So Long, Nafta; Hello, USMCA. What You Need to Know

(Bloomberg) -- As a candidate in 2016, President Donald Trump pledged to renegotiate the North American Free Trade Agreement and to terminate it “if we don’t get the deal we want.” After 13 months of diplomatic negotiations, plus further political wrangling within Washington, a replacement takes effect on Wednesday with modest changes in some areas, significant additions in others and a new name, the U.S.-Mexico-Canada Agreement.

1. What happens to Nafta?

It enters the history books, having guided trade among the U.S., Canada and Mexico for more than 26 years, starting on Jan. 1, 1994. It phased out tariffs on most goods, creating what was for a time the world’s largest free-trade zone and gradually tripling trade among the three countries. It integrated North American supply chains in auto manufacturing and other industries and removed barriers to foreign investment and cross-border trade in services.

2. How does the USMCA change things?

Though Trump has depicted it as altogether different -- “The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!” -- even a fellow Republican, Senate Finance Chairman Chuck Grassley, said 95% of the new deal “is the same as Nafta.” Still, some industries will notice changes. For automakers, new rules require more vehicle components to be made in North America, with a portion made by workers earning an average of at least $16 per hour. Canada will allow more imports of U.S. dairy products. Both Canada and Mexico will increase the value of goods that can be imported duty-free. Internet platforms can’t be held liable for third-party content, and companies can’t be required to store their data locally. Canada is also increasing its copyright protection term.

3. Why did Nafta have to be renegotiated?

Calling it the “worst deal in U.S. history,” Trump blamed Nafta for increasing the U.S. trade deficit and sending manufacturing jobs to Mexico. Though economists argue over Nafta’s impact on the U.S., most objective analyses have found it didn’t cause major aggregate American job losses but also didn’t significantly boost gross domestic product there. Trump wasn’t alone in calling Nafta inadequate. The deal, implemented when the name Amazon referred only to the forest, couldn’t have anticipated e-commerce and digital trade, for instance.

4. How will things improve for the U.S.?

The U.S. International Trade Commission found it will boost U.S. trade with Mexico and Canada by about 5% overall, resulting in a 0.35% GDP increase in its sixth year. It will increase U.S. workers’ annual incomes by an average of $150 and increase employment by 0.12%, or roughly 176,000 jobs. Trump has said the pact could bring more than 1 million jobs to the U.S., far beyond other estimates.

5. Is everyone so positive?

An International Monetary Fund assessment was less rosy for the U.S. It said the agreement will reduce the country’s “welfare” (a measurement of consumption) by $794 million, while boosting Canada’s by $734 million and Mexico’s by $597 million -- “relatively small” effects at the aggregate level. Just implementing the deal will benefit businesses by providing increased certainty about the future, especially because it largely exempts Canada and Mexico from future auto tariffs. The deal won’t, however, stop the U.S. from reviving tariffs on Canadian aluminum that American officials say respond to an oversupply from the north.

6. What held up the USMCA?

The deal was in limbo for months as U.S. opposition Democrats, who control the House of Representatives, successfully negotiated several changes before ratifying it. The revised agreement removes a loophole in Nafta that allowed any country to object to the formation of enforcement panels. It adds new labor provisions, including a labor-specific dispute panel system and an inter-agency committee to monitor labor rights in Mexico. Democrats also succeeded in removing a provision that would have guaranteed 10 years of data protection for biologic drugs.

The Reference Shelf

• The Congressional Research Service summarizes key provisions in the USMCA.
• A side-by-side comparison of Nafta and USMCA.
• These were five sticking points that leaders of the three countries had to work out.
• The African continent is seizing the title of world’s largest free-trade zone.
• A Council on Foreign Relations review of Nafta’s economic impact
• From Bloomberg Government, everything you need to know about the USMCA.
• Summary of changes that U.S. Democrats negotiated in the agreement.

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