Written by: Kelly Grounds, Peak Associate
After months of uncertainty regarding the North American Free Trade Agreement (NAFTA), we learned this past week that it is officially dead, and will be replaced with the United States Mexico Canada Agreement (USMCA). Essentially, NAFTA 2.0, but with several new challenges for Canada’s economy and international trade.
NAFTA was in place for 24 years with few significant problems, so why the change? In short, because U.S. President Donald Trump wanted it. One of his campaign promises was that he would kill NAFTA, citing it as one of the “worst trade deals” in U.S. history.
This is one of the few promises that Trump had made about trade, alongside removing China from the World Trade Organization and raising tariffs on imported goods. It still has to be approved by the U.S. Congress, but it’s estimated that the deal will be signed into law before December.
So, what was the United States able to achieve with their new deal?
American automotive industry push
The USMCA stops manufacturers from getting automobile parts from other countries, so that more production can take place within the U.S. As well, new wage rules mean that the average minimum wage in automobile factories will be $16 going forward. Under NAFTA, there were none of these restrictions; tariffs were low on car parts and there were no caps on automobile imports. This is likely meant to make American automotive companies more productive.
Canadian dairy protections lost
Canada’s also lost some of their dairy protections under the new deal. Under NAFTA, Canada had protections that gave their dairy farmers the edge in both the domestic and international markets, allowing Canada to set their own tariffs. Under USMCA, Canada is forced to give U.S. dairy farmers access to Canada’s domestic markets. If America offers cheaper products, this may provide brutal new competition for Canadian farmers.
No private trade agreements
Possibly the most concerning trait of the USMCA comes with section 32.10, which requires Canada, Mexico, and the United States to inform the others when they are pursuing a non-market trade deal without them. This could allow the U.S. or Mexico to veto the trade deal. China in particular is concerned about this, calling it another part of their ongoing trade war with America. They also fear that the United States will most likely try to veto any potential trade agreements between China and either Mexico or Canada.
Canada was also able to keep chapter 19 of NAFTA in the new deal. Chapter 19 gives all three countries a forum to discuss dispute resolution mechanisms, which ensures that both Canada and Mexico aren’t completely defenseless against to the United States should conflict arise.
But even with this, things are bleak. Letting another country veto your own trade deals is tantamount to giving up part of your country’s sovereignty — part of your country’s ability to be free and independent from outside pressure. The United States could threaten to kill the USMCA any time Canada doesn’t do as they say.
Mexico also lost a lot under USMCA. While they had initially negotiated a bilateral trade deal with the U.S. back in August, a lot of what had previously been negotiated was forgotten. While it is easier for Mexican labourers to unionize under USMCA, they are being backed into a corner with the new minimum wage being placed on automobile factories. Mexico’s current minimum wage is $5.53 CAD and the increase to $16.00 will be one that most factories simply will not be able to afford. This will probably result in production being moved back to the United States, therefore costing Mexico jobs.
As far as the United States is concerned, this is a win. It’s also one of the only campaign promises that Trump has been able to fulfill. The USMCA shows a concerning power that the United States has over its neighbours. They essentially negotiated a deal that gives them huge oversight over Canada’s and Mexico’s actions, and brings several seemingly minor changes to two of our largest industries. This is a frustrating example of what a continent can become when some businessman, not a politician, is running one of its largest countries.
