On 30 September 2018, Canada, Mexico, and the US announced that they had reached an agreement on a modernized NAFTA just hours before a self-imposed 1 October deadline. The new agreement has been renamed the United States-Mexico-Canada Agreement (USMCA), otherwise known as NAFTA 2.0. While commentators have joked that the name is the only thing to have changed, there are several substantial alterations and additions, along with some notable omissions, that may impact the trade operations of US small- and medium-sized enterprises (SMEs) should the agreement pass and enter into force.
The USMCA is far from a done-deal. All expectations point to it passing and entering into force sometime in 2020, but the process won’t be easy.[i] The agreement is scheduled to be signed by all three parties at the end of November, and then will need to be passed by legislatures in each of the three countries. In the US, partisan politics and the results of the November mid-term elections seem certain to have an impact on the ratification process.
Leaving the political procedures aside, we at TradeMoves have analyzed important elements of the 1,800+ pages, 34 chapters, 4 annexes, and 12 side letters in the new agreement focusing on impact to US SMEs. SMEs are not only major stakeholders but also integral to North American supply chains. According to data from the US International Trade Commission, of the more than 57,000 US firms that import from Mexico 81.4% have fewer than 100 employees. That same statistic is 83.7% of the more than 86,000 US firms that import from Canada.[ii]
Overall, the agreement is a positive step towards alleviating some of the uncertainty surrounding US economic relations with its two most important trading partners and neighbors, stemming from President Trump’s repeated threat to take the US out of NAFTA altogether. Additionally, the USMCA remains a trilateral agreement despite several weeks of doubt as to whether Canada would sign on to what the US and Mexico had already agreed bilaterally. Looking more closely at the details, the negotiated agreement contains both opportunities and challenges for SMEs to consider.
Wins/Opportunities for SMEs:
Challenges and Issues Remain:
A lot remains uncertain and the impacts of the USMCA if it is passed and enters into force will take years to measure. What is clear is that US SMEs and those across North America are much better off with the USMCA than with no FTA at all. The USMCA does provide for some new trade promoting opportunities for SMEs, but there are equally as many challenges and uncertainties. Not every sector will be impacted in the same way or to the same extent. For example, changes to the rules of origin will require major supply chain adjustments in the automotive and textile sectors, while other industries will be largely unaffected. The worst-case scenario of a complete breakup of NAFTA has been avoided, something for which the business community can breathe a sigh of relief. However, SMEs and businesses around the country still have work to do in order to analyze the changes and assess the impacts on their finances, supply chains, and investment decisions if and before the agreement enters into force, most likely sometime in 2020.
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[i] Caporal, Jack and William Alan Reinsch, “From NAFTA to USMCA: What’s New and What’s Next,” Center for Strategic and International Studies, https://www.csis.org/analysis/nafta-usmca-whats-new-and-whats-next.
[ii] “SBE Council Responds to new USMCA Trade Deal (NAFTA 2.0),” Small Business & Entrepreneurship Council, https://sbecouncil.org/2018/10/01/sbe-council-responds-to-new-usmca-trade-deal-nafta-2-0/.
[iii] Hufbauer, Gary Clyde and Euijin Jung, “Higher De Minimis Thresholds: A Win in the USMCA,” Peterson Institute for International Economics, https://piie.com/blogs/trade-investment-policy-watch/higher-de-minimis-thresholds-win-usmca.
[iv] “United States-Mexico-Canada Trade Fact Sheet Modernizing NAFTA into a 21st Century Trade Agreement,” Office of the United States Trade Representative, https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/october/united-states%E2%80%93mexico%E2%80%93canada-trade-fa-1.
[v] Chander, Anupam, “The Coming North American Digital Trade Zone,” Council on Foreign Relations, https://www.cfr.org/blog/coming-north-american-digital-trade-zone.
[vi] Schott, Jeffrey, “For Mexico, Canada, and the United States, a Step Backwards on Trade and Investment,” Peterson Institute for International Economics, https://piie.com/blogs/trade-investment-policy-watch/mexico-canada-and-united-states-step-backwards-trade-and.
[vii] “A Trade Agreement with Mexico and potentially Canada: Report of the Industry Trade Advisory Committee on Small and Minority Business,” ITAC 9, https://ustr.gov/sites/default/files/files/agreements/FTA/AdvisoryCommitteeReports/ITAC%209%20REPORT%20-%20Small%20and%20Minority%20Business.pdf.
[viii] Ikenson, Daniel, “NAFTA 2.0: The Best Trade Agreement Ever Negotiated (Except for All of the Others),” CATO Institute, https://www.cato.org/blog/nafta-20-best-trade-agreement-ever-negotiated-except-all-others.
[ix] Long, Heather, “U.S., Canada and Mexico just reached a sweeping new NAFTA deal. Here’s what’s in it.” Washington Post, https://www.washingtonpost.com/business/2018/10/01/us-canada-mexico-just-reached-sweeping-new-nafta-deal-heres-whats-it/?utm_term=.44d9d299c6db.
[x] Brown, Chad, “The 5 surprising things about the new USMCA trade agreement,” Washington Post, https://www.washingtonpost.com/news/monkey-cage/wp/2018/10/09/the-5-surprising-things-about-the-new-usmca-trade-agreement/?utm_term=.2560ebaf9edc.
[xi] “NCBFAA Urges Elimination of Drawback Restrictions in NAFTA,” National Customs Brokers & Forwarders Association of America, Inc., http://www.ncbfaa.org/Scripts/4Disapi.dll/4DCGI/cms/review.html?Action=CMS_Document&DocID=20143&Time=-1894173038&SessionID=2847913279f9616c83ft2m53q0j98fl37sfnp0i18n7cu066424x2f5w5kma2r3q&MenuKey=about.