Baker Institute expert: USMCA will mostly preserve North American economic structure

If the United States-Mexico-Canada Agreement (USMCA) is ultimately approved by the three parties and enters into force, most of the North American Free Trade Agreement (NAFTA) structures that allow North American manufacturers to compete effectively with their counterparts in Europe and Asia will be preserved, according to a new issue brief from Rice University’s Baker Institute for Public Policy.

USMCA, a modified and modernized version of NAFTA, could take effect as soon as Jan. 1, 2020. If it’s approved, it will govern most economic relationships between the three largest countries in North America for at least 16 years, according to brief author David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute. NAFTA had an indefinite horizon.

The agreement would impact nearly $1.2 trillion in annual trade of goods and services, Gantz said.

“Given that NAFTA was negotiated in 1991-92, it is obvious that many changes have occurred affecting regional and global trade in the ensuing 25 years,” wrote Gantz, who is also the Samuel M. Fegtly Professor of Law at the University of Arizona’s James E. Rogers College of Law and director emeritus of the college’s international trade and business law program. “The new subject matter includes small- and medium-sized enterprises, state-owned enterprises, corruption, e-commerce, data localization and general regulatory practices, some of which may set the standard for future trade agreements concluded by the three parties.”

The USMCA consists of 34 chapters, compared with 22 in NAFTA, along with numerous annexes and side letters. According to Gantz, significant economic or political changes in NAFTA were made to rules governing the automotive trade, dispute settlement, intellectual property and agriculture.

Gantz outlines positive changes in the USMCA, including enhanced labor and environmental protections, currency manipulation and agriculture rules. He also highlights the downsides, including rules of origin and related restrictions on automobiles, reduced investor protections, hydrocarbon sector investment in Mexico, the 16-year sunset clause, failure to deal with steel and aluminum tariffs, the 10-year term for biologic drug protection that will drive up costs in Mexico and Canada, and the prohibition of Mexico or Canada from concluding a free-trade agreement with a nonmarket economy.

“Given that the effective implementation of the USMCA will require close coordination among the United States, Mexico and Canada for the indefinite future, it is too soon to tell if the personal attacks by (President Donald) Trump on Canadian Prime Minister Justin Trudeau will have a lasting negative effect on the United States’ closest ally and largest trading partner,” Gantz concludes. “Similarly, Trump and (Mexican President Andrés Manuel) López Obrador effectively began with a clean slate on Dec. 1, 2018, sharing an opportunity to establish cordial relations that will facilitate the successful implementation of the USMCA – or the opposite.”

About Kendall Schoemann

Kendall Schoemann is a staff writer in Rice University's Office of Public Affairs.