What you need to know about Trump's NAFTA 2.0

Ethan Wolff-Mann
Senior Writer
U.S. Trade Representative Robert Lighthizer holds a “Trump Playbook” document as he stands behind U.S. President Donald Trump as the president announces the United States-Mexico-Canada Agreement (USMCA) during a news conference in the Rose Garden of the White House in Washington, U.S., October 1, 2018. REUTERS/Leah Millis

After over a year of negotiation, NAFTA 2.0 has been accepted by the U.S., Mexico, and Canada. The United States Mexico Canada Agreement, or USMCA for short, appears to be similar to the old version on its face.

“The new trade deal agreed with Canada and Mexico won’t in itself have much impact on the U.S. economy,” Capital Economics wrote in a analyst note.

While pundits may disagree on how impactful the changes are, there are a number of key differences. And some of them come as concessions the Trump administration has extracted from its trading partners to the north and south that are already being framed as a political win.

U.S. auto industry

The biggest may be for U.S. auto workers. Under the new rules, more labor must be done by workers earning a certain amount, essentially setting a minimum wage. For a car to be considered “regional,” 75% of its components must be made in the area, versus 62.5% in the old NAFTA treaty. This could potentially protect American automaker jobs that could have otherwise gone to Mexico, where labor costs are cheaper.

At the same time, auto exports from Canada and Mexico to the U.S. will be exempt from U.S. tariffs, something that would have rankled the industry.

U.S. dairy industry

The two last-minute changes hammered out between Canada and the U.S. before the Sept. 30 deadline involved a concession for each nation. The first, Canada’s agreement to loosen its protectionist dairy practices, which restricted American producers’ ability to sell milk to the north. Going forward, 3.5% of its dairy market will open up to the U.S. In return, Canada received the concession of allowing special NAFTA courts to remain, in which trade disputes can be addressed. (Though Canadian dairy farmers aren’t pleased with the deal.)

Caps and sunsetting

Other changes include stronger IP protections, import caps, and adding a 16-year expiration date for the trade deal, a concession the U.S. made as it wanted a shorter-term deal. After the period, the countries must revisit the agreement. (The current NAFTA has no expiration date.)

Panjiva S&P Global Market Intelligence noted that the absolute caps of what can come from Mexico and Canada are 2.7 times more than the current amounts, giving a significant amount of headroom should imports increase from the U.S.’s neighbors.

Everyone can claim victory

The win is an obvious one for the U.S. and President Trump, at least on the surface.

“Trump will exaggerate the win. But it’s a win,” tweeted Eurasia Group’s Ian Bremmer.

It’s a new agreement that abandons a politically sensitive term. As former Mexican Ambassador to the U.S., Arturo Sarukhan, wrote on Twitter: “NAFTA had become a dirty word for many. Still remember that we couldn’t get the Obama admin to mention it by name in North American leaders summit communiqués.”

American dairy industry groups responded positively to the opening up of markets, with the concession likely to even out the disparity between dairy prices north and south of the border.

For the auto industry, companies will likely have to pay more as labor costs rise, which will raise prices for consumers. However, the deal erases uncertainty that has plagued market sentiment, and workers should see more jobs anchored firmly in the U.S. by the minimum wage rules.

But this can easily be framed as a win for all three countries, not just the U.S. For Canada, the resolution is a victory, as uncertainty is killed and investment in Canada is encouraged.

For Mexico, as former Mexican Ambassador to China Jorge Guajardo told Yahoo Finance, free trade continues and the U.S. will now be able to direct its full attention to China and the trade war.

Guajardo noted this is especially good for Mexico, as many countries – including Mexico – suffered from China’s entry into the WTO. “Nobody was displaced by WTO as much as Mexico,” he said. “The fact that we can keep NAFTA and China has barriers is a wonderful opportunity for Mexico.”

The political costs and looking forward

One important question: Were these wins worth the year of strained international relations among three countries?

According to Guajardo, the end result — the deal itself — has no political cost because it works out for all three countries. But the insults that preceded, in which Trump called Mexicans rapists and said that Mexico will pay for the wall, have torched goodwill that will take time to rebuild, and whose true costs in relationships have not been calculated.

Another potential cost is President Trump blinking, though this is framed as a win, Capital Economics noted.

“Along with the deal recently agreed with South Korea, however, it provides another example of President Donald Trump backing down from his hard-line protectionist threats in return for modest concessions that allow him to claim victory,” Capital Economics noted. “This won’t have gone unnoticed by the EU, Japan or China.”

Going forward, eyes will be on the trade war with China, and how Congress views the deal.

As Dan Clifton of Strategas mentioned in a recent note, it’s possible that the economic impact report and analysis that Congress will order before addressing the deal could show less growth rather than more growth, adding uncertainty to the process, which could increase further if Democrats take the House in the upcoming midterm elections.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, retail, personal finance, and more. Follow him on Twitter @ewolffmann.

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