LEARN ABOUT THE KEY DIFFERENCES BETWEEN THE USMCA AND NAFTA
On July 1, 2020 the new trade agreement between the United States, Mexico and Canada, known as the United States-Mexico-Canada Agreement (USMCA) or the United States-Mexico-Canada Agreement (T-MEC in Spanish) will enter into force.
Donald Trump, President of the United States, and Nancy Pelosi, Speaker of the United States House of Representatives, agreed that this is a better trade agreement than the previous one: the so-called North American Free Trade Agreement, known as NAFTA in English or TLCAN in Spanish.
In general terms, the USMCA does not advance trade liberalization in North America beyond what NAFTA had already achieved.
Canada essentially kept its sensitive sectors such as dairy products, cultural industries, and telecommunications protected, while the United States achieved increased protection in the automotive, textile, and garment production sectors.
During the past three months, work was done on all regulatory adjustments to bring the domestic laws of the United States, Canada and Mexico into line with the agreements reached. Now that it is about to come into force, it is good to review the main differences between both trade agreements and at Credit Report we present a summary of the most important ones for you to take into consideration in your business.
The Chinese exception
The agreement signed on November 30, 2018 by the presidents of the three North American countries, includes a special restriction for Canada or Mexico to negotiate a trade agreement with a “non-market” economy, a rating used by the United States.
The USMCA establishes that a member country that wants to initiate negotiations for a free trade agreement with a non-market economy country must send it a notification at least three months in advance.
This clause also gives the other two members of the USMCA access to the reading of the complete agreement, at least 30 days before its final signature. Although the mere fact of signing an agreement with a “non-market” economy allows any of the other two partners to declare the USMCA as evicted.
China and Vietnam, for example, are two such economies classified as “non-market” economies, according to the United States International Trade Commission.
Exchange rate manipulation
For the first time in a trade agreement, a whole chapter is established on rules to prevent exchange rate manipulation. Chapter 33 of the USMCA establishes that all signatory countries are obliged to maintain a market-determined exchange rate regime and refrain from competitive devaluation through intervention in the foreign exchange market.
The three members of the trade agreement also have a commitment to publish monthly information on their international reserves and their exchange positions and interventions in the spot and future foreign exchange market. As well as providing quarterly information on portfolio capital flows and exports and imports.
Perhaps one of the chapters with the greatest changes in the USMCA is related to the automotive market. First, quotas were established for a total of 2.6 million Canadian and Mexican vehicles for marketing. This is a significant advance over the 1.8 million vehicles established in NAFTA.
However, the USMCA establishes that 75% of the parts of a vehicle need to be manufactured in one of the three countries to remain free of tariffs. This new rule is greater than the 62.5% of parts produced domestically as set out in NAFTA.
The new USMCA specified that 70% of all steel, aluminum and glass used in the production of cars must come from North America.
On the labor side, it states that 40% of a car and 45% of a truck must be produced at an average wage of $16 per hour, which may represent a competitive advantage for the production plants of U.S. auto companies, which offer higher wages than the auto industries in Mexico.
This USMCA agreement will be in force for 16 years and some details will be reviewed every six years. Now is a good time to check if this new commercial agreement offers advantages for your products or your brands and at Credit Report we can help you with a detailed analysis for your company, especially if you want to explore the possibility of finding new commercial partners in any country in North America.