How Does the USMCA impact the countries involved in it?

Authors: Burhanuddin S. Naib, Yash Vardhan Jagnani

Research Head: Ong Guan Da

Editor: Akshat Daga

Abstract

This paper aims to explore the new United States–Mexico–Canada Agreement (USMCA) and review the changes from the old North America Free Trade Agreement (NAFTA) and how the new agreement affects the economies of the countries involved. For the US, focus will be onagriculture, labour industry, intellectual property and digital trade, for Mexico,the automobile industry and labour regulationsand for Canada, theeconomy as a whole and thedairy industry.

1. Background

The NAFTA came into effect on January 1st, 1994, as a result of trilateral trade talks between the US,Canada and Mexico. The agreement progressively eliminated taxes and duties, making exceptions to certain agricultural products traded with Canada(United States Trade Representative, 2020).

2. Impacts on the US economy

USMCA added $80 billion to the US economy, which is equivalent to a 0.5% increase in US GDP. USMCA emphasises on reducing the remaining non-tariff measures on trade and US economy. The Commission estimates that USMCA would raise the US real GDP by $68.2 billion and US employment rate by 0.12% (“U.S.-Mexico-Canada Trade Agreement”, 2019).

2.1 Agriculture

Although NAFTA had some provisions concerning US agriculture, it was not enforced upon. However, USMCA provisions are expected to have a combined increase of $2.2 billion in U.S agricultural products and exports. USMCA increased market access forUS dairy, poultry, and egg producers, increasing export opportunities for US domestic producers. Through this agreement, Canada would be permitted to maintain a supply management system that protects domestic producers of domestic dairy, poultry, and egg products (“U.S.-Mexico-Canada Trade Agreement”, 2019).

2.2 Digital trade

USMCA is the first trade agreement which addresses digital trade, giving it a strong foundation for the expansion of trade and investment in digital services (Chuck Grassley, 2020). USMCA would reduce the scope for investor-state dispute settlement mechanism (ISDS). Only firms in these sectors i.eoil and natural gas, power generation, telecommunications, transport services, infrastructure, that are under government contracts would be able to file claims using ISDS (“U.S.-Mexico-Canada Trade Agreement”, 2019).

2.3 Intellectual property

USMCA focuses on driving greater economic growth by establishing and enforcing intellectual property rights. It entails the protection of biologic drugs for 10 years(Chuck Grassley, 2020).The agreement facilitates the protection of trade secrets-both civil and criminal while guaranteeing the ability to license trade secrets.

2.4 Labour

USMCA has provided the “strongest”labour and environment obligations in any US trade agreement, making US companies to be fully subjected to the enforcement and dispute settlement.NAFTA wasn’t as active in terms of the labour provision. USMCA compensated for the obligations by ensuring protection to migrant workers and includes a non-derogation provision that prohibits the elimination or weakening of existing labour regulations in a way that impacts intra-party trade or investment(“U.S.-Mexico-Canada Trade Agreement”, 2019).

3. Impacts on Mexico

Changes tolabour and environment provision in the USMCA affected Mexico the most. The USMCA makes labour rights lawfully enforceable and the Dispute Settlement chapter establishes a first-of-its-kind United States-Mexico Rapid Response Mechanism, providing for monitoring and expedited enforcement of labour rights to ensure effective implementation of Mexico’s landmark labour reform at particular facilities while respecting the sovereignty and due process (NAFTA, n.d.). Similarly, under the environment chapter, all environmental provisions have been bought at the core and are fully enforceable.

Mexico’s competitive advantage has been its cheap labour andextremely relaxedenvironmental laws, attracting investors from all over the world. The new agreement impacts the Mexican economy negatively.

Firstly, it would limit Mexico’s competitive advantage of low-cost labour with the passing of a minimum wage requirement in the automotive industry, where 40-45% of the automobiles manufactured must be made in factories where workers earn at least $16 per hour. While seen as a sympathetic move by US negotiators to help Mexican workers, it can be interpreted as a means to limit the number of manufacturing jobs in Mexico (Rajan, Kamath, Padmanabhan, Hansen, & Hari, 2020).

Secondly, the Mexican economy is currently declining and in a vulnerable state, these new labour laws would damage its economy as Mexico have lost their competitive edge over other countries, resulting in foreign companies to invest in other countries (Castañeda, 2019).

Positive impacts can be seen inthe automotive industry. The agreement increasing the use of North American-made parts from 62.5%to 75% by 2023 in both light vehicles and trucks, will give the Mexican supplier industry opportunity to increase its production(Díaz, 2018).Secondly, the new labour laws that are detrimental in the short run can be beneficial to Mexican workers as it promotes a labour-friendly environment, increasing the productivity of its workers (Díaz,2018).

4. Impact on Canada

USMCA have mixed impacts on the Canadian Economy. USMCA might help Canada recover from its declining growth rate as a sound US economy will support Canadian exports. On the flipside, if there is a larger than expected global growth slowdown or major escalation in tension between US

and China, it would weaken the Canadian exports accompanied by lower business confidence and investment (International Monetary Fund, 2019).

The change in the Dairy agreement affected Canada the most. There is fear among Canadian dairy farmers because USMCA exposed Canada’s long-protected dairy market to the United States. Farmers fear that this will reduce the demand for its local dairy production. The Canadian government said that it will spend $1.31 billion over 8 years to compensate Canadian farmers for their losses (Coletta, 2019).

5. Conclusion

For the US, USMCA is surely an upgrade from the NAFTA because it addresses provisions relating to a wider variety of sectors and enhanced the policies and regulations of its existing sectors. For Mexico, USMCA is detrimental in the short run as it snatches away Mexico's competitive advantage of cheap labour but it might be beneficial for Mexico in the long run as it will help to put in place proper labour practices and promote labour welfare. For Canada, the dairy sector will be heavily affected, but the government has addressed this issue by rolling out a plan to spend $1.31 billion over the next 8 years to compensate the farmers.