It’s not your father’s NAFTA anymore. Late Sunday night, U.S. and Canadian negotiators agreed on a new trade deal that replaces 1994’s NAFTA deal with a “United States-Mexico-Canada Agreement,” or USMCA. The tri-party deal is viewed as a victory for President Trump, who has long derided NAFTA as being unfair to the United States.
A significant part of the deal is related to auto manufacturing and exports from Canada and Mexico into the U.S. market. Under the terms of the USMCA, both Canada and Mexico will be limited to a quota of 2.6 million vehicle exports to the United States. Current export levels of around 2 million from Canada and 1.8 million from Mexico give the two trading partners some room to grow and, at the same time, protect their auto manufacturing industries. The quota is effective in the event the president imposes a 25% tariff on light vehicle imports from other countries.
One limit on the deal is that a higher proportion of the parts used to build cars and light trucks must be made in North American plants that pay a wage of at least $16 an hour. The deal struck in August between the United States and Mexico also included changes to NAFTA sought by U.S. labor unions that would make it easier for unions to organize in Mexico.
In addition to the deal on cars, the U.S. dropped demands to eliminate the special NAFTA courts that have allowed the trading partners to challenge restrictions imposed by the other partners. In exchange, Canada opened up its market for dairy products, agreeing to allow imports of up to 3.5% of the country’s $16 billion annual domestic market for dairy products. Canada also failed to get Trump to lift tariffs on U.S. imports of steel and aluminum.
The United States and Mexico want to get a signed deal by the end of November. Mexico’s new president, Andrés Manuel López Obrador, takes office on December 1. In the United States, the president wants the deal signed quickly in the event the Republicans lose control of Congress in the November elections. Congress likely won’t vote on the USMCA until next year.
Markets reacted favorably to the announced deal and all three major U.S. indexes opened higher Monday morning.