USMCA: A Modern Trade Deal with Mixed Outcomes for North America
The United States-Mexico-Canada Agreement (USMCA), which came into force on July 1, 2020, replaced the 26-year-old North American Free Trade Agreement (NAFTA). While USMCA retained many core principles of NAFTA, it introduced several changes aimed at modernizing the trade relationships between the U.S., Mexico, and Canada. Below, we explore the key pros and cons of this revamped trilateral trade deal.
Pros
1. Modernization of Trade Rules
One of the most significant advantages of the USMCA is that it updates rules for the 21st century economy. NAFTA was created in a pre-digital age, and the USMCA incorporates modern provisions that reflect technological advancements. For instance, it includes rules on data flow and digital trade, ensuring that businesses in the digital economy can operate across borders without facing restrictive tariffs or discriminatory policies. This is crucial for technology and e-commerce sectors, which have grown significantly over the past two decades.
2. Improved Labor Standards
The USMCA includes provisions aimed at improving labor conditions, particularly in Mexico. One of the key requirements is that 40-45% of auto content must be made by workers earning at least $16 per hour by 2023. This is intended to prevent companies from moving operations to Mexico solely to benefit from lower wages, promoting better wage parity across North America. It also mandates that Mexico enact labor reforms to ensure workers have better rights, including collective bargaining.
3. Stronger Intellectual Property (IP) Protections
The agreement strengthens IP rights, which is particularly beneficial for U.S. and Canadian businesses in sectors like pharmaceuticals, entertainment, and technology. For example, the USMCA extends copyright terms to 70 years after the life of the author and provides 10 years of data protection for biologic drugs, up from the five years under NAFTA. This ensures businesses can better protect and monetize their innovations, particularly in industries that rely on intellectual property.
4. Environmental Protections
USMCA introduces environmental provisions designed to ensure sustainable trade. These include commitments to combat illegal fishing and protect marine environments, air quality, and endangered species. Importantly, the agreement makes these provisions enforceable under the dispute settlement mechanism, unlike in NAFTA, where environmental provisions were sidelined.
Cons
1. Limited Gains for Canada
While USMCA brought updates, some experts argue that Canada saw relatively limited benefits. For example, while the deal opens up more access for U.S. dairy products to Canadian markets, the gain for Canada’s dairy sector was minimal. Additionally, Canada's ability to appeal U.S. trade actions under NAFTA's Chapter 19 was retained, but its broader interests in protecting its trade-sensitive industries like lumber and steel were only partially addressed.
2. Automobile Industry Costs
While the USMCA’s labor provisions aim to protect workers, particularly in Mexico, some argue that these could increase costs for automakers. The requirement for higher wages in the production of cars and the higher percentage of regional content required (75%, up from 62.5% under NAFTA) could raise production costs, particularly in Mexico, leading to higher prices for consumers. This may also dissuade automakers from investing in Mexico, potentially reducing the competitive advantage that Mexico's auto industry enjoyed under NAFTA.
3. Pharmaceutical Costs
The enhanced IP protections, particularly the extended data protection for biologics, could increase drug prices in Mexico and Canada. These countries had previously benefitted from shorter exclusivity periods, allowing them to produce cheaper generic drugs more quickly. The longer protection period under the USMCA may delay access to affordable medicines, leading to higher healthcare costs in these countries.
4. Trade Disputes and Tariffs
Despite the agreement, there have been lingering trade disputes, especially concerning tariffs on goods like steel and aluminum. Although the USMCA was designed to alleviate trade tensions, both the U.S. and Canada have had to impose retaliatory tariffs on each other’s products since the agreement took effect. This highlights the fact that the USMCA has not fully resolved protectionist policies and trade disputes, especially under shifting political landscapes.
Conclusion
The USMCA brings critical updates to the NAFTA framework, particularly in areas like digital trade, labor standards, and environmental protections. However, it also introduces complexities, such as potential cost increases in the automobile and pharmaceutical sectors. While the deal represents a modernization of North American trade, it is not without its challenges, particularly regarding its long-term effects on industries like manufacturing and healthcare. Overall, the USMCA strikes a delicate balance, addressing both the strengths and the limitations of its predecessor, NAFTA.
Disclaimer:
This blog post is for general informational purposes only and does not provide legal or professional advice. Laws related to USMCA and trade agreements may change. For specific legal advice, consult a licensed attorney. Barbarian Law is not responsible for any actions taken based on this content.
