US, Mexico and Canada agree to new trade deal

US, Mexico and Canada agree to new trade deal

On Monday (local time), the leaders of the United States, Mexico and Canada formally agreed to replace the North American Free Trade Agreement (NAFTA) with a new trade deal.

NAFTA, which has been in force since 1994, will be superseded by the United States-Mexico-Canada Agreement (USMCA) to govern the more than US $1.2 trillion in trade between the three countries.

Most of the key provisions of USMCA will not come into effect until 2020, to allow sufficient time for the US Congress, Canadian Parliament and the Mexican General Congress to approve it.

The three countries have been negotiating a comprehensive revision of the free trade arrangements for more than a year, and the difference will be more than cosmetic.

“It’s not NAFTA redone, it’s a brand new deal,” President Trump said at the White House on Monday.

The new agreement establishes new rules for the production of automobiles, reduces trade barriers for American dairy products, and will retain a dispute resolution tribunal that the US had sought to eliminate.

Under USMCA, vehicles will eventually have to have 75% of their content produced in North America to qualify for zero tariffs, up from the 62.5% threshold required by NAFTA, which is intended to force auto manufacturers to source fewer parts from Europe and Asia.

Additionally, a percentage of parts must come from “high wage” factories, rising to 40% by 2023, for a vehicle to be tariff-free. Such factories must pay a minimum of US $16 per hour in average salaries — about triple the average wage in a Mexican factory at present.

This is expected to encourage auto manufacturers to switch some suppliers to Canada and the US, although may result in production being moved to other low-cost countries outside North America instead, such as China.

Canadian and Mexican auto manufacturers will also be granted exemptions on any future US tariffs for 2.6 million imported passengers vehicles, more than either country has exported to the US in the last year.

However, the US’ 25% tariffs on Canadian and Mexican steel imports will remain in place for now.

Canada will also reduce the protections for its domestic dairy market, opening the door for a larger volume of American dairy imports.

Currently, Canada limits imports of dairy products and government support gives Canadian products an advantage on international markets against American products. Canada has agreed to open up its markets to American dairy and to eliminate the support programme.

Grocery stores in the Canadian province of British Columbia will also be required to cease selling locally-produced wines on certain shelves, and to stock American wines alongside them.

Compromises were made on dispute resolution, with Canada successfully pushing to retain the “Chapter 19” mechanism where each country is represented on a panel that hears challenges to trade actions. However, it did agree to eliminate investor-state dispute resolution provisions that allow foreign investors to sue for relief if a country changes its domestic policies, although this will remain in place between Mexico and the US.

It will also be easier for Mexican workers to form and join trade unions, for American financial services companies to access Canadian and Mexican markets, and for American pharmaceutical companies to protect their intellectual property in Canada.

The USMCA will be reviewed after six years, as required by its terms, and continue for the full 16 year period if the countries remain satisfied, with the ability to renegotiate a further 16 year period.

Although President Trump wanted to review and renegotiate the deal more frequently, the first review will not take place until after he leaves office, regardless of whether he is elected to a second term.

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