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The United States Signs the USMCA with Mexico and Canada

The United States Signs the USMCA with Mexico and Canada

President Donald Trump signed the USMCA with Mexico and Canada on January 29, 2020, two weeks after the U.S. Senate passed it and the Mexican Congress did the same.  The next and final step before the trade treaty’s implementation is its approval by the Canadian Senate and House of Commons.

The USMCA with Mexico and Canada will replace the NAFTA, signed by the three North American trading partners in 1994.  With U.S. president’s signature on the agreement, Donald Trump fulfilled one of his key election promises.  Trump hailed the treaty as one of the “fairest and most balanced” commercial accords that has ever been negotiated. 

According to the U.S. International Trade Commission (USITC), one of the biggest benefits that the treaty will bring to the three participating nations is the reduction of “political uncertainty” related to the rules that govern the digital economy.  Additionally, the USITC estimates that the new trade accord will result in an increase in the U.S. GDP by approximately 0.35% and will generate 176,000 net new jobs.

For his part, Mexican President Andrés Manuel López Obrador has stated that he believes that the signing of the USMCA by the United States president is “good news” for Mexico because it will mean the “arrival of investments” to his country. 

In addition to these benefits, experts in international trade believe that the implementation of USMCA with Mexico and Canada will signify positive change in three other important areas:

The Automotive Industry

The new agreement includes changes to the automotive industry’s rules of origin.

With NAFTA, 62.5% of the value of automobile was required to originate in North America to access preferential tariff treatment.  With the advent of the USMCA with Mexico and Canada, this figure will rise to 75% of the total value of a vehicle. 

This change is important because many U.S. companies that are established in Mexico currently purchase significant percentage of their auto parts from countries such as China and Korea.  Under the new terms of trade, they will have to source more of these inputs from within the three nation North American free trade region.

Also, an important change in the USMCA with Mexico and Canada is the provision that stipulates that between 40% and 45% of the value of a passenger vehicle manufactured within the national territory of the three countries must be produced by workers that earn a minimum of US $16 per hour. 

This clause of the agreement is intended to incentivize the retention of automotive parts manufacturers in the United States.  However, his may affect job creation and investment in the sector in Mexico.

The Effect of USMCA with Mexico and Canada on the Pharmaceutical Industry

The new North American trade deal increases barriers to the access of generic and bio-comparable medicines.  In practice, this will result in an increase in the protection of Mexican pharmaceutical companies from the entry of generic drugs.

It is expected that this provision of the USMCA with Canada and Mexico will stabilize (or possibly increase) the final price of products to consumers.  This is because, most often, generics are lower in price than brand-name medicine.

Labor Rights

The new USMCA with Canada and Mexico provides for an annex in which the three countries each pledge to adopt and comply with labor standards and practices as established by the International Labour Organization.  It is not clear, at this time. how this commitment will translate into concrete actions. 

It is certain, however, that under the terms of the new commercial accord, Mexico will amend the country’s labor laws to ensure the right of workers to participate in collective bargaining activities, as well as will give Mexican workers access to secret-ballot union elections for both bargaining and contracts, as well as will ban “protection unions” set up before anyone is hired.

Not Enough?

Some are critical of the new USMCA with Canada and Mexico.  For instance, Mexican economist, Ruiz Naples, does not see much in the agreement that is beneficial to Mexicans, although he does concede that Mexican negotiators were able to save some of the most beneficial NAFTA provisions that the Trump Administration sought to eliminate. He also points out that no major changes were made in the energy sector or in the telecommunications industry.

Ruiz notes that changes beneficial to Mexico were not made under the USMCA.  According to the economist, “the United States will be able to continue to sell corn at a price lower than Mexican production because it is being subsidized by the US government.”

In another area the new trade treaty incorporates a clause that states that the members of the pact must inform the other members of their intention to establish free trade agreements with a country that does not operate under free market conditions.  The agreement states that any of the three parties that are involved may terminate the treaty in the event that one of the members does not comply with this requirement.

Analysts point out that this condition could have been driven by the U.S. to restrict agreements with countries such as China, although the Asian economic powerhouse was not specifically mentioned.

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