It’s been thirteen months, nine official rounds of negotiations, countless side meetings, and a brief period where Canada’s participation appeared precarious, but this past Sunday night, the U.S., Mexican, and Canadian negotiators finally announced a new regional trade agreement. The United States-Mexico-Canada Agreement (USMCA) builds on the old NAFTA and pulls in much of the modernization that had been outlined in the previous Trans-Pacific Partnership (TPP) negotiations. In fact, the similarities are so strong, that the agreement has been deemed more of a rebranding than a trade revolution. However, there are some notable changes to the deal’s content, the tone of the negotiating process, and the agreement’s potential long-term regional effects.
In the new agreement, the United States coaxed modest concessions from Canada and Mexico, as both countries staked out positions that generally sought to protect the status quo. The biggest trade shift was in the regional content requirements for automobiles, which would be slated to rise from 62.5 to 75 percent by 2020. Additionally, by that same year, 40 percent of car value would have to be produced in factories that pay their workers at least a $16 an hour wage. These measures clearly aim to keep manufacturing jobs in the United States and Canada. However, time will tell if they have the intended effect or if companies find it cheaper to forego the tariff exemptions altogether rather than comply.
There were changes across other broad areas. Canada opened up its dairy market slightly for U.S. farmers but held on to cultural exemptions and two of three provisions that allow for dispute settlement panels. While the United States succeeded in adding in a future negotiating clause, although it didn’t get its originally desired five year clause but settled for review in sixteen years. Intellectual property and patent rights were also added, as were stronger labor rights. For more information, my colleagues at White & Case published a detailed analysis of what the deal contains – you can read it here.
These (fairly slight) changes, however, came at the expense of months of intense negotiations that differed significantly from past deals. From the very first meeting in August 2017, the U.S. team set an “America First” tone that remained throughout the negotiating process. The threat of a U.S. withdrawal always remained an option (and could still be on the table), and at times felt not only possible but likely. U.S. tariffs were also wielded as a negotiating tactic, pressuring Canada and Mexico to get in line or face economic consequences. And the negotiations also wrapped up with threats to kick Canada out of the agreement if the country’s negotiators failed to accept the United States and Mexico’s agreed-upon measures.
In the end, the hardline process helped inject urgency into the negotiations, brought forth today’s modernized USMCA, and potentially saved a regional trade agreement in general. However, the U.S. negotiators’ tough approach comes with its own costs and sets the precedent for future regional negotiations. These costs include a year of uncertainty that surrounded the trade agreement, which affected firms’ investment decisions. Meanwhile, U.S. soft power may have taken a hit, as Canadian and Mexican populations watched their leaders be insulted or threatened into compliance. Across North America, the trade agreement did not include any talk of cooperation, aligned interests, or regional competitiveness and instead featured only “wins” or “concessions.”
Yet, the entire USMCA process isn’t over. The agreement will be signed on November 30th–Mexican President Enrique Peña Nieto’s last day in office–and will then need to pass through procedural hurdles and be ratified by all three countries’ respective legislative bodies. This process will also be complicated by the United States’ November midterm elections, with the regional trade agreement likely to intertwine with broader U.S. debates on national politics. Mexico faces the similar situation of a new incoming administration. Yet the Mexican president elect Andrés Manuel López Obrador has spoken positively about the USMCA and his party’s control of Congress will likely ease any tense debates.
Over the past thirteen months, it’s been a long road to a new agreement, and it’s not over yet. I’ll be following the upcoming events over the next few months on the USMCA and watching closely to see if it is the first step toward a more strategic trade approach globally. I look forward to connecting with you all over Facebook, Twitter, or LinkedIn to hear what all the trade news may mean for you and your businesses.
Sincerely,
Antonio Garza