The New NAFTA Deal

Canada and Mexico are the second and third biggest trade allies for the United States. Historically these nations have had a healthy relationship with very few trade disputes. This is the reason why the North American Free Trade Agreement, i.e. the NAFTA was said to be successful. However, President Trump has been extremely critical of NAFTA ever since he was a candidate. He firmly believes that other countries like Mexico and Canada were getting an unfair advantage because of NAFTA.

This is the reason why he pressurized Canada and Mexico to renegotiate the terms of the trade. As a result, a new agreement was formed in spectacular fashion. Delegates from the three countries came to a conclusion hours before the self-imposed deadline was breached. Under the threat of tariffs from the United States, Canada and Mexico have agreed to some revisions in the old agreement. However, if Donald Trump is to be believed the new agreement is entirely new, i.e. it is not a modification over the old agreement. President Trump wanted to make sure that the world understood that this was a different agreement which is why he has renamed it the United States-Canada-Mexico- Agreement (USCMA). In this article, we will have a closer look at some of the important changes that have been made in this agreement.

Automobile Sector: Analysts tracking the Trump presidency know that he is more emotional about certain industries than he is about others. Consider the case of aluminum and steel industry which Trump believes are the backbone of the economy even though there are no facts available to back this claim. Similarly, Trump is also very emotional about the automobile industry. He was extremely critical of the NAFTA agreement because he believed that NAFTA was single-handedly responsible for the drastic fall in the number of manufacturing jobs in the United States. Some of the provisions introduced in the USCMA agreement are as follows:

  • The new agreement does provide the opportunity for duty-free imports of cars into America. However, only cars which have more than 62.5% of their content manufactured in North America can qualify for duty-free imports. Hence, auto companies cannot import spare parts from China, assemble them in Mexico and sell them to American customers without paying any taxes. Trump has tried to align the interests of United States, Canada as well as Mexico. Countries like China which are not a party to the agreement are the real losers in such a scenario.
  • Trump has also mandated that about 40% of the spare parts which are used in any vehicle must be manufactured at a high wage facility. A high wage facility has been defined as any factory or production unit which pays a minimum wage of $16. This minimum wage is three times the wages that are paid in Mexican factories as of now. Many experts believe that Trump is trying to forcibly bring the production back to America even though it is not economically feasible.
  • The problem with imposing such complex provisions is that complying with them also leads to high costs for the company. Many analysts have warned that car companies may simply get fed up with the increasing regulation associated with manufacturing in the North American region. Many firms might simply opt out. The end result will be the exact opposite of what Donald Trump intended, i.e. more and more companies might simply relocate their manufacturing process to low-cost locations like China.

Wine and Cheese Sector: Another major grievance that Donald Trump had was with the Canadian dairy sector. According to Trump, Canada was being hypocritical. On the one hand, they insisted that Americans implemented free trade policies while on the other hand, they were protectionist about their dairy sector.

As per the new agreement, Canada has agreed not to be protectionist anymore. The dairy market in Canada will now be open to all the companies in North America. Donald Trump believes that this will positively impact the American dairy farmers.

Donald Trump has also negotiated to change regulation in the Canadian province of British Columbia. As per the current law, only wines manufactured in British Columbia were allowed to be stocked in a particular shelf in the stores. Now, with the advent of USCMA, American wines will also be stocked alongside the Canadian wines. This is likely to boost America’s wine exports as well.

Other Sectors: Donald Trump has scored some quick wins on other subjects as well. For instance, under this agreement, he has secured the rights for American financial services companies to join the Mexican markets. Since Mexico is still a developing market, this access is very valuable for these financial service firms.

He has also negotiated for the rights of American pharmaceutical companies. The patents of some of these companies were about to expire. As a result, Canadian companies would have produced the generic equivalent of these drugs and taken the market share away from Americans. Now, the period of the patent will be increased. Obviously, this will increase the profitability of American companies.

To sum it up, under the United States Canada Mexico Agreement, the United States has used its muscle power to intimidate its allies into a deal. According to many analysts, this may end up creating a disaster in the long run.

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