NAME: NKIRE FAITH AYOMIDE

LEVEL: 400 LEVEL

MATIRC NUMBER: 18AH023848

LECTURER: DR DURUJI MOSES

DISCUSS THE DIFFERENCES BETWEEN

NAFTA AND USMCA

INTRODUCTION

The United States, Mexico, and Canada updated NAFTA to create the new USMCA. USMCA is

mutually beneficial for North American workers, farmers, ranchers, and businesses. The new

agreement, which entered into force on July 1, 2020, will create a more balanced environment

for trade, will support high-paying jobs for Americans, and will grow the North American

economy.

WHAT IS NAFTA?

The North American Free Trade Agreement (NAFTA) was inspired by the success of

the European Economic Community (1957–93) in eliminating tariffs in order to stimulate trade

among its members. Proponents argued that establishing a free-trade area in North America

would bring prosperity through increased trade and production, resulting in the creation of

millions of well-paying jobs in all participating countries.

A Canadian-U.S. free-trade agreement was concluded in 1988, and NAFTA basically extended

that agreement’s provisions to Mexico. NAFTA was negotiated by the administrations of U.S.

Pres. George H.W. Bush, Canadian Prime Minister Brian Mulroney, and Mexican Pres. Carlos

Salinas de Gortari. Preliminary agreement on the pact was reached in August 1992, and it was

signed by the three leaders on December 17. NAFTA was ratified by the three countries’ national

legislatures in 1993 and went into effect on January 1, 1994.

Provisions

NAFTA’s main provisions called for the gradual reduction of tariffs, customs duties, and other

trade barriers between the three members, with some tariffs being removed immediately and
others over periods of as long as 15 years. The agreement ensured eventual duty-free access for a

vast range of manufactured goods and commodities traded between the signatories. “National

goods” status was provided to products imported from other NAFTA countries, banning any

state, local, or provincial government from imposing taxes or tariffs on such goods.

NAFTA also contained provisions aimed at securing intellectual-property rights. Participating

countries would adhere to rules protecting intellectual property and would adopt strict measures

against industrial theft.

Other provisions instituted formal rules for resolving disputes between investors and

participating countries. Among other things, such rules permitted corporations or individual

investors to sue for compensation any signatory country that violated the rules of the treaty.

Additional side agreements were adopted to address concerns over the potential labour-market

and environmental impacts of the treaty. Critics worried that generally low wages in Mexico

would attract U.S. and Canadian companies, resulting in a production shift to Mexico and a rapid

decline in manufacturing jobs in the United States and Canada. Environmentalists, meanwhile,

were concerned about the potentially disastrous effects of rapid industrialization in Mexico,

given that country’s lack of experience in implementing and enforcing environmental

regulations. Potential environmental problems were addressed in the North American Agreement

on Environmental Cooperation (NAAEC), which created the Commission for Environmental

Cooperation (CEC) in 1994.

Further provisions of NAFTA were designed to give U.S. and Canadian companies greater

access to Mexican markets in banking, insurance, advertising, telecommunications, and trucking.

Criticism

Many critics of NAFTA viewed the agreement as a radical experiment engineered by influential

multinational corporations seeking to increase their profits at the expense of the ordinary citizens

of the countries involved. Opposition groups argued that overarching rules imposed by NAFTA

could undermine local governments by preventing them from issuing laws or regulations

designed to protect the public interest. Critics also argued that the treaty would bring about a

major degradation in environmental and health standards, promote the privatization and

deregulation of key public services, and displace family farmers in signatory countries.

Effects

NAFTA produced mixed results. It turned out to be neither the magic bullet that its proponents

had envisioned nor the devastating blow that its critics had predicted. Mexico did experience a

dramatic increase in its exports, from about $60 billion in 1994 to nearly $400 billion by 2013.

The surge in exports was accompanied by an explosion in imports as well, resulting in an influx

of better-quality and lower-priced goods for Mexican consumers.

Economic growth during the post-NAFTA period was not impressive in any of the countries

involved. The United States and Canada suffered greatly from several economic recessions,

including the Great Recession of 2007–09, overshadowing any beneficial effects that NAFTA

could have brought about. Mexico’s gross domestic product (GDP) grew at a lower rate

compared with that of other Latin American countries such as Brazil and Chile, and its growth in
income per person also was not significant, though there was an expansion of the middle class in

the post-NAFTA years.

Little happened in the labour market that dramatically changed the outcomes in any country

involved in the treaty. Because of immigration restrictions, the wage gap between Mexico on the

one hand and the United States and Canada on the other did not shrink. The lack

of infrastructure in Mexico caused many U.S. and Canadian firms to choose not to invest directly

in that country. As a result, there were no significant job losses in the U.S. and Canada and no

environmental disaster caused by industrialization in Mexico.

Expansion of the agreement

Although NAFTA failed to deliver all that its proponents had promised, it continued to remain in

effect. Indeed, in 2004 the Central America Free Trade Agreement (CAFTA) expanded NAFTA

to include five Central American countries (El Salvador, Guatemala, Honduras, Costa Rica,

and Nicaragua). In the same year, the Dominican Republic joined the group by signing a free

trade agreement with the United States, followed by Colombia in 2006, Peru in 2007,

and Panama in 2011. According to many experts, the Trans-Pacific Partnership (TPP) that was

signed on October 5, 2015, constituted an expansion of NAFTA on a much-larger scale.

Peter Bondarenko

WHAT IS USMCA?

The United States-Mexico-Canada Agreement (USMCA) is a free trade agreement between

Canada, Mexico, and the United States that entered into force on July 1, 2020. This agreement
was reached to modernize the 25-year-old NAFTA into a 21st century, high-standard

agreement.

This is a multilateral free trade agreement that was created with the intention of benefiting trade

flows in North America while bolstering channels for investors, exporters, importers, non-

governmental groups, and governments to seek to resolve problems and disputes.

The USMCA is a win for the three countries involved as it supports mutually beneficial trade

which leads to freer markets, fairer trade, and robust economic growth in North America.

The agreement reduces costs and makes cross-border transitions easier and more predictable.

USMCA prohibits custom duties on products distributed electronically, enhances protection and

enforcement of IP rights, ensures fair and transparent treatment when supplying cross-border

services and encourages regulatory compatibility and cooperation.

HISTORY AND NEGOTIAIONS

The USMCA resulted from the renegotiation of the former North America Free Trade

Agreement (NAFTA), which had been enacted in 1994. The negotiations to modernize the

previous agreement began in 2017, and primarily focuses on provisions surrounding auto

exports, steel and aluminum tariffs, and the dairy, egg, and poultry markets.

The three countries came to a formal agreement on October 1, 2018, and the USMCA was

proposed during the G20 summit the following month. Following further negotiations over the

following year, a revised version of the agreement was signed by United States President Donald

Trump, Mexican President Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau was
signed on December 10, 2019. The agreement was then ratified by all three countries in 2020 and

came into effect on July 1, 2020.

The countries now have until 2023, 3 years after the date it came into effect to fully enforce the

USMCA’s stipulations.

The agreement will receive a formal review in 2025-2026.

AGREEMENT AND HIGHLIGHT

The USMCA aims to facilitate and support trade between the participating countries,

encouraging free and fair trade and further driving economic growth in North America. While

the USMCA has broad impacts on all kinds of trade between the involved countries, 5 of the

most agreements most important provisions include the following:

Dairy and Agriculture

The USMCA will increase U.S. farmers’ access to the Canadian dairy market by raising the

amount of U.S. goods that can be exported to Canada tariff-free. This will allow the U.S. tariff-

free access to up to 3.6% of the Canadian dairy market. The number of tariff-free exports

allowed for some poultry products will also be expanded.

Automobiles

One of the most significant portions of the USMCA stipulates new trade regulations for

automobiles and automotive parts. Under NAFTA, cars and trucks with at least 62.5% of their

components manufactured in one of the three participating countries could be sold free of tariffs.
The USMCA increases that minimum requirement to 75%. At the same time, the USMCA

stipulates minimum wages for workers in the automotive manufacturing process: 40-45% of the

work done on eligible vehicles must be accomplished by workers earning at least $16 (USD) per

hour.

Intellectual Property

The USMCA increases intellectual property protections. Among other changes to trade policy,

the new agreement extends the copyright period to 70 years beyond the life of the creator, an

increase of 20 years in some cases. The USMCA also addresses new products that weren’t

around when NAFTA was written in the early 1990s. The USMCA prohibits tariffs on digital

music, e-books, and other similar digital products. The agreement also establishes copyright safe

harbor for internet companies, meaning they can’t be held liable for copyright infringements of

their users if they make good faith efforts to stop infringement.

Sunset Provision

Unlike NAFTA, the USMCA is set to expire after 16 years unless it is renewed. All three nations

are required to come together for a joint review every 6 years. The agreement is not

automatically terminated if one party refuses to renew it at one of these joint reviews. Instead,

the nations are required to meet every year for the following 10 years to resolve the issues

blocking renewal. The agreement expires if no agreement is reached in those 10 years.

Labor
The USMCA sets up an independent investigatory panel that can investigate factories accused of

violating workers’ rights and stop shipments from factories found to be in violation of labor

laws. In addition, Mexico says it will enact a wide array of labor reforms to make it easier for

workers to unionize and stop violence and other abuses of workers. These provisions are meant

to achieve two goals: to improving working conditions for Mexico’s workers and create a more

even playing field between U.S. and Mexican factories because Mexican wages are likely to rise

Other key agreement highlights also include provisions on rules of origin to encourage more

goods and materials to be manufactures in the United States and ensure the benefits of USMCA

flow to North American workers, new commitments for market access, to address non-tariff

barriers related to trade in remanufactured goods, import licensing, and export licensing, and

finally, provisions surrounding small businesses to cut red tape and make it easier for small

businesses to tap into foreign markets and participate in cross-border trade.

Impact of the Agreement

The agreement is playing a positive role in boosting trade flows, as well as improving bilateral

and trilateral relations between the participants.

Under the United States-Mexico-Canada Agreement, trade is bouncing back from pre-COVID-

19 levels, averaging a 6% increase across the region from 2019 to 2021. With a record 75% of

Canadian and Mexican imports coming from the United States, both countries are both the US’s

largest export market and the US’s largest trading partners, accounting for more than twice US

trade than with China.

In 2021, the total trade flows between the three countries reached $1.3 Trillion, and 2022

seemingly had a similar trajectory. Trade in the region reached $642.6 billion in the first five

months of 2022 alone, showing a 23% increase from 2021.

However, there have also been challenges, and more are expected to come. Disputes have arisen

between the three countries over the past 2 years, and with USMCA dispute panels having been

previously established to address issues on Canadian dairy tariffs, US solar panel duties and,

most recently, rules of origin for vehicles.

Despite these challenges, the agreement is showing obvious mutual benefits for the countries

involved and the agreement is maintaining its promise of free and fair trade for the region.

DIFFERENCES BETWEEN NAFTA AND USMCA

USMCA is in many ways, a continuation of the original NAFTA. It seeks to promote and

protect free trade between the three countries that make up North America.

Auto manufacturing boost

The USMCA requires 75% of a vehicle’s parts to be made in one of the three countries –

up from the current 62.5% rule – in order to remain free from tariffs when moving between

the three signatory countries.

It also requires more vehicle parts to be made by workers earning at least $16 an hour,

which may provide a boost to manufacturing in the United States, where wages are higher

than in Mexico.

The International Trade Commission report found that these changes would add 28,000

jobs in the industry over six years, while also leading to a small increase in the price of

vehicles that consumers pay.

But the American Automotive Policy Council, which represents General Motors, Ford and

Fiat-Chrysler, argued the ITC report underestimated the long-term investments US

automakers will make because of the USMCA.

A Trump administration report was more positive, projecting that the deal would

create 76,000 auto jobs over five years. That would mean a more than 7% increase in

employment over the current 990,000 US auto workers.

On Tuesday, the trade group said the big three automakers were “pleased” that the USMCA

was moving forward.

“The USMCA allows the US auto industry to remain globally competitive by ensuring

vehicles and auto parts are able to move freely across country lines,” said Matt Blunt,

president of the American Automotive Policy Council, in a statement

But auto plants are capital intensive and it takes a long time to move production. Industry

analysts have said that some automakers may opt to pay the tariff at least at first, rather

than move plants or shift hiring.

Labor laws strengthened

Manufacturing workers have long blamed NAFTA for sending jobs to Mexico, where

wages are lower, and it was a priority for Democrats that the USMCA strengthen the

enforcement of labor rules, creating a more level playing field for American workers.

Lawmakers were able to include some changes to enforcement language before coming to

an agreement Tuesday with the Trump administration, and the deal now has the backing of

the AFL-CIO, the largest federation of unions in the US.

“For the first time, there truly will be enforceable labor standards – including a process that

allows for the inspections of factories and facilities that are not living up to their

obligations,” said AFL-CIO President Richard Trumka in a statement.

The deal struck by Democrats provides for an interagency committee that will monitor

Mexico’s labor reform implementation and compliance with labor obligations. It also, for

the first time in any US trade agreement, allows for “rapid response” panels to review

whether specific facilities are violating workers’ rights and to levy duties or penalties on

products made at those facilities.

Dairy farmers get more market access

The original NAFTA eliminated tariffs on most agricultural products traded among the

three countries. Canada and Mexico are already the two biggest export markets for US

farmers and ranchers.

The USMCA will keep those tariffs at zero, while further opening up the Canadian market

to US dairy, poultry and eggs. In return, the United States will allow more Canadian dairy,

peanuts and peanut products, as well as a limited amount of sugar, to cross the border.

Environmental protections

The agreement provides $600 million to address environmental problems in the region –

like sewage spillovers from Tijuana that impact San Diego – and makes regulations easier

to enforce by doing away with a requirement to prove a violation affects trade.

While the new enforcement measures pleased most Democrats, they didn’t go far enough to

get environmental groups like the Sierra Club to support the agreement.

The final text “will be even worse than we originally anticipated for our air, water, climate,

and communities,” said Sierra Club Executive Director Michael Brune in a statement.

The provision that was removed from the trade deal would have required the three

countries to provide at least 10 years of exclusivity for biologics, which are complex and

costly to make. Currently, the US provides 12 years of exclusivity, while Canada provides

eight years and Mexico five years.

Republicans have long supported including exclusivity provisions for pharmaceutical

companies in trade deals, and the pharmaceutical industry quickly came out against the

provision’s removal.

“Eliminating the biologics provision in the USMCA removes vital protections for

innovators while doing nothing to help US patients afford their medicines or access future

treatments and cures,” said Stephen Ubl, CEO of PhRMA, a trade group. “The only
winners today are foreign governments who want to steal American intellectual property

and free ride on America’s global leadership in biopharmaceutical research and

development.”

CONCLUSION

The North American manufacturing community has now had over a year to sort out the

differences between NAFTA and USMCA. But many are still unsure about exactly how the two

free-trade trade agreements differ and what provisions impact them most. While most of the

terms remain unchanged between the two trade deals, there are several key differences that have

been noted.
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USMCA

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Lobosco, K., Fung, B., & Luhby, T. (2019b, December 17). 6 key differences between NAFTA

and the USMCA deal that replaces it. CNN.

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