The Primary Differences Between NAFTA and USMCA

The North American manufacturing community has now had over a year to sort out the differences between NAFTA and USMCA. But many are still unsure about exactly how the two free-trade trade agreements differ and what provisions impact them most. 

While most of the terms remain unchanged between the two trade deals, there are several key differences that should be noted. We will cover the most significant differences between NAFTA and USMCA to clarify the new trade deal paradigm. This enhanced understanding will simplify things for manufacturers interested in manufacturing in Mexico or other North American locations. 

The NAFTA Replacement

Giving voice to the frustration of many in the US, then-candidate Donald Trump called NAFTA “the worst trade deal maybe ever signed, anywhere.”  As automation and other factors brought about an historic decrease in US manufacturing jobs at the same time the North American Free Trade Agreement (NAFTA) was implemented, many linked the two in a causal relationship. It seemed that NAFTA had somehow shifted these jobs to Mexico. 

As a result, NAFTA was hugely unpopular since it’s implementation in 1993. Major political leaders from both sides of the aisle in the US decried the deal. Trump made replacing it a central plank in his campaign platform. And in the summer of 2020, his renegotiation of the deal with Mexico and Canada went into effect. 

Called the United States-Mexico-Canada Free-Trade Agreement (or USMCA), the new version looks a lot like the old one. However, the Trump administration argued it patched up a lot of holes that gave the US the short end of the proverbial stick in international trade. Progressives in the US pledged it will also protect labor in all three signatory countries.

Below are the primary differences between NAFTA and USMCA that international manufacturers should be aware of.

Key Differences with the New USMCA

• Automotive Industry rules have changed. The automotive industry was probably the primary industry affected by the USMCA. Now, country-of-origin rules have changed. In order for automobiles to enjoy tariff-free status, at least 75% of their parts must come from North America. NAFTA previously required 62.5%. 

The hope is this will increase North American jobs by decreasing reliance on inputs from South Korea, Japan, Germany, and other parts-supplying countries. Vehicles that do not meet this higher ratio are subject to a 2.5% tariff. However, this change may result in higher automobile costs for consumers. 

• Labor rules have changed. Under the USMCA, 40-45% of an automobile’s parts must be manufactured by workers making at least $16/hour by next year to avoid tariffs on that unit.
  

Likewise, Mexico is required to pass more labor-friendly laws, making it easier for workers to unionize. A key change in the USMCA version debated in the US Congress was to create an enforcement panel of multinational exports to ensure labor protections in Mexico. Currently, Mexico has the lowest wages in North America by far.

• Canada’s dairy market was opened. Now, US farmers have increased access to Canada’s dairy market. All three countries, under both NAFTA and USMCA, enjoy 0% tariffs on agricultural goods. 
• Digital and Intellectual property protections have been extended. Under NAFTA, copyright protections lasted until 50 years after the author’s life. This has been extended to 70 years.
  Additionally, the USMCA prohibited duties on digital products like ebooks and music, even offering protection against lawsuits for US-based internet companies for content on their platforms. 
• Certification of Origin has been simplified. Under NAFTA, companies were required to complete a formal certificate of origin. However, this may now be satisfied through informal means, such as commercial invoices or other documentation.
  
• The De Minimis threshold was increased. The minimum threshold for duty-free imports has been increased to $150 USD (up from $20) for imports into Canada and $100 (up from $50) for imports into Mexico. This will especially impact retailers importing low-value goods.
• There is now a Sunset provision. One of the key differences between NAFTA and USMCA is the sunset provision that causes the agreement to expire 16 years after it was implemented (2036). It also requires a review of the trade deal every six years to amend or re-authorize the agreement to ensure no issues are overlooked.

Expectations are that the USMCA will create more jobs for the US, Mexico, and Canada, and increase worker protections. Mexico already has more FTAs (free trade agreements) than any other country. And this reworking of NAFTA is viewed positively as a net gain for the Latin American country and US or Canadian firms operating there.