The U.S.-Mexico-Canada Trade Agreement potentially represents a major sea change in the economic picture of North America. The bill significantly restructures (and would replace) the North American Free Trade Agreement, which the three nations signed back in 1994. Late in May, the bill's chances of approval by legislatures in each country appeared reasonably high, as political tensions over the deal started to calm down, according to Bloomberg. The act's final text was solidified May 30 and U.S. Trade Representative Robert Lighthizer submitted a Statement of Administrative Action the same day, allowing the deal to be sent to Congress.
However, the White House under President Donald Trump threatened Mexico with broad tariffs if the nation failed to stem to the administration's satisfaction unauthorized entry into the U.S. by Central American migrants seeking asylum. (Fortune reported Trump ultimately didn't impose the import duties after reaching a deal with Mexican government leaders in the first week of June.) Also, some opposition to the deal persists in the U.S. Congress vis-à-vis desire for stronger environmental and labor-rights enforcement, according to The New York Times.
It's thus uncertain when or if the USMCA will be ratified by Congress and signed into law by the president. Now is a critical time for business leaders who aren't fully familiar with the USMCA's background and implications to learn all about it.
Roots of the pending legislation
The original NAFTA treaty eased the processes of cross-border trade through wide-ranging tariff elimination and thus caused its volume to dramatically increase, especially between the U.S. and Mexico. It also ultimately attracted no small amount of criticism from people and organizations in disparate sociopolitical and economic spectra.
Advocates for American workers stated that NAFTA provided an impetus for domestic companies to move their production facilities to Mexico and thus eliminate manufacturing job opportunities in the U.S. Not dissimilarly, numerous Mexican critics of the treaty believed it placed an undue burden on low-income farmers, particularly in regions like Chiapas. According to a comprehensive brief on the treaty prepared by the Council on Foreign Relations, the latter effect was caused by competition from government-subsidized American farming operations. (Canada greatly increased trade with the U.S. through NAFTA, particularly in agriculture, but tensions have arisen between the American and Canadian governments over the energy and dairy sectors.)
A complex path to ratification
Mexico, Canada and the U.S. began renegotiating NAFTA in August 2017, as the CFR's brief noted. Motivations differ among the nations' leaders: For example, U.S. President Donald Trump has frequently espoused using tariffs to strengthen global markets for American goods, and new Mexican President Andrés Manuel López Obrador often decries NAFTA's adverse effects on Mexico's working class. Yet Trump, Obrador and Canadian Prime Minister Justin Trudeau all believed the treaty could be reshaped to trilateral benefit. The three leaders shook hands on the new USMCA in September 2018.
There were speed bumps on the road to the USMCA's pending approval. President Trump imposed tariffs on steel and aluminum imports in March 2018 and didn't except Canada or Mexico from them, leading to retaliatory import duties. Trump relaxed his stance on the matter, eliminating the tariffs May 17, 2019, per Bloomberg. Mexico and Canada lifted their counter-tariffs the same day. Trudeau and Obrador pushed the bill to their respective nations' legislatures May 29, and both seemed confident it would pass. Ratification in those nations could, all things being equal, occur at any time, according to MarketWatch.
However, the White House's new import-tax threat soured Mexican-American relations and may have delayed the ratification process there. Also, while Bloomberg noted Lighthizer would testify before Congress June 19 in the interest of persuading skeptical lawmakers, it appears increasingly unlikely that the USMCA will pass before Congress goes into its August recess.
What the deal could mean for businesses
Industries like agriculture and manufacturing will be significantly affected by the USMCA if it takes effect. American dairy farmers will be able to export their products to Canada more easily, potentially allowing for a more level playing field between those nations in that sector. Per the agreement's Rules of Origin, 40% to 45% of all automotive parts (and a number of other manufactured goods) sold in the three nations must be fabricated by workers earning at least $16 per hour, and at least 75 percent of all auto parts sold must be made in Mexico, Canada or the U.S. The latter points particularly strengthen various aspects of each nation's manufacturing sector, even with the cost increase represented by mandated wage raises.
Regulations and taxes on numerous exports will also decrease, and this could have a significant positive effect on small businesses – particularly the e-commerce field, which represents a steadily increasing share of the economy of each nation. Additionally, numerous fields, including the creative arts, stand to benefit from the significant reinforcement of intellectual property protections included in the USMCA, and the elimination of customs duties on software and other digital product sales is critical for an increasingly tech-dependent global market.
Some larger firms may bristle at certain aspects of the USMCA, such as the elimination of special arbitration privileges that corporations enjoyed under NAFTA, per The New York Times. Additionally, the stronger copyright protections for advanced "biosimilar" pharmaceuticals versus other drugs are controversial, because they effectively favor the industry's biggest firms with more resources.
All in all, the USMCA does improve on many aspects of its predecessor that were most contentious. Whether this is enough for the new trade agreement to finally find approval with all three legislatures remains to be seen. But even if it doesn't pass in the next month or two, American businesses – especially those dealing frequently with Canadian and Mexican partners – would be wise to prepare themselves for the USMCA's changes.