NAFTA is getting a sequel, and it’s going to be big.
The United States Mexico Canada Agreement (USMCA) is a new trade agreement designed to replace/update the North American Free Trade Agreement (NAFTA) originally passed into law November of 1994. The USMCA is also confusing at face, mired in political conflict, and very important to understand if you do any buying/shipping across either border.
At its core, the USMCA exists to facilitate trade between Canada, Mexico, and the United States by regulating new thresholds for duty taxes, tariffs, and labor rights. This includes everything from imposing a quota on Mexican automotive production, to extending the copyright length for sound recordings in Canada. It’s far-reaching, jointly written, and jointly enforced.
There are a lot of conflicting opinions on the many merits and failings of the USMCA, but we’re not here to throw our hat into the political ring. (It’s pretty scary in there).
We’re here to talk about what all this political jargon means for shippers, carriers, and logistics providers in the coming years.
NAFTA: An Overview
First, some history.
As previously mentioned, the North American Free Trade Agreement (NAFTA) is the original trade agreement upon which the USMCA is based. While there are some notable changes between the two (we’ll talk about that shortly), there are even more resemblances. If you want to appreciate the remix, you‘ve got to hear the original.
Much like the USMCA, NAFTA’s conception was fraught with controversy, and borne from another, similarly named trade agreement between the US and Canada passed in 1988.
NAFTA is the largest free trade agreement in the world, and has received generally positive reviews from economists. This is due in large part to the decrease in food and oil prices for all co-signers and a sharp increase in trade between the three member countries. However, it has also enjoyed a fair share of criticism for manufacturing job losses in the US, a rise in labor abuses in Mexico, and its negative environmental impact.
Here’s what NAFTA does:
- Eliminates tariffs on imports and exports between member countries, so long as the exporters have a Certificate of Origin that proves the export originated in the US, Canada, or Mexico.
- Establishes trade dispute procedures to both interpret the agreement and avoid expensive lawsuits.
- Requires all NAFTA countries to recognizes patents, trademarks, and copyrights from other member nations.
- Makes business travel easier between the US, Canada, and Mexico.
- Grants most-favored-nation status to all NAFTA nations. Which means member countries can’t offer better deals to investors from non-NAFTA countries, and must offer federal contracts to businesses in all three member nations.
The USMCA: An Overview
The USMCA exists to expand upon NAFTA and address concerns over the agreement’s environmental impact and labor issues. It also adds language to account for digital copyright law and data distribution in the internet age. The USMCA at once replaces and updates NAFTA in some key ways.
Here are the biggest differences between NAFTA and the USMCA
- To qualify for zero tariffs, automobiles must now have 75 percent of their components manufactured in Mexico, the US, or Canada. Under NAFTA, that number was 62.5 percent.
- A “sunset clause” that requires member nations to review the deal every six years.
- The USMCA extends the terms of copyright from 50 years after the life of the author to 70 years beyond the life of the author. It also expands the original copyright lingo to include digital media and prohibit data localization.
- 40 to 45 percent of automobile parts must be made by workers who earn at least $16 an hour by 2023, and Mexican authorities are required to allow workers to form collective bargaining units. As a result, Mexico has already passed USMCA compliant labor laws.
- Canada will provide new tariff rate quotas exclusively for the United States, allowing American farmers to sell more milk, cheese and other dairy products north of the border. Canada also agreed to end a pricing system that limited imports of certain milk ingredients.
What Does All This Mean for Cross-border Shippers?
About $33 billion dollars.
According to the US International Trade Commission, the USMCA is going to increase annual U.S. exports to Canada and Mexico by a combined $33 billion above the current NAFTA baseline.
Mexico’s industry has boomed in the past few years thanks to a one-two punch of increased Chinese tariffs and NAFTA itself. Nearshoring, or outsourcing to nearby countries, has done nothing but gain popularity in the face of increasing shipping costs. Rising fuel prices alone have cut into profits for many major manufacturers, and concerns about cargo ship emissions have resulted in stricter and stricter standards. All this to say, Mexico is looking better than ever for big business. Especially automakers.
Because so many of the USMCA’s provisions favor homegrown manufacturing (especially in the aforementioned automotive sector) it’s likely even more offshore manufacturing will move into Mexico. As our CEO Matt Silver pointed out in his 2020 predictions interview – this may result in some serious capacity crunches and surges.
Canada will also see more cross-border trade, particularly in the dairy industry, as American farmers move to fill the new gap. The International Dairy Foods Association has already come out in strong support of the agreement, and echoes the sentiment that the deal will increase trade and prop up the American dairy industry. This, in turn, will call for more cross-border reefer capacity. Which, if you’re a small shipper just breaking into Canada, might prove difficult if prices spike accordingly.
All told we’re looking at some big increases in cross-border exports. The American Trucking Association’s President and CEO Chris Spear put it best:
“This agreement will boost both U.S. exports and gross domestic product, meaning more truck movements and delivering measurable returns for our industry.”
Chris Spear, American Trucking Association President and CEO
What this means for your individual business depends primarily on your industry, your volume, and your present capacity. If you have any inkling that maybe you need to take another look at your supply chain, now is the time. And if, while you’re reassessing your supply chain, you think you could use an innovative new cross-border solution – might we recommend SCOUT by Forager?
When Does the USMCA Come Into Effect?
Hard to say. Here’s the timeline so far:
- May 18, 2017 – Formal USMCA negotiations begin
- April 8, 2018 – Formal talks end
- November 30, 2018 – The US, Canada, and Mexico sign the USMCA
- June 20, 2019 – The Senate of Mexico ratifies the agreement
- January 27, 2019 – Canada begins the formal ratification process
- January 29, 2020 – The United States signs the agreement into law
So far, the US and Mexico have both ratified the USMCA. Canada has yet to sign the agreement into law, but the Canadian ratification process is already underway. It’s difficult to pin an exact date on when it will be finalized, so keep an eye out.
The Bottom Line
The USMCA is a big agreement, and it has big, NAFTA-shaped shoes to fill. It’s hard to know the exact scope and scale of the USMCA’s impact, but it’s safe to say we should all stay informed and stay prepared.