NAFTA & USMCA
The North American Free Trade Agreement, also known as NAFTA, is a free trade deal signed between America, Mexico and Canada. Even though the deal was signed on the 1st of January 1994, US and Canada were already enjoying benefits of free trade since 1989. The NAFTA deal broadened that by adding Mexico.
This deal made the signing countries the biggest free market economy in the world. It eliminated tariffs on a number of sectors, especially agriculture and manufacturing. It also lifted restrictions and barriers to investment in the countries and provided security to intellectual property owners.
The major beneficiaries of the NAFTA deal were supposed to be small businesses. It helped them reduce many tariff barriers and some non tariff barriers. It also helped improve labor conditions and environment issues, though the actual benefits of both of these are debatable.
A few points about NAFTA:
- Before NAFTA, there was an imbalance in tariffs between Mexico and the U.S. This imbalance was addressed by reducing tariffs in specific areas over 15 years. Half of tariffs were abolished with immediate effect while the remaining were to be reduced as part of a gradual tariff reduction process. Some of the specific areas that NAFTA covers are engineering, advertising, construction, accounting, health and education among others.
- Another aspect of NAFTA is that is allowed US truckers access to Mexico by easing license requirements as well as border protocols. These barriers were a major hurdle in trade between the two countries so this particular change was welcomed by many traders.
- Health and safety standards were improved and the lower standard of one country was not allowed to cause any hindrance in trade matters. The process of inspection of exported products as well as certifications was accelerated to help the traders.
- Establishment of commissions to cater to environmental and labor issues. These commissions had the authority to impose penalties on government authorities that weren’t imposing the laws or were lagging behind in this department.
- Reductions in tariffs for auto parts as well as changes in the rules that determined the country of origin of the goods.
- More trade was encouraged in the telecommunications department.
- Reduction of barriers in trade related to apparel and textile.
- Promotion of free trade in the agriculture department. NAFTA either abolished existing tariffs or established a ten-year plan to phase out these tariffs gradually.
- More trade facilitation in financial services and insurance markets.
- More investment opportunities for traders of the three countries.
- Protection of intellectual property of the individuals and companies of the signing nations.
- More rights for American companies to bid on government projects of Canada and Mexico.
NAFTA allowed products imported from any other NAFTA member country to be classified as “national goods”. This meant that these goods were exempt from taxes imposed by any local or central government. Custom duties were either to be immediately dropped or phased out over the years. Only a few items were classified as sensitive and were agreed to be phased out over a period of 15 years.
One major benefit of the NAFTA deal was the opening up of the Mexican economy to US and Canada. Mexico is emerging as a growing economy and foreign economies are looking at ways to be a part of it. Critics however were of another opinion. Some argued that NAFTA would end up causing harm to the local American businesses but people were ensured that consumers would get the most benefit out of improved trade deals. The US Chamber of Commerce was pretty vocal in supporting the deal as it was in line with their vision for small business owners. Their support was instrumental in countering the opposition from labor who tried their best to stop the deal.
NAFTA – Small businesses
Many commentators feel that small and medium sized businesses have the biggest advantage under the NAFTA agreement. The spending of Mexican consumers is much bigger than that of the Japanese or the Europeans and that is exactly what NAFTA helps to facilitate. As far as Canada is concerned, America already does a lot of business with them. Therefore, the impact of NAFTA on US-Mexico trade was much bigger than on US-Canada trade.
Before NAFTA, any firm exporting to Mexico needed to have a physical office there. For large companies, this wasn’t a big deal. However, small businesses simply did not have the capital to afford an office in Mexico. This gave small businesses such a disadvantage that they simply weren’t able to export any product to Mexico. Once NAFTA was implemented, small businesses did not have the physical office restriction anymore, allowing them to export those products to Mexico that were already available or manufactured in enough quantity in the US.
Thus, the playing field was leveled for both small and large businesses. This was the biggest reason why the US Chamber of Commerce was so supportive of NAFTA.
Just like a person familiarizes himself/herself with foreign cultures before visiting the country, familiarization with the culture of the country you plan to do business with is very important. What people need to realize is that the business norms of Mexico, or any other country for that matter, are unique to that country. Before one commits the resources of his/her business there, some research about local norms is necessary. It is not a bad idea to hire a local person to manage the day to day operations of the business in Mexico.
Opposition to NAFTA
The biggest fear of people in America was that NAFTA would help businesses to conveniently move their operations to Mexico and take advantage of cheap labor.
This fear was justified in a lot of ways. In the beginning of the 2000 decade, the economy was quite fragile and it was feared that a recovery would almost be impossible if the businesses were trying to move out of the country.
Similarly, environmental activists claimed that NAFTA did nothing to help improve the climate. Mexico as well as Canada are continuously blamed for promoting business activities that damage the climate. Businesses have tried to undermine a side accord in NAFTA that focuses on environmental protection. This side accord allowed citizens of all three countries to accuse businesses in any of the three countries of environmental damage. A commission was set up that would allow members of all three countries to investigate any such accusations.
Effects of NATA
Yet another criticism of NAFTA was that it brought a trade deficit to America. America started importing more products from Mexico than it was exporting. At the same time, the amount of business being done was increasing, but so was trade deficit. This gave the critics another talking point in opposing NAFTA. Manufacturing jobs were going out of the US, giving critics yet another talking point. However, it is worth noting that manufacturing jobs in the US were declining well before NAFTA came into effect.
In response to the above criticism, it must be said that in an economy as big as the US, it is almost impossible to isolate the effects of NAFTA. For instance, it is not possible to figure out what percentage of US trade deficit is a result of NAFTA. It is also not possible to determine the exact amount of manufacturing jobs lost to NAFTA agreement as the number was already declining before the deal was signed. Due to all these ambiguities, the debate continues till today.
One effect of the continuous opposition to NAFTA is that it has stopped further similar deals around the globe.
The Central American Free Trade Agreement (CAFTA) is one example of that. It was introduced in 2005 but received so much opposition that it couldn’t pass through Congress.
USMCA stands for the United States Mexico Canada Agreement. It is an improved version of the NAFTA deal. Some of the improvements and changes it include affect the automobile industry while others are improved policies for environmental standards, IP rights and protection, digital trade and labor.
This deal is President Donald Trump’s legacy who was a vocal critic of the NAFTA deal and didn’t shy away from calling it one of the worst deals ever.
Let’s take a brief look at what the USMCA contains:
Country of Origin:
NAFTA determined that 62.5% of the components used in car manufacturing had to be manufactured in one of the three NAFTA countries to qualify for zero tariffs under NAFTA. USMCA increased this percentage to 75%.
Provisions to improve labor conditions for workers in the signing nations. About 40-45% of the car parts need to be manufactured by workers who are making at least $16 per hour by the year 2023. This is just one component of the many protections given to workers, especially women and migrants.
US access to Canadian dairy
Farmers in the US were allowed access to the dairy market in Canada. This was a welcomed news for US farmers and gave them opportunities for growth.
IP Protection/Digital Trade
The copyright terms were changed from 50 years to 70 years. Provisions were added that determined there would be no tax on online content like ebooks and music. Some protection was given to internet companies as well, especially those that had to deal with liability issues for the content users uploaded on their platform.
This agreement was made subject to a sunset clause of 16 years. This meant that the agreement would expire in 16 years time. At every 6 years interval, the deal can be reviewed and the three participating countries can decide if they want to extend it.
In the month of June 2019, Mexico ratified the deal and become the first country to do so. However, it met a lot of resistance in the US where politicians raised a lot of objections, including the usual environmental issues and labor problems. A commission was set up to work with the administrators to come to an agreement. About six months later, they reached an agreement. The biggest victory for the Trump administration was the rapid response mechanism. This allowed an independent panel to take quick action in case Mexico failed to conform to its union laws.
As is always the case, even the revised deal was the subject of criticism from labor factions as well as environmental activists. However, there was enough political support for the deal to pass successfully through congress.
President Donald Trump officially signed the document containing the USCA on 29th January 2020.
As of this writing (March 2020), the final hurdle for the USMCA is now the Canadian parliament. It is facing similar criticism as it did in the US, but the deal is expected to go through. Once that happens, it will come into effect 90 days from the date it passes through the Canadian parliament.