USMCA

The US, Mexico, and Canada finally hammered out a trade deal, which is excellent news for the economies of all three nations. The new agreement, which still must be finalized and agreed upon by Congress, is known as the US-Mexico-Canada Agreement (USMCA). It replaces the North American Free Trade Agreement (NAFTA) which had been in place for about 25 years.

Canada and Mexico are crucial trading partners for the United States, accounting for 34% of exports and over 26% of imports. For Texas, nearly 37% of exports go to Mexico, with another almost 9% to Canada, which is the state’s second-largest export market. On the import side, 34% of Texas imports are from Mexico and almost 7% are from Canada, the third largest. (The state’s second largest source of imports is China, with over 16%.)

Many of the core aspects of NAFTA remain in place, but the USMCA also incorporates some changes and updates. A larger percentage of a vehicle’s parts must now be made in North America for it to be exempt (75% by 2020, compared with 62.5% now). Additionally, 40% of the work on vehicles must be paid at $16 per hour by 2023, which is triple current Mexican wages. The Canadian dairy market will be opened up to US producers, and the US will allow more Canadian agricultural products of certain types to be imported.

The USMCA includes stronger protection of intellectual property including patents for medications. It also outlines criminal penalties for pirating movies online and addresses duties on digital music, books, software, and video games that are distributed electronically. The dispute resolution rules remained largely intact. The agreement will remain in force for 16 years but could be extended indefinitely through the course of meetings of the three nations which will occur every six years.

Now that an accord has been reached, a significant source of uncertainty has been removed. Companies which had been in a holding pattern awaiting the outcome can move forward with investments and plans. Businesses affected by changes can start to react. The consequences of not having a strong North American trade agreement were so negative that it was almost impossible to comprehend a scenario where NAFTA was gone and not replaced, as was threatened. There are still some details to be worked out (including the status of US tariffs on steel and aluminum from Canada and Mexico), but the biggest hurdle has definitely been cleared. There are some needed updates, some minor improvements in places, and a few things that will make North American goods less competitive globally. On balance, however, the most important thing by far is that it is done and all three nations are stronger for it!!