Canada agreed at the last minute to join the new trade deal set to replace NAFTA named the United States-Mexico-Canada-Trade Agreement (USMCA). Markets reacted positively to the news as the Dow, S&P 500 and NASDAQ all reported gains of 0.7%, 0.4%, and 0.1%, respectively, on Tuesday. However, despite the new name, the deal can be thought of as just an updated version of the 25-year-old NAFTA, or NAFTA Classic. The new deal is set to come into full effect 2020, once all member countries legislative branches have approved the agreement.
The USMCA, or NAFTA 2.0, makes significant changes and additions to key provisions of NAFTA Classic. One of which is the addition of the provision which requires that between 40% to 45% of vehicle parts must be made by workers earning a minimum of USD 16 per hour. The provision is designed to combat the outsourcing of U.S manufacturing jobs, as the competitive edge of cheap labor is lost by Mexico. The argument is that companies will decide to manufacture cars in the U.S as the cost of labor is set at a level across all NAFTA 2.0-member countries. It is important to note that the new provision does raise the standard of living for Mexican manufacturing workers. Markit’s September Purchasing Manager’s Index rose 0.9% to 55.6 due to a rise in new orders and production. Moreover, the deal strengthens made-in-North-America rule as 75% of car parts must now be made in North America.
Another significant aspect of NAFTA 2.0 is the elimination of Class 7 milk by Canada, which gave a competitive advantage to Canadian dairy producers over American dairy producers. U.S. farmers have long since bellowed about their ability to export their products to Canada. While NAFTA Classic faced criticism of pushing out small Mexican farmers by flooding Mexico with cheap subsidized U.S. products, NAFTA 2.0 might have a similar, but not as strong of an effect in Canada for dairy producers. Sylvain Charlebois, Professor of Food Distribution and Policy at Dalhousie University in Halifax argues that though Canadians will get cheaper dairy products in the long-run, Canada will suffer a loss of dairy farming jobs.
Lastly, two other significant additions are the strengthened intellectual property regimes and the removal of the investor-state dispute settlement (ISDS) mechanisms. NAFTA 2.0 establishes 10-year biologics pharmaceuticals patents, 15-year industrial designs patents, 10-year agricultural chemicals patents, in addition to extending copyrights by 20 years. While the removal of the ISDS stops the ability of companies to sue governments for intruding on potential future profits; Canada, Mexico and the U.S have been sued a joint 85 times since the creation of NAFTA Classic.