USMCA: Overview

Introduction

Since the early days of US trade policy, trade negotiations and agreements between the United States and other countries have been the center of numerous debates and controversies. Of particular concern were agreements between the United States and fellow North American countries Canada and Mexico, as productive trading relationships with those neighboring nations came to be deemed essential to the economic well-being of them all. Following a series of earlier trade agreements, the North American Free Trade Agreement (NAFTA) was enacted in 1994, beginning a new era of reduced trade barriers among the three countries. Over the subsequent decades, however, criticism of NAFTA increased, and replacing that trade agreement with new policies became a primary concern within the federal government following US president Donald Trump’s election in 2016.

Beginning in mid-2017, the United States, Mexico, and Canada began negotiations for a new trade agreement that would replace NAFTA. Known in the US as the United States–Mexico–Canada Agreement (USMCA), the proposed deal sought to retain elements of the earlier agreement while addressing new areas of concern, including intellectual property and labor rights. Although representatives from all three countries signed the agreement in late 2018, it did not immediately gain the necessary approval of Congress due to an ongoing debate regarding whether the USMCA would prove beneficial or detrimental to the US economy. Proponents asserted that the USMCA would boost the economy, ensure appropriate protections for intellectual property, and ensure the continuation of mutually beneficial trade relationships within North America. However, many opponents argued that the agreement would have a negative effect on employment and wages, while others asserted that it would damage the United States’ sovereignty and place excessive limits on the member countries’ ability to negotiate trade deals with other allies.

Understanding the Discussion

Free trade agreement: A trade agreement between countries designed to help trade by limiting tariffs and otherwise setting mutually beneficial trade policies; sometimes abbreviated FTA.

North American Free Trade Agreement (NAFTA): A free trade agreement among the United States, Canada, and Mexico that was signed in 1992 and entered into force in 1994.

Reciprocal Trade Agreement Act of 1934: Federal legislation allowing the US president to negotiate reciprocal trade agreements with foreign countries, aimed at reducing tariffs.

Tariff: A tax on products or raw materials being imported into a country.

History

For much of the United States’ early history, the nation’s international trade policy reflected a protectionist approach that relied on import tariffs to protect domestic manufacturers from foreign competition. By making imported goods and materials costlier to purchase than their US-made counterparts, the US government attempted to encourage domestic purchasing and limit imports. However, the United States was not the only country to implement high tariffs on imports, and that widespread phenomenon limited US businesses’ ability to export their products as well. Consequently, some businesses and industry organizations opposed restrictive trade policies. High tariffs remained common into the twentieth century, and by 1934, the average tariff rate for the United States was 18.4 percent, according to the US International Trade Commission. That year saw the passage of the Reciprocal Trade Agreement Act of 1934, which gave the president the power to negotiate reciprocal trade agreements with foreign countries, marking a key turning point in US trade policy. The law allowed the president to negotiate directly with select trading partners to establish mutually beneficial trade policies that featured fewer barriers to trade and limited tariffs. Although the United States engaged mainly in large-scale multilateral trade negotiations with economic allies during the mid-twentieth century, the bilateral reciprocal trade agreements established during the 1930s and 1940s set a significant precedent that would further shape US trade policy in the second half of the century.

As international trade became a key facet of the US economy, trade between the United States and neighboring countries became the subject of increased interest among lawmakers and trade organizations. In 1984, the US and Canadian governments began negotiations to create a free trade agreement that would allow the two countries to engage in trade with fewer restrictions. The negotiations resulted in the creation of the Canada–US Free Trade Agreement (CUSFTA), a bilateral agreement that went into effect in January 1989. The United States and Mexico began negotiations for a similar trade agreement in 1990 but in 1991 shifted their focus to a trilateral trade agreement that also included Canada. The resulting agreement, the North American Free Trade Agreement (NAFTA), created a free trade area that encompassed the United States, Canada, and Mexico and significantly reduced barriers to trade present in the three nations’ previous trade policies, including tariffs and limits on the amounts of certain goods able to be imported or exported. Although signed by the leaders of each country in 1992, NAFTA remained controversial both before and after it entered into force in January 1994, as opponents of free-trade policies warned that the agreement could harm employment rates and other aspects of the US economy. The agreement also garnered criticism from advocacy groups concerned about the impacts of increased international trade on workers and the environment.

NAFTA’s provisions did not come into effect all at once. Some tariffs and other restrictions were eliminated immediately, but others were phased out over a period of years. The last restrictions came to an end in 2008, at which point NAFTA was considered fully in effect. Although trade among the United States, Mexico, and Canada increased under NAFTA, the agreement remained controversial across the political spectrum during the 2000s and 2010s.

During the period leading up to the United States’ 2016 presidential election, Republican candidate Donald Trump gained significant attention for his opposition to NAFTA, which he described as detrimental to the US economy and business interests, linking it to an increase in outsourcing and a loss of jobs for American workers. Following Trump’s inauguration in January 2017, his administration focused heavily on renegotiating NAFTA to address such concerns and develop a trade agreement that reflected the administration’s more nationalist economic approach. Negotiations among US, Mexican, and Canadian trade officials began in August 2017 and continued into the following year, concluding in September 2018 with the finalized United States–Mexico–Canada Agreement (USMCA). Although Trump, Canadian prime minister Justin Trudeau, and Mexican president Enrique Peña Nieto signed the proposed agreement in November 2018, Congress still had to ratify and implement the USMCA.

After the trilateral negotiations concluded, the USMCA drew widespread comparisons to NAFTA due to its relative similarities to that earlier agreement’s approach to free trade. However, while some media venues characterized the agreement as simply a new version of NAFTA (NAFTA 2.0, some called it), the proposed agreement did incorporate a number of key changes to US, Mexican, and Canadian trade policy, including adjustments to import-export regulations within the dairy industry that would increase US dairy exports to Canada and decrease Canadian dairy imports. With regard to the automotive industry, the USMCA increased country-of-origin requirements for automobiles, requiring at least 75 percent of an automobile’s components to have been manufactured within a member country in order to be imported without incurring a tariff (the threshold was 62.5 percent under NAFTA). The USMCA also devoted significant attention to intellectual property rights, extending copyright terms in Canada and increasing the amount of time before pharmaceuticals could be produced generically. In response to concerns about the labor implications of free-trade agreements, the proposed agreement also included provisions dealing with wages and employment discrimination.

In the months after the USMCA was officially finalized, the agreement continued to undergo revisions in response to the concerns of lawmakers and industry groups. In addition, the agreement, much like its predecessor, became the center of intense controversy among politicians and relevant organizations on the question of whether to ratify the deal. Supporters of the USMCA, including the Trump administration and leaders of some agricultural and industrial advocacy groups, highlighted the potential economic benefits of the agreement. Opponents both within and outside the federal government cautioned, however, that the deal’s limited benefits could come at a substantial cost for American consumers and workers. In addition to meeting objections from many Democratic lawmakers, the agreement received criticism from some Republican and libertarian lawmakers and advocacy groups, who argued that the USMCA interfered with US sovereignty. The status of USMCA remained in flux in 2019 and was further modified that year to address concerns related to labor and environmental protections, among other issues. Following the ratification of the updated agreement by all three countries, USMCA finally went into effect on July 1, 2020. While many praised the new deal, critics remained. The global COVID-19 pandemic further complicated the deal's enactment, contributing to a slow or uneven implementation of new rules among many industries. Some observers noted that certain industries, such as the automotive industry which was deeply impacted by the pandemic, did not have time to focus on putting the new deal into effect and likely would have a delayed reaction to some parts of the plan.

USMCA Today

After USMCA was implemented, concerns involving Canada's dairy industry came to light. In December 2020, the US made a formal inquiry to review alleged unfair measures adopted by Canada. After a resolution was not reached, in May 2021 the US announced that a dispute settlement panel had been requested to further review Canada's actions. The US purported that Canada was denying American dairy farmers and exporters their full benefits under the USMCA agreement. Specifically, the Canadian government was accused of unfairly allocating its dairy tariff-rate quotas (TRQs), or the amounts of certain dairy products such as cheese and yogurt that could be imported at lower duty levels. The US contended that this practice limited the amount of US dairy products that could enter Canadian markets. The dispute panel was the first to be requested under chapter 31 of the USMCA. By November 2021, three officials had been appointed to the panel and an investigation was underway. The panel ruled in 2022 that Canada's TRQ policies were inconsistent with its USMCA commitments. Although Canada subsequently revised its TRQ policies, the US requested a second USMCA trade dispute settlement panel investigation, which ruled in November 2023 that Canada's revised TRQ policies had opened its domestic dairy market sufficiently, thus satisfying its obligations under USMCA.

Challenges also arose in September 2021, when the US approved new legislation to increase electric vehicle (EV) credits. For vehicles to qualify for tax credits (up to $7,500 per vehicle), they would need to be assembled in the US. This raised concerns for the Canadian government which felt the credits would disproportionately benefit automakers such as General Motors and Ford that are based in Detroit and would discriminate against EVs produced in Canada. Canadian leaders threatened to launch a challenge through USMCA if the legislation passed. In December 2022, a USMCA panel ruled that the US position on automotive rules of origin were inconsistent with terms of the USMCA because the US requirements were too stringent and went beyond the scope of the trade agreement.

In 2024 observers of international trade in North America anticipated that elections scheduled to take place that year in Mexico and the United States would determine the outcome of the signatories' six-year review of the USMCA in July 2026. The incoming governments could decide to extend the agreement past its original end date of July 2036 or to renegotiate the agreement. If the agreement is not extended in 2026, it would come up again for review before its expiration date.

These essays and any opinions, information, or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

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