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, 2018.1 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.2

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 USMCA was negotiated under the Trump Administration, but the idea of a replacement for NAFTA dates back before President Trump’s presidential term. Over the years, NAFTA had frequently been blamed for the export of U.S. manufacturing to Mexico and the accompanying loss of jobs and suppression of wages among U.S. workers. In 2008, then-presidential candidate Obama had pledged to renegotiate NAFTA in the interests of American workers but later declined to do so during his administration.3

As a candidate in the 2016 election, President Trump campaigned on renegotiating NAFTA in order to try and get more favorable terms for the U.S. 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 on September 30, 2018.4

First, the Mexican Senate ratified the deal on June 19, 2019, and approved amendments to it on December 12, 2019.56 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.4 Finally, the Canadian Parliament ratified the treaty on March 13, 2020.7

Several difficulties emerged before and shortly after 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, 2020.89 On August 6, 2020, President Trump announced he would reinstate tariffs on Canadian aluminum, which had originally been put in place in 2018.10 The Canadian government responded, saying it was planning to place equal tariffs on U.S. aluminum products. On October 27, the same day the Canadian government was expected to unveil its retaliatory trade measures, President Trump suspended the tariffs, retroactive through September 1. However, the office of the U.S. Trade Representative said that the U.S. may reinstate the tariffs if aluminum imports from Canada «exceed 105 percent of the expected volume in any month».11

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:12

  1. 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 amount of tariff-free exports allowed for some poultry products will also be expanded.13
  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.14
  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 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.14
  4. 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.14
  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.

North American Free Trade Agreement (NAFTA)

Launched in 1994, NAFTA consists of Canada, Mexico, and the United States. It is the most significant economic bloc in the Americas and comparable to the EU in size (see www.nafta-sec-alena.org). NAFTA’s passage was smoothed by the existence, since the 1960s, of the maquiladora program under which U.S. firms located factories in northern Mexico to access low-cost labor and avoid tariffs.

What has NAFTA accomplished for its members? Initially, the accord increased market access between Canada, Mexico, and the United States. It eliminated tariffs and most nontariff barriers for products and services traded in the bloc and made it possible for member–country firms to bid for government contracts in all three countries. NAFTA also established trade rules and uniform customs procedures and regulations. The members agreed to rules for investment and intellectual property rights. NAFTA also provides for dispute settlement in such areas as investment, unfair pricing, labor issues, and the environment.

Since the bloc’s inception, Canada and Mexico have become the most important export markets of the United States, accounting for about one-third of U.S. exports. In the three-year period through 2012, the largest increase in U.S. export growth stemmed from exports to Canada and Mexico. In the 1980s, Mexico’s tariffs averaged 100 percent and gradually decreased over time, eventually disappearing under NAFTA. Annual NAFTA foreign investment in Mexico rose dramatically as U.S. and Canadian firms invested in their southern neighbor. Following NAFTA’s passage, Mexico’s per-capita income has risen substantially. Mexico is now Latin America’s wealthiest country in per-capita income terms.43
Other economic blocs are found worldwide. They include:

The European Free Trade Association, which includes Iceland, Liechtenstein, Norway, and Switzerland. It is linked to the European Union. It has free trade agreements with many countries worldwide.

MERCOSUR, or the El Mercado Comun del Sur (the Southern Common Market), the strongest bloc in South America, established in 1991 (see www.mercosur.int).

The Association of Southeast Asian Nations (ASEAN), created in 1967 with the goal of maintaining political stability and promoting regional economic and social development among its members (see www.aseansec.org).

Asia Pacific Economic Cooperation (APEC), which aims for greater free trade and economic integration of the Pacific Rim countries. It incorporates 21 nations on both sides of the Pacific, including Australia, Canada, Chile, China, Japan, Mexico, Russia, and the United States (see www.apec.org).

The Australia and New Zealand Closer Economic Relations Agreement (CER), founded in 1983, which promotes free trade between the two nations.

The Gulf Cooperation Council (GCC; see www.gcc-sg.org/eng), which aims to coordinate economic, social, and cultural affairs among its members: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.