What is the USMCA?

The United States-Mexico-Canada Agreement, also known as the USMCA, is a trade deal between the three nations which was signed on November 30, 2018. The USMCA replaced the North American Free Trade Agreement (NAFTA), which had been in effect since January of 1994. Under the terms of NAFTA, tariffs on many goods passing between North America's three major economic powers were gradually phased out. By 2008, tariffs on various agricultural and textiles products, automobiles, and other goods were reduced or eliminated.

Key Takeaways

  • The United States-Mexico-Canada Agreement (USMCA) is a free trade agreement between those three countries.
  • The USMCA replaced the North American Free Trade Agreement (NAFTA).
  • The USMCA took effect on July 1, 2020.
  • If not renewed, the USMCA will expire in 16 years.

The idea of a replacement for NAFTA dates back before President Trump's election, as a candidate, President Trump campaigned on renegotiating NAFTA in order to try and get more favorable terms for the U.S. Trump The USMCA began to officially take shape when the Trump administration sent the required 90-day notice to Congress that he was going to begin talks to renegotiate NAFTA. The talks officially began on August 16, 2017 and ended September 30, 2018.

First, the Mexican Senate ratified the deal on June 19, 2019, and approved amendments to it on December 12, 2019.  Then, on December 19, 2019, the U.S. House of Representatives passed legislation to approve the USMCA. The legislation passed the Senate in January 16, 2020, and on January 29 President Trump signed it into law. Finally, the Canadian Parliament ratified the treaty on March 13, 2020.

Several difficulties emerged before the treaty went into effect on July 1, 2020. First, on May 31, 2019 President Trump said starting June 10 the U.S. will impose a 5% tariff on all Mexican imports. He threatened this increase in tariffs unless the Mexican government took sterner measures to lower the number of Central American asylum seekers entering the U.S. from Mexico. A deal was reached to avoid the tariffs on June 8, 2020.  Second, as the date of the treaty neared, reports emerged that the Trump administration was planning to implement tariffs on Canadian aluminum on July 1, 2020, just as the new trade deal takes effect. This could spark retaliatory tariffs from Canada.

Important Provisions of the USMCA

Per the Office of the United States Trade Representative, the USMCA is a "mutually beneficial win for North American workers, farmers, ranchers, and businesses." NAFTA aimed to create a free trade zone between the U.S., Canada, and Mexico, and the USMCA utilizes NAFTA as a basis for a new agreement. While the USMCA has a broad impact on trade of all kinds between the three named nations, some of the agreement's most important provisions include the following:

  1. Dairy and Agriculture
    The USMCA will increase U.S. farmers' access to Canadian dairy 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 amount of tariff-free exports allowed for some poultry products will also be expanded.
  2. 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.
  3. 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 which 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.
  4. Sunset Provision
    Unlike NAFTA, the USMCA will expire after 16 years unless it renewed, and all three nations are required to come together for a joint review after 6 years.
  5. 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.