U.S.-Mexico-Canada Agreement: Free Trade with Significant Limitations

In November 2018, the United States, Mexico and Canada signed the "U.S.-Mexico-Canada Agreement" (USMCA), modernizing and updating their trilateral trade agreement NAFTA. While USMCA is better than no agreement at all, it is a clear setback compared to NAFTA. Ratification at the national level is still pending and remains uncertain due to political arm wrestling in Washington.

To withdraw the United States from NAFTA was one of President Donald Trump’s central campaign promises during the 2016 presidential election. Against this backdrop, it can be considered a triumph of diplomacy over populism that the trade agreement was instead renegotiated and signed under the new name USMCA. Intense negotiations, accompanied by persistent threats from the White House, lead to an agreement on a treaty text in October 2018. The signed agreement has now to be ratified by the three partner countries.

Slow Ratification Process

In mid May 2019, a major political hurdle to ratification had been overcome when the Trump administration removed U.S. tariffs on steel and aluminum for Mexico and Canada. The two countries, for their part, withdrew their counter-tariffs.

In an erratic move at the end of May 2019, underscoring the volatility of the Trump administration’s policy, the president surprisingly announced special tariffs on all Mexican products. This threat was not related to any trade disputes. Instead, Trump demanded that Mexico cracked down more vigorously on migrants crossing the U.S.-Mexican border. The Mexican government was able to avert these tariffs through some already planned concessions on migration policy.

Mexico ratified USMCA in mid-June 2019. Canada’s government plans to vote on the treaty only after it is certain that no further changes will be demanded by the United States. A new treaty text would have to be approved in a new ratification process in all three countries.

The ratification process in the U.S. Congress is subject to intense political arm wrestling between the Democrats’ majority in the House of Representatives and the Trump administration. For a majority in the House, Trump would need about 20 to 30 Democratic votes. The Democrats, however, criticize that the provisions on worker rights and the environment stipulated in USMCA are too weak and call for renegotiations. Both Mexico and Canada are rejecting this request. Talks between President Trump and the Democrats are strained and at times were laced with personal insults. For this reason, too, Democrats are unwilling to provide the president with a domestic political success by ratifying USMCA.

Despite the fact that no agreement has yet been reached with the Democrats, the Trump administration has initiated the legal ratification process at the end of May 2019. This could bring USMCA to a vote in July - with an uncertain outcome. The ratification deadline ends in August when the Congressional summer recess begins. Canada will hold federal elections in October 2019, and the campaigns for the upcoming 2020 presidential elections will increasingly dominate the United States in the coming months.

NAFTA: An Engine for North American Trade

In addition to the gradual dismantling of tariffs and non-tariff barriers to trade, NAFTA, coming into effect in 1994, was the first comprehensive free trade agreement of the United States. It includes provisions in areas such as public procurement, intellectual property protection, and trade in services and investment. In all these areas, fundamental principles of liberalization were adopted, with only explicitly defined sectors being excluded. Furthermore, the three partners established minimum labor and environmental standards in two complementary agreements linked to NAFTA. The agreement also includes new enforcement mechanisms and dispute settlement procedures, giving additional weight to the agreed-upon provisions.

Between 1993 and 2017, the trade volume between the USA, Canada and Mexico more than quadrupled from 290 billion U.S. dollars to 1.3 trillion U.S. dollars. Trade within the NAFTA region thus increased faster than total U.S. trade. In 2018, Canada and Mexico were the United States’ two main export markets (goods and services) with 14.6 percent and 12.0 percent respectively of total U.S. exports. U.S. imports from Mexico accounted for 12.1 percent, imports from Canada for 11.5 percent of total U.S. imports, which puts them in second and third place behind China. The United States have a trade deficit of 78.6 billion U.S. dollars with Mexico (goods -86.6 billion U.S. dollars, services +8.0 billion U.S. dollars) and a trade surplus of 3.6 billion U.S. dollars with Canada (goods -24.6 billion U.S. dollars, services +28.2 billion U.S. dollars). The U.S. trade volume with its two NAFTA partners represents 24.9 percent of total U.S. foreign trade, while the trade balance of the United States with its two NAFTA partners represents only 11.9 percent of the total U.S. trade deficit.

USMCA: Setback Compared to NAFTA

A termination of NAFTA, without an alternative involving all three North American states, would have been extremely damaging economically and politically. It would have disintegrated the North American economic area and destroyed production networks that had been growing over decades. German companies are tightly integrated into the value chains of the NAFTA region, especially in the automotive industry.

Nevertheless, USMCA is a setback compared to NAFTA. Particularly problematic are the strict rules of origin. These extend beyond the automotive sector to several other industrial sectors such as chemicals, steel, glass and fiberglass. Equally disconcerting are the quota regulations for the automobile trade. The passages concerning the negotiation of further free trade agreements as well as regarding public procurement give further cause for serious concern. A detailed assessment can be found in the USMCA factsheet (in German).