USMCA, the NAFTA Replacement, to Have Positive Effect on U.S. Economy

Last November, the U.S., Canada, and Mexico reached a consensus on a trade deal. The agreement, called the USMCA would replace the North American Free Trade Agreement (NAFTA), which has been in effect for over 25 years. The new deal is projected to improve many U.S. sectors, the most prominent improvement being in manufacturing.

New rules of origin will improve the U.S. automotive sector. The agreement introduces tighter regulations on importing auto parts, stating that cars and trucks must have 75 percent of their parts manufactured in North America to avoid tariffs. This is a considerable difference from 62.5 percent in NAFTA.

An analysis by the U.S. Trade Representative estimates that the USMCA will boost investments, parts purchases, and jobs within the first five years of its enactment. The analysis also includes that the U.S. would earn $34 billion in automotive manufacturing investments within the first five years. Employment would also likely increase, with the agreement creating 76,000 new jobs in the auto manufacturing industry.

Among other new provisions, the deal also calls for new labor provisions throughout the U.S., Canada and Mexico. In order to qualify for duty-free treatment, companies will be required to have 40 percent of each car and 45 of each truck to be made by workers that earn at least $16 per hour. While this most directly will benefit Mexican workers by raising their wages, it will indirectly affect the United States’ auto industry as well. If Mexico raises wages for their workers, companies will no longer move production there–resulting in more manufacturing jobs for the U.S. and Canada.

“The impact of these automotive rule changes really is going to be the most profound over the long run,” said a USTR senior official, “right now, the companies are making major investment decisions about where to locate supply chains for the autonomous vehicles and electric vehicles.”

Although the core of the agreement remains similar to NAFTA, there are numerous substantial changes. Unlike NAFTA, the USMCA allows for the three countries to sanction eachother for labor and trade violations.

Supporters of the agreement are hopeful that lawmakers will approve the USMCA before August. On the other hand, many are doubtful that the U.S. Congress is not likely to ratify the USMCA before 2020. “it’s marginally more modern,” said Sarah Goldfelder, former U.S. diplomat in Mexico and Canada. “It does deal with digital industries, it has some of the foundations of a 21st century agreement, but it will need to be addressed six years from now.”

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