Trade transformation

Proposed NAFTA 2.0 garners enthusiasm, skepticism

Posted on Nov 14, 2018 :: Global
Jessica Thiel
Posted by , Insight on Manufacturing Staff Writer

Since his campaign, President Donald Trump has promised to renegotiate the North American Free Trade Agreement, which he has called “the worst trade deal in the history of the country.”

He delivered on that promise when on Oct. 1, the United States, Mexico and Canada struck a new trilateral trade agreement. Now called the U.S.-Mexico-Canada Agreement, or USMCA, it’s an updated version of the NAFTA agreement signed by the three countries in 1994.

Major changes include country of origin rules for automobiles, labor provisions for certain auto workers, increased access to the Canadian dairy market for U.S. farmers and beefed-up intellectual property rights. It also adds a sunset clause that stipulates the terms of the agreement will expire after 16 years and that the agreement is subject to review every six years.

Trump hailed the new agreement, saying “USMCA is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our farmers and manufacturers, reduces trade barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world.”

Ngosong Fonkem, a trade compliance lawyer and senior adviser at Addison-Clifton, LLC, says there’s disagreement about how much change the new agreement delivers.

“I think it’s universally accepted that the USMCA is better than no NAFTA. The issue is, is the new agreement better than the old agreement?” he says. “Is it really a complete overhaul or is it just some sort of branding? In my opinion, it is just branding.”

Fonkem says the agreement does deliver some desirable changes and takes steps to modernize the 24-year-old NAFTA, including new standards for e-commerce and intellectual property provisions, many of which he says are borrowed from the language of the Trans Pacific Partnership, which Trump rejected.

Marc von der Ruhr, professor of economics at St. Norbert College, casts a skeptical eye on the deal, calling it “mostly a modest revision of NAFTA.” He says Trump’s efforts to revisit the agreement are tied to nationalistic aims that may include anti-free trade sentiments and misperceptions about international trade.

The agreement would bring key changes to the auto industry, he says. Under it, cars would be free of tariffs only if 40 percent of their content is made by workers earning at least $16 per hour, which far exceeds the average manufacturing wage in Mexico. In addition, to qualify for duty-free treatment, by 2023, 75 percent of a car’s value would need to originate in the free trade zone, up from a 66 percent requirement that would kick in either on Jan. 1, 2020 or the date the agreement is enacted.

“Bottom line, cars to U.S. consumers will become more expensive, global supply chains will be less robust and businesses will be exposed to more uncertainty,” he says.

With increased access to the Canadian dairy market, dairy farmers do stand to benefit, von der Ruhr says. Manufacturers in the region who are involved in the auto industry could as well.

John Holevoet, director of government affairs for Green Bay-based Edge Dairy Farmer Cooperative, says the agreement would bring positive changes to the dairy industry. His organization represents dairy farms of all sizes in eight Midwestern states.

While Canada opening its dairy market to the United States has garnered much attention, Holevoet says in revisiting NAFTA, his organization was most concerned about maintaining its trading relationship with Mexico. Gaining access to the Canadian dairy market, which has always been quite closed to the United States, was secondary. He appreciates that the new agreement addresses both issues and keeps free trade with Mexico intact.

Edge also was concerned with geographical indications, or GIs, as they relate to cheese. The European Union policy aims to restrict the use of generic cheese names such as parmesan, fontina and feta to specific geographical regions. The organization is pleased that the USMCA maintains zero tariffs on dairy and all other agricultural products and protects against GIs that would prevent U.S. producers from using common cheese names.

“We were glad to see this was still a triparty agreement,” Holevoet says. “There were some doubts that would actually end up being the case.”

The proposed agreement now awaits congressional approval, and the outcome of the midterm elections — still uncertain at press time — will play a large role in that. If Democrats take control of one or both houses of Congress, gridlock could result, Fonkem says.

The fate of the agreement could rest on public sentiment around trade, von der Ruhr says.

“International trade is a highly misunderstood concept and often evaluated emotionally without regard to economic theory,” he says. “Among economists, comparative advantage-based free trade is one of the universally more agreed-upon concepts and is viewed as a good thing.”