Difference Between NAFTA and USMCA

The economic rationale for free trade has remained the same since trade agreements in the United States were largely negotiated by a small manageable group of policymakers and business leaders. FTAs back in the good old days, rarely made headlines and although the deals were made far from the public eye, it benefited the society for good and hence was desirable. That changed since the 1980s, when trade agreements failed to address the major issues and led to strong disagreements in terms of labor rights, human rights, public health, and most importantly, environmental protection. Probably the most debated and the most studied trade agreement in history was the NAFTA, which reshaped North American economic relations. But since its inception, NAFTA has been a controversial accord until it was replaced by the USMCA.

What is NAFTA?

The North American Free Trade Agreement (NAFTA) was a three-country accord negotiated and signed by the governments of United States, Mexico and Canada in December 1992, which came into effect in January 1994. The U.S. President George H.W. Bush, Mexican President Carlos Salinas, and Canadian Prime Minister Brian Mulroney signed a historic deal that created a trilateral trade bloc in North America, gradually eliminating most tariffs and other trade barriers on products and services between the participating nations. The NAFTA was the first joint free trade agreement between a developing nation and industrial countries, and was signed into law by President Bill Clinton.

The NAFTA, in practical terms, was a new and improved version of the Canada-United States Free Trade Agreement (CUSFTA). The NAFTA picked up the unfinished business from the FTA and restructured it to include the protection of intellectual property rights, rules against distortions to investment, creation of the Commission for Environmental Cooperation (CEC), regulation of the labor market, and improved coverage of transportation services. The agreement fundamentally reshaped the economic relations between the participating nations and as a result, cross-border investment among the nations grew considerably and regional trade witnessed a threefold increase. Yet, NAFTA was branded as the worst trade deal ever during the Presidential campaign of Donald Trump.

What is USMCA?

When President Donald Trump took office in January 2017, he sought to replace the NAFTA with a new trade agreement and finally under the leadership of the new President, the years-long agreement was replaced by the new, updated United States-Mexico-Canada Agreement (USMCA), also characterized as the “NAFTA 2.0” or the “New NAFTA”. The agreement came into force in July 2020. This modernized version of the NAFTA, considering it largely updated the already signed provisions from its predecessor, aims to govern most economic relationships in North America, including the over $1.3 trillion in annual trade of goods and services, for at least 16 years or more.

The USMCA maintains the 25-year-old NAFTA’s existing zero-tariff policy on food and agricultural products, while expanding the United States access to Canadian dairy market. Key changes include tighter rules of origin in the textile, automobile and apparel sectors, further goods trade facilitation, support for high-paying jobs for Americans, updated provisions in regards to financial services, improved environmental regulations, greater protection to workers, and a provision about entering free trade agreements with non-market economies.

Difference between NAFTA and USMCA: Key Changes

Rules of Origin

– The most controversial provision and the most notable change in the new agreement is the rules regarding the country of origin of auto manufacturers, which states that automobiles must have 75% of their components manufactured in the United States, Canada or Mexico, up from NAFTA’s 62.5%.

Labor Provisions

– While both the deals focused on the better regulation of the labor market, the USMCA changed the provision to address sex-based discrimination, migrant labor force, and violence against workers. According to the new mandate, 40% to 45% of the automotive spares and components must be made in facilities where workers are paid at least $16 an hour.

Expanded Market Access

– The new agreement opens up the Canadian dairy market to the US farmers, which means American dairy farmers now have free pass to sell a wide range of dairy products in Canada. The new mandate gives the United States tariff-free access to 3.6% (up from 3.25%) of the Canadian dairy market. Canada also agrees to remove the milk class 7 pricing provisions.

Intellectual Property Rights

– The new deal extends the copyright terms to afford protection for copyrights of at least 70 years after the author’s death. The term must be at least 75 years since it was first published or 70 years after the author’s death. This compares to only 50 years under NAFTA. Furthermore, the USMCA prohibits duties on music and ebooks.

De Minimis Rule

– The new agreement raises the de minimis value levels for taxes and duties from the previous 7% to 10% to facilitate a greater cross-border trade. Canada agrees to increase its de minimis threshold for the very first time in years, from $15.07 (C$20) to $30.15 (C$40) for taxes. Goods that were previously not eligible under the NAFTA 7% allowance, may qualify for a 10% allowance under the new trade deal.

Sunset Clause

– The new trade agreement added a much controversial sunset clause that has been a source of debate since the USMCA came into effect. According to this clause, the three nations must review the deal every six years, at which point the participating nations may choose to extend the period of the USMCA for another 16 years. The deal expires after 16 years in its final iteration.

NAFTA vs. USMCA: Comparison Chart

Summary

Most economists believed that NAFTA has provided greater benefits to the North American economy by expanding trade and improving economic relations among the participating nations. Yet, NAFTA remains a perennial topic of interest in the broader debate over the benefits in regards to free trade. So, against this backdrop, the US renegotiated the terms of NAFTA under the leadership of then President Donald Trump with their partners, Canada and Mexico, with the aim of supporting high-paying jobs and growth. Those promises culminated in a new trilateral accord, USMCA signed by the leaders of the three countries.

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