President Trump is hoping that restructuring the North American Free Trade Agreement with Mexico and Canada will help him deliver on his campaign promise to American workers.
The new agreement, dubbed the United States-Mexico-Canada Agreement, or USMCA, is expected to encourage more auto manufacturing within the U.S., create more jobs for blue-collar autoworkers, and open up dairy trade between the U.S. and Canada.
Even if it succeeds in accomplishing those and other U.S. trade goals, it might also mean the average consumer could pay more to purchase goods like new cars.
- What’s the background?
- What are people saying?
- Why does it matter?
- How could this impact you?
- What’s next?
What’s the background?
Launched in 1994, NAFTA was a long-standing trade agreement between the U.S., Canada and Mexico. Trump has repeatedly criticized the original agreement, saying that the deal provided an incentive for American companies to send U.S. manufacturing jobs to Mexico, where they could save money on labor costs.
In fact, on the campaign trail, presidential candidate Trump promised to tear up NAFTA and replace it with a better deal.
The three NAFTA countries began renegotiating the terms of a new deal in August 2017. The U.S. and Mexico came to an agreement in August, but Canada was hesitant to renegotiate NAFTA.
The country eventually came to the table on Sunday after Trump agreed to exclude it from his threat of a 25% auto tariff, and after acknowledging that dropping out of a trade pact with the U.S. would have crippled Canada’s economy — given nearly three-fourths of its exports go to the U.S.
Unlike the original trade agreement, the USMCA will push for more jobs in the auto industry. One new rule requires that a significant percentage of a vehicle be made by workers earning at least $16 an hour. This is expected to encourage Ford, GM and Chrysler to build more of their vehicles in the U.S. or Canada, and fewer in Mexico.
What are people saying?
President Trump and Canadian Prime Minister Justin Trudeau are both presenting the USMCA as a win for their countries.
In the U.S., the Trump administration claimed victory for persuading Canada to open up its dairy market to more American farmers. But the bigger success may be a provision of the trade deal that could prompt automakers to shift suppliers from Mexico to the U.S. and Canada.
Canada may also benefit by seeing more jobs for autoworkers stay within its borders. Trudeau persuaded Trump to exclude Canadian automakers from a 25% tariff, but was unable to negotiate an end to proposed U.S. tariffs on steel and aluminum.
Canada also fought to keep a dispute resolution process that the Trump administration wanted to scrap. In addition, Trump wanted the new deal to expire in five years, but Canada and Mexico pushed the sunset date to 16 years.
Why does it matter?
The Trump administration believes the USMCA will help reduce the $68 billion U.S. trade deficit with Mexico.
A large part of this will come from automakers creating more jobs in the U.S. But this could come with higher costs for GM, Ford and Chrysler.
U.S. farmers are also expected to increase dairy exports to Canada, including milk products like milk powder and milk proteins.
How could this impact you?
U.S. consumers could be stuck footing the bill that comes as a result of this new deal.
For example, American automakers are expected to raise the prices of new cars to make up for increased labor expenses, though it’s still unclear by how much.
What’s next?
The USMCA still faces an uphill battle in the U.S.
Congress must ratify the USMCA before it can go into effect. The trade deal is expected to face little opposition in Canada and Mexico. But the road ahead may be more challenging in Washington.
The vote isn’t expected to take place until 2019, after the midterm elections, at which point Democrats could gain more control in Congress. Even though labor unions, which typically lean Democratic, support the trade agreement, Democrats may be unwilling to give the Trump administration a victory.
Some pro-business Republicans may also be skeptical about the trade agreement because of the concessions the Trump administration made for labor unions.
If it passes, the three countries would meet every six years to determine whether to continue with NAFTA 2.0. Unless they take steps to extend the trade deal, it would expire in 16 years.