New North American trade deal includes changes that aim to help Midwest's auto sector

Following more than a year of negotiations, and many days when it seemed as though talks would fail, Canada, Mexico and the United States reached agreement on a trilateral trade pact on Sept. 30. The deal has a new name — the United States-Mexico-Canada Agreement, or USMCA — and some new provisions, but also is notable for what it keeps in place.
“About 70 percent is the same [as the North American Free Trade Agreement],” notes Chad Hart, an associate professor of economics at Iowa State University. “What this means is that the rules we have been playing under for the last 20-plus years have been reaffirmed, and this adds market certainty.”

Here is how some of the key sticking points in negotiations ultimately were resolved.

  • Domestic content for vehicles (“rules of origin”) — Under the new agreement, 75 percent of an automobile’s content must come from North America in order for it to avoid domestic tariffs (this is up from the 62.5 percent threshold under NAFTA). In addition, at least 40 percent of the vehicle must be made in a factory where the average worker’s wage is $16 per hour. Both of these changes were top priorities of the Trump administration.
  • Dispute settlement — The Trump administration also wanted to do away with NAFTA rules that had allowed non-U.S. panels to decide trade disputes involving U.S. companies. This change was a “red line” for Canada, however, and the new agreement will continue to allow independent North American panels to resolve these disputes.
  • Sunset clause — The Trump administration wanted to include a five-year sunset clause (NAFTA had no sunset clause at all). Negotiators ultimately settled on a 16-year sunset provision, with the three countries conducting a formal review of USMCA after six years to determine whether to extend the sunset date.
  • Canadian dairy policy — While retaining its supply management system for dairy, Canada agreed to slight increases in market access for U.S. dairies and to end its “Class 7” program — a particular target of U.S. negotiators that said this recent Canadian policy on ultrafiltered milk products (used to make cheese and yogurt) had distorted trade and hurt U.S. dairy farmers in states such as Wisconsin.
  • Vehicle quotas —The United States raised the number of vehicles produced in Canada and Mexico that can come into this country tariff-free. The new quota is 5.2 million per year, more than 1 million above the number in NAFTA.
The USMCA also adds to or updates the NAFTA agreement in several key areas: for example, improving border management, aligning the three countries’ regulatory structures, and including language on e-commerce and intellectual property.
“Some of the new intellectual-property rules agreed to by the three countries will serve to present common standards when negotiating with other countries, such as China,” Hart notes.
It’s not entirely clear what the new agreement will mean for the Midwest’s economy. The auto-related provisions could help maintain, and grow, jobs in this important regional sector. For example, under NAFTA, many suppliers had used components from plants outside of North America. This may change with a stronger domestic-content requirement now in place. In addition, the new $16-an-hour wage threshold means that Mexican companies will have to substantially raise salaries, making U.S.- and Canadian-based auto plants more competitive and viable.
For the Midwest’s agriculture sector, the USMCA is expected to maintain market access, and expand it for various commodities, including dairy, poultry and wheat.
The USMCA still must receive formal approval in all three countries. In the United States, Congress likely won’t vote on the new agreement until next year.

 

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