “Frankly, the deal we have with the United States, we are, I would argue, in better shape than we have been in the past 25 years.”
It’s now up to governments to make USMCA official.
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