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Understanding USMCA – A shift from NAFTA


the worst trade deal ever made

Above are the comments made by President Donald Trump about NAFTA, during the presidential campaign of 2016. Such was the value of the agreement in the eyes of then “would be president” of the US, the most prominent member of the NAFTA (North American Free Trade Agreement). He promised to re-negotiate a more workable agreement if he wins the presidential election. The agreement ultimately was signed four years later. NAFTA was replaced by a new agreement w.e.f July 1st, 2020. The new agreement is named USMCA (United States – Mexico – Canada Agreement). 

The agreement was signed on December 8, 1993, by former President George H. W. Bush. The United States, Canada, and Mexico, the three North American nations, are parties to this agreement. NAFTA aims to eliminate trade barriers among the three countries. The objectives behind the agreement were to stimulate business investment, reduce trading costs, and to harmonize the business environment between member nations. It was also aimed at developing, North America as the most competitive business hub among the regional business blocks. The NAFTA proved a success becoming beneficial for member countries by ensuring trade suitability and cost effect imports and exports for the US, leading to clear economic advantages. 

A new phase of negotiations was started among the NAFTA member countries to improve the agreement. The series of deliberations ended up on September 30, 2018, by agreeing on signing and a new framework called NAFTA 2.0 — which was later re-named as the USMCA. Vital issues such as job losses in the US, worker exploitation in Maquiladoras, intellectual property protection, and the fast-developing e-commerce environment are the major concerns of the revitalized USMCA agreement. The spirit of job creation by regaining the manufacturing strength of the US is a driving force behind the new arrangements. 

As per the new agreement, Canada will entirely withdraw from the investor-state dispute settlement. In some cases between the US and Mexico, these settlements will remain intact. It means that the US and Canadian investors will not be able to access investor-state dispute resolution any longer. 

The Trump administration was critical of NAFTA, encouraging the outsourcing of automobile production as it was harmful to U.S. Jobs and manufacturing. NAFTA required automobiles to have 62.5% of components manufactured in Mexico, the U.S, or Canada to qualify for zero tariffs. Under the USMCA, this will increase to 75%. Also, between 40% and 45% of automobile parts must be manufactured by employees who earn more than $16 an hour.

The USMCA has considerably relaxed the requirement of a certificate of origin. It is no more needed. Minimum documents like an invoice or similar commercial documents are enough to prove the origin. The importer now bears the burden of exercising reasonable care for documents concerning origin. 

The de minimis (duty-free) threshold has been increased from $20 to $150 for imports into Canada and from $50 to $100 for imports into Mexico. This might adversely impact retailers in Canada and Mexico, pushing them hard financially when importing low-value goods.

US farmers will be able to access the Canadian dairy market exclusively under the reforms to Canada’s dairy pricing. It is also predicted that dairy exports will increase by more than $314 million a year.

Intellectual property and the digital economy have been amended as well. USMCA intends to extend the terms of copyright from 50 to 70 years after the demise of the author. Few clauses are also added to ensure the availability of duty-free ebooks and music. An extended focus is on protecting the rights of internet companies and digital entities.

Parties will be allowed to maintain protocol considering the preferential treatment of both small and medium enterprises. Using electronic tendering procedures and protections against corruption and fraud will also be recognized under this agreement. 

USMCA will keep a check on projects having the potential to cause a dangerous impact on the environment. It will help to mitigate the risks of environmental damage. Compliance with the National Environmental Policy Act in the US should fulfill this requirement.

The sunset clause is a sort of a built-in expiry of the agreement. The agreement is flexible for re-negotiating and even withdrawing from it on or before of 16th year of its post-implementation. It is a relief for all parties to have their say in the agreement.  

The USMCA agreement has a built-in expiry date of 16 years. It will expire if not renewed with the mutual consent of all three participants. The renewal may be on re-negotiated amended or extended terms. In other words, it means the parties to the agreement can review it after every 16 years. 

The revised USMCA agreement has no significant impact on textile trading between the member countries. It specifically does not address any vital issue concerning textiles, but the other terms do have a mild impact on the textile trade as well.

  1. Revised rules provide incentives for using regional inputs.
  2. Restructured Tariff Preference Levels (TPLs).
  3. Updated rules of Origin make trading more flexibile.
  4. New robust customs enforcement provisions ensure more transparency.
  5. Excludes TSA uniform procurement from Government Procurement Obligations.