President Trump has delivered on his promise of setting up new trade agreements with Canada and Mexico as the three countries struck a deal on a fresh framework called the United States-Mexico-Canada Agreement (USMCA). This will not only replace NAFTA, but will also give a boost to America’s attempts to keep Chinese businesses in check.
The new agreement
“Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st century. 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,” IG Bank quotes a joint statement by the three nations.
Before being elected, Trump had labeled existing U.S. trade deals bad for the American economy and promised to rework them into the country’s favor once he was in power. And as expected, the USMCA does give American businesses much more benefits than the NAFTA agreement. USMCA will be signed by Trump once it has been passed by Congress.
“It is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduce Trade Barriers to the U.S., and will bring all three Great Nations closer together in competition with the rest of the world,” The Epoch Times quotes President Trump.
USMCA requires cars and trucks sold in the U.S. to have 75 percent of the components manufactured within the three countries. Trump has increased the figure from NAFTA’s requirement of 62.5 percent partly because he wants to boost auto parts manufacturing in North America while reducing imports from Asia.
To ensure that Mexico does not end up becoming the sole beneficiary from its low wages, the USMCA explicitly requires 40-45 percent of automobile content to be made by employees who earn a minimum wage of US$16 per hour. This has to be done by 2023 and is aimed at bringing wages in Mexico up to par with the U.S.
The new deal also allows countries to sanction one another for labor violations that end up affecting trade. So, if the U.S. were to find out that certain car parts being imported from Mexico were from businesses that violate the US$16 per hour agreement, America can enact sanctions against car part imports from Mexico.
Keeping China in check
USMCA also helps Trump put additional pressure on China by limiting the markets in which it can sell. Earlier, Chinese businesses could send components to Mexico and Canada, from where the final product would be exported to the U.S. This process allowed the Chinese to evade U.S. tariffs. However, such practices will come to an end with the new agreement.
“There were holes in NAFTA that were damaging to the U.S. industry. Now, the new agreement is to close those holes. Much like the current trade war with China, Trump doesn’t want China to exploit those holes anymore,” Frank Xie, a business professor at the University of South Carolina, says in an interview with The Epoch Times.
As per the USMCA deal, if Mexico or Canada were to enter into a free trade deal with a non-market nation like China, the other countries can pull out of the agreement in just six months. By this provision, Trump has ensured that Chinese businesses will not be able to evade U.S. tariffs anymore by shipping components to Canada or Mexico.