Bye-Bye NAFTA, Hello USMCA

The Trump administration scores a diplomatic victory.

The United States-Mexico-Canada Agreement, or USMCA, entered into force on July 1, replacing NAFTA, the previous, 27-year-old trade deal between the three nations. Under NAFTA, bilateral and regional trade quadrupled from $290 billion to $1.23 trillion. Businesses, workers, and consumers are eagerly—or anxiously—awaiting signs of the new regime’s impact.

NAFTA removed a multitude of barriers but the deal’s negative impact on wages and labor conditions, among other things, pressured the three governments to adopt a new agreement, although many original provisions remain in effect.

The new agreement includes tighter North American content rules for the auto industry; removal of tariffs on auto imports now requires 75% North American content instead of the previous 62.5%. USMCA also requires that 70% of a vehicle’s steel and aluminum originate in one of the three countries. And it increases US dairy access up to 3.59% of Canada’s dairy market.

NAFTA’s dispute settlement mechanism was also at issue in the negotiations. The new agreement eliminates direct disputes between investors and governments but keeps US-Mexico investor-state disputes in energy, infrastructure, telecom, and other sectors if the claimant exhausts local remedies. NAFTA’S dedicated energy chapter has been removed, but the USMCA accepts Mexico’s recent constitutional energy reforms and its governmental ownership of energy assets.

USMCA extends the term of copyright to 70 years, prohibits circumvention of technological protection measures and introduces criminal and civil penalties protection for trade secret theft—including by state-owned entities—and cyber theft, a growing concern for businesses. It also features some revised labor and environmental protections and related dispute settlement in the region, including new monitoring mechanisms for workers’ rights. A new chapter covers state-owned enterprises.

Finally, new sections and provisions cover digital trade, protecting cross-border data flows and prohibiting custom duties on electronically transmitted products, among other things. USMCA also includes, a review mechanism for the whole agreement after six years and a sunset rule after 16 years. With China in mind, it also allows a party to withdraw if another party enters into a free-trade agreement with a non-market economy.