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Goodbye NAFTA, hello USMCA. What the new trade deal means for U.S. manufacturers

Posted by IndustryNet on Thursday, October 4, 2018

100000280conveyorsThe U.S., Canada and Mexico have been embroiled in NAFTA negotiations for more than a year now, culminating in a new deal that was finally struck between the three nations on October 1st.

The new trilateral agreement promises increased wages, strengthened intellectual property, and expanded access to markets, while reducing the U.S. trade deficits. But what does it mean for the American manufacturer?

The new trade deal, officially termed the United States-Mexico-Canada Agreement (USMCA) is the result of sixteen months of heated negotiations between the three nations and is geared to replace the 23-year-old North American Free Trade Agreement (NAFTA) in the year 2020.

NAFTA has been the subject of much controversy, lauded by some economists and reviled by others. Largely accepted by U.S. presidents since the Clinton era, the current administration brought NAFTA back to the spotlight over the past year, proclaiming it a job killer that has allowed significant trade deficits to build up. Or, in short, “The worst trade deal ever signed”.

The prospect of a NAFTA overhaul inspired mixed reactions from the business community, with a number of industry associations and U.S. Senators expressing concerns that a NAFTA revamp could have serious consequences for companies that have relied on these trade partnerships for decades.

Given the business community’s reluctance to embrace a complete teardown of the deal, negotiators proceeded with a “do no harm” approach, focusing on modernizing the agreement and enhancing its more useful aspects, rather than building anew from scratch.

“Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA),” said The United States Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland in a joint statement. “USMCA will give our workers, farmers, ranchers and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region. It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”freight

The new bilateral agreement, the full text of which can be found here, is comprehensive and touches upon a number of issues such as labor, environment, regulatory practices, intellectual property, and government procurement.

The USMCA's impact on manufacturers, though limited to just a few specific industries, are outlined next.

USMCA's impact on U.S. manufacturing

Auto Industry

Most significant for U.S. manufacturers will be changes to the “rules of origin” provision. Currently, NAFTA requires 62.5% of materials needed for the manufacture of a given product be domestically sourced in order to avoid tariffs.

The USMCA raises that percentage to 75%. This will have a large impact on U.S. automakers and those industries that rely on international supply chains.

Additionally, the new deal requires 30% of a vehicle produced by the participating nations be made by workers earning at least $16/hour. That percentage increases to 40% in the year 2023.

It also includes provisions allowing workers in Mexico to unionize. This, of course, is intended to discourage American companies from relocating south of the border in order to access low-wage labor.

Steel Industry

The U.S.’s new 25% tariff on imported steel remained a sticking point throughout negotiations, with Canadian officials requesting the tariff on Canadian steel be struck from the new deal.

What the two nations agreed to, ultimately, was a 60-day waiting period, essentially allowing them to go back to the negotiating table, treating the steel tariffs as a separate issue from USMCA. It remains to be seen whether or not the 25% duty will stick.
Textiles and Apparel

The textile industry was initially on deck for additional “rules of origin” stipulations, but ultimately these were struck down. Unlike the auto industry, U.S. textile and apparel companies should see no real change under the new deal.

Other features of USMCA

Other facets of the agreement include increased U.S. access to the Canadian dairy market and a much-needed updating of its intellectual property protections. Another interesting part of the deal is the U.S.’s right to impose a 25% emergency tariff on automobiles and automotive parts in the event of a national emergency.

elderly woman works on auto assembly lineWhat if the USMCA is a disaster?

Negotiators agreed on a “sunset clause” for USMCA, meaning a point at which the deal terminates. U.S. officials had initially proposed a five-year sunset clause, an idea that was struck down by Canada and Mexico.

Instead, the deal will wind down after sixteen years. This is different from NAFTA, which included no sunset clause.

What next?

Since the USMCA is not significantly different from what is already in place, the new deal is expected to pass Congress, though U.S. manufacturers are likely to begin planning for these policy changes in advance.

Once signed into law, the deal will go into effect in 2020.

As with the tariffs imposed on nearly half of Chinese imports to the U.S., changing trade policies have a significant impact on American businesses, with many now scrambling to reexamine their supply chains and search for domestic suppliers. Industrial marketplaces like IndustryNet help industrial buyers connect with suppliers and also provide a direct path for U.S manufacturers to increase their visibility among domestic industrial procurers.

 

 

 

 

 

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