A New and Improved NAFTA? Stanford Law’s Alan Sykes on President Trump’s New Trade Deal

President Trump announced a new trade deal, the United States-Mexico-Canada Agreement (USMCA), late on October 1. It has been dubbed the new NAFTA. In this Q&A, Stanford Law Professor Alan O. Sykes discusses highlights of the new deal and how it might benefit American workers.

Can you sketch out the highlights of the deal?

The USMCA retains most of the old NAFTA, but does make some non-trivial changes. Most prominently it changes the rules in auto trade, tightening the conditions for cars manufactured in North America to be able to receive duty-free treatment when crossing the border into another USMCA country. The percentage of value manufactured in North America must now be 75% rather than 62.5%, and 30-40% of the manufacturing must be done in facilities that pay workers at least $16 per hour. The latter requirement hits production in Mexico and would tend to shift some production toward the United States and Canada. Other highlights include some limited opening of the Canadian dairy market to certain products, extended protection for bio-pharmaceutical patent holders, some new rules facilitating ecommerce, some tighter truck safety standards for Mexican trucks entering the United States, and an agreement to review the entire agreement every six years.

Side letters promise to exempt Mexico and Canada from any new auto tariffs, but the steel and aluminum tariffs remain in place pending the negotiation of an alternative, possibly quotas. For U.S. and Canadian investors, the right to sue the U.S. and Canadian governments for damages following a breach of investment commitments is eliminated, although investors in certain sectors retain the right to bring suits against Mexico.

Alan Sykes
Stanford Law Professor Alan Sykes

Can you explain the “rules of origin?” Will the change to the rules of origin do much to encourage car makers to build in the U.S.?

Goods can have many components manufactured all over the world, automobiles being a prime example. USMCA affords duty-free treatment to automobiles “made in” the three member countries when exported to another member. If the transmission is from Japan, the engine from Mexico, the tires from Taiwan, the body from Alabama, and the assembly process in Ontario, where is the car “made?” The answer depends on the rule of origin, which as indicated above now requires that 75% of the value of the components come from one of the three member states, and 30-40% of the value from factories that pay at least $16 an hour. If these conditions are met, the car will be treated as “made in” a member country. Otherwise, it will be subject to the tariff charged on imports from non-member countries.

Regarding the provision for a higher minimum wage of $16 per hour, is that across the trading zone, or just in the U.S.? And is it for certain jobs and only the auto industry?

It is not a minimum wage but a condition for USMCA origin and duty-free treatment of the finished product.  It can be satisfied by factories paying the required wage in any member country.

Can you talk about IP protections added in this agreement?

The main one concerns bio-pharmaceutical products and the period during which they are protected against generic competition in Canada and Mexico. U.S. law now provides for a 12-year period, while Canada and Mexico have now agreed to increase their protection to ten years.

Does USMCA adopt some of the better parts of the Transatlantic Trading Partnership (TPP) agreement?

No.

Does it pave the way for the US to basically adopt TTP in a piecemeal way?

I don’t see how.

Is this an improvement to NAFTA—or TPP? Is it a “good deal” for the U.S.? Are there any negatives?

It is a modest change from NAFTA with a mixed bag of effects. Free traders will applaud things like reduced protection in the Canadian dairy market, although the liberalization is small. The auto provisions may lead to some new jobs (or save some old ones) in North America, especially in Canada and the United States, but will raise the costs of cars produced within USMCA members. It will thus tend to hurt consumers (modestly) and could reduce the profitability of North American automakers (modestly). It is also possible that it might backfire to a degree and lead more cars to be produced outside the member countries, with the manufacturers preferring to pay the 2.5% tariff rather than incur the higher costs to claim USMCA origin. The reduction of investor rights to sue protects member governments from suits but exposes investors to somewhat greater risks. More patent protection for bio-pharmaceuticals is good for Pharma and not so good for its consumers, with uncertain (and probably extremely small) effects on innovation. The absence of a resolution to the steel and aluminum tariffs raises the specter of long-term quota restrictions in those markets and higher prices to downstream industries.

The new agreement is a much smaller scale agreement than TPP in terms of the amount of trade covered, and its provisions are more restrictive in various ways. Those who favor trade liberalization will find it inferior and lament our exit from TPP.

As for whether it is a “good deal,” it is a better outcome than simply scuttling NAFTA or doing a U.S.-Mexico bilateral. By comparison to the original NAFTA, the changes are fairly small potatoes.

And what are the next steps for this deal? Do you anticipate it gaining support in Congress? Or might there be contentious issues?

USMCA must still be ratified by Congress, and the assumption is that it will come up early next year.  Republican free traders will breathe a sigh of relief and likely support the new arrangement. Pro-trade Democrats may feel much the same way, and one might think that long-term critics of NAFTA among the Democrats (e.g., Bernie Sanders, Elizabeth Warren, Sherrod Brown, Debbie Stabenow) might welcome many of the provisions such as greater protection for the auto industry.  But there is also a question whether the Democrats will see their support as bolstering President Trump politically, thus leading to some opposition.

Professor Alan O. Sykes is a leading expert on the application of economics to legal problems whose most recent scholarship is focused on international economic relations.