USMCA: A Worthy Successor to NAFTA?

By James Dail (CMC ’20)

Last Friday, President Trump, along with the heads of state of Mexico and Canada, signed the United States Mexico Canada Agreement (USMCA). The USMCA is the result of extensive trade negotiations between the three North American nations that began shortly after President Trump took office. The President sparked these negotiations in order to replace the North American Free Trade Agreement (NAFTA), a trade agreement ratified in 1994 that created a free trade zone between the three countries. While it is not a total replacement, the USMCA contains NAFTA’s original framework of a free-trade zone, but it builds upon it further through long overdue labor protections. If appropriate enforcement mechanisms are put into place, then these new provisions could raise living standards in all three countries as a result of its labor reforms.

The key benefit for the United States is the generous provisions that the USMCA contains for U.S. car companies. Upon ratification, 75% of the component parts in an automobile will need to be manufactured in either the U.S., Mexico or Canada. This constitutes a large increase over the current requirement of 62.5%. If this production requirement is not meant, then those cars will be subjected to tariffs. This gives companies like Ford, General Motors, and Chrysler a production advantage over their Asian and European rivals. Today, cars manufactured on other continents, especially in Asia, are often able to be made with cheaper parts, forcing U.S. car companies to import many parts from abroad in order to compete. This provision will allow them to manufacture more component parts here in the U.S., likely creating new jobs.

The USMCA is also very generous in its protections for Mexican workers. These protections also provide the United States and Canada with tangential benefits. The agreement requires Mexico to pass laws giving all of its workers the right to unionize, which is currently severely restricted. This will likely increase incomes all across the country, as labor unions have a demonstrative positive effect on earnings. Furthermore, there is also a provision that, by 2023, at least 40% of all automobiles need to be produced and assembled by workers who earn at least $16 an hour. A large portion of the manufacturing done by car companies based in the U.S. is performed in Mexico, so this will raise the living standards for many workers. While being of great help to Mexico, these provisions are also designed to boost job growth and increase wages in the United States and Canada. One of the key consequences of NAFTA has been that U.S. companies move production to Mexico in order to have fewer expenses. By bringing wages in Mexico closer to what they are in the United States and Canada, companies will no longer have an incentivize to move production, and jobs, to a country where workers will be paid less.

Though this agreement will likely result in increased living standards in Mexico, as well as further job growth in the United States and Canada, there are potential pitfalls. For one, the USMCA will lead to increased prices for cars in the United States. As a result of the component parts and pay provisions, cars will now cost more to manufacture. However, this is a small price to pay, considering that improving pay in Mexico will incentivize companies to bring off-shored jobs back to the United States, and this will revitalize communities and raise the living standards of many workers. In a way, paying more for a car will act as a sort of subsidy for these new workers.

One concern that the Democrats have raised about the agreement is that there is a lack of an enforcement mechanism against Mexico if it fails to pass a law that allows its workers to unionize. The Democrats are right to be concerned about this, as raising living standards in Mexico is what will bring off-shored jobs back to the United States. Though the agreement has already been signed, it is essential that prominent members of the Mexican government be sanctioned if they do not follow through on this promise.

The USMCA keeps NAFTA’s free trade framework in place while giving additional labor protections to automobile manufacturers and Mexican workers. This will increase the standard of living in Mexico while returning off-shore jobs to the United States in Canada. Even though Congress will be divided next term, it would do well to ratify it.

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