The winners and losers in the new NAFTA

By Atif Kubursi, Professor Emeritus of Economics, McMaster University   

Industry Government Manufacturing autos Canada dairy environment free trade IP labour Mexico NAFTA tariffs trade US USMCA

The new deal is preferable to economic chaos.

NAFTA is out but the United States-Mexico-Canada-Agreement (USMCA) is in.

But how different is USMCA from NAFTA? Who loses and who wins?

Canadian negotiators and government officials are singing the praises of the new deal, still subject to approval by U.S. Congress. U.S. Trade Representative Robert Lighthizer and Foreign Affairs Minister Chrystia Freeland said the agreement “will result in freer markets, fairer trade and robust economic growth in our region.”

They added: “It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”


It’s understandable that the chief negotiators would try to sell the deal as a win-win-win agreement, but, like any deal resulting from long and at times acrimonious negotiations, it’s not quite that simple.

Challenging trade practices

The most significant achievement by Canadian negotiators is their success in preserving Chapter 19 from the original NAFTA. These provisions allow Canada, Mexico and the United States to challenge one another’s anti-dumping and countervailing duties in front of a panel of representatives from each country.

This is generally a much easier, less costly and more predictable process than trying to challenge a trade practice in a U.S. court. Canada has successfully used Chapter 19 to challenge the United States on its softwood lumber restrictions.

Auto sector

Canada has also staved off the tariffs Trump threatened to impose on autos and auto parts that could have devastated the Canadian auto industry, which contributes over $50 billion in income and sustains more than 500,000 direct and indirect well-paying jobs in Canada.

The agreement would shield the first 2.6 million Canadian car exports to the U.S. from any tariffs. This is significantly higher than the current 1.8 million cars that Canada on average exports to the U.S. annually.

Under the terms of the agreement starting in 2020, a car will qualify for tariff-free treatment only if 75 per cent of its contents are made in North America, up from 62.5 per cent in the current NAFTA.

In addition, at least initially, 30 per cent of the content must be produced by workers earning at least US$16 an hour. This will ramp up to 40 per cent in 2023. The wage is more than three times what the average Mexican autoworker earns now.

Despite these successes, there are a few negatives to contend with that would affect this key industry. The wage hikes required in Mexico will undoubtedly raise the cost of production of North American cars and render a good part of them non-competitive on world markets, particularly in Asia.

While higher Mexican wages may discourage auto makers in Canada and the U.S. to relocate to Mexico, the new rules could create strong incentives for American and Canadian auto makers to move to Asia.

The dairy industry

The U.S. has repeatedly complained about the unfairness of Canada’s protection of its dairy industry as if the Americans don’t protect their own farmers. The Canadian supply management system is a far more efficient way to protect farmers’ incomes than the farm price support system in place in the United States.

Nonetheless, the U.S. got its way, forcing Canada to yield a larger market share for American dairy farmers. While Canada, under the new terms of the Trans-Pacific Trade Agreement, was willing to grant a 3.2 per cent market share to trade partners, under the USMCA, it yields 3.6 per cent.

Perhaps more significant is Canada’s willingness to eliminate the pricing scheme for what is known as Class 7 dairy products allowing U.S. producers to out-compete Canadian farmers.

The government has already suggested it will introduce subsidies and farm income protection schemes that Canadian taxpayers will have to pay for.

Drug patents

A serious change is Canada’s acceptance of lengthening the patents of pharmaceutical companies to 10 years. This pretty much means that U.S. drug companies will now be able to sell pharmaceuticals in Canada for 10 years before facing generic competition. That’s up from the eight years of “market protection” that’s currently in place.

This means individuals, insurance companies and governments will pay more for pharmaceuticals.

Intellectual property rights

New and more stringent intellectual property rights rules and time limitations for the protection of patents and trademarks, including those for biotech, financial services and even domain names, are included in USMCA.

While many believed that these updates were necessary given that the original agreement was negotiated 25 years ago, Canada will benefit less from these protections than the U.S. given the differences in size of these sectors in both countries.

Labour, environment

The USMCA makes a number of significant upgrades to environmental and labour regulations, especially those in force in Mexico. The agreement stipulates that Mexican trucks that cross the border into the United States must meet higher safety regulations, and that Mexican workers must have more ability to organize and form unions.

The real issue with these provisions, now as before, is this: Will these new standards be implemented in Mexico? U.S. negotiators tried hard to introduce an automatic sunset clause on the deal but failed to get their way.

As things stand now, the USMCA stipulates that the three nations will automatically review the agreement after six years. If all parties agree it’s still working, then the deal will continue for the full 16-year period, with the ability to renew after that for another 16 years.

Trump did not get his wish for the sunset clause, but there will be an automatic review, although it won’t happen until long after Trump has vacated the Oval Office.

Better than chaos

So it’s incorrect to claim that all North Americans will be better off under the new deal. There will be losers, and there will be winners.

The new deal, on the whole, is not any better than the old deal, but it’s surely better than the uncertainty created by renegotiating NAFTA and the chaotic atmosphere created by Trump during the negotiations.

Judging by the performance of the stock markets in both the U.S. and Canada since the deal was announced, Canadians are less convinced than Americans about the net benefits. The TSX rose by a modest 31 points while the Dow Jones climbed 193 points. The Canadian dollar strengthened, but that’s a mixed blessing.

If there’s any lesson to be learned after months of tense negotiations, it’s this: Canada should never again allow itself to be overly dependent upon one trading partner. Canada must diversify its products and services that liberate Canadians from the stranglehold of geography.

This article was originally published on The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts. Disclosure information is available on the original site.

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