After more than a year of negotiations and minutes before the midnight deadline, the United States, México, and Canada reached a new free trade, tri-national agreement. The US-México-Canada Agreement (USMCA) will ultimately replace the North American Free Trade Agreement (NAFTA). USMCA or NAFTA 2.0, contains 34 Chapters and 12 side letters covering agriculture, dispute resolution, e-commerce, and labor relations.
1. Background on NAFTA 1.0
Before we can understand the USMCA, it is important to understand the history behind NAFTA. NAFTA, or as it is known in Spanish: Tratado de Libre Comercio de América del Norte (TLCAN), was executed by the United States of America, México, and Canada on January 1, 1994.
The goal of NAFTA was to create a free trade zone between the U.S., Canada, and México. In addition to the core agreement, incorporated in NAFTA are the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC). The NAALC and NAAEC were added with the goal of protecting workers and the environment.
The NAALC is typically referred to as the “Labor Side of the Agreement,” and within the agreement each country agreed to enforce its own labor standards and to strive to improve labor standards within its respective countries. The NAAEC is the “Environmental Side of the Agreement,” within which each of the three countries agreed on principles and objectives for the conservation and the protection of the environment.
NAFTA created the largest free trade area in the world, helping drive down consumer good prices, and boosting economic growth, profits and employment in all three countries.
II. The Impact Of NAFTA to Employers in the Region
Many economic experts note that NAFTA was quite beneficial to the United States. This benefit came in the form of lowered tariffs and import prices, as well as a narrowed risk of inflation. Some argued that it also had a positive impact on interest rates in the United States.
From 1993 to 2017, the United States increased its exports of goods to México and Canada from $142 billion to $525 billion, which equates to a third of its total exports. It is estimated that NAFTA helped create at least 5 million direct and indirect jobs in the United States associated with the export of goods.
In México, NAFTA facilitated the growth of the maquiladora industry. A maquiladora is essentially a subcontractor manufacturing operation, where factories import material and equipment on a duty-free basis for assembly and manufacturing. The assembled product may then be returned to the raw materials’ country of origin. NAFTA had a direct result in the growth and expansion of this industry.
The interdependence of the three economies is seen not only through the growth in the maquiladora industry, but also in the automobile manufacturing industry. For example, by 2020, México will manufacture 25% of all North American cars. Additionally, approximately 75% of Mexican exports are sold to United States consumers, a number which in large part is a direct result of NAFTA.
On September 30, 2018, the United States, México, and Canada completed negotiations of an updated trade agreement now known as United States-México-Canada Agreement—“USMCA,” or as we like to refer to it, NAFTA 2.0. While the deal was agreed upon by the three countries, it must ultimately be ratified by each country’s legislature and, as such, will likely not go into effect before 2019.
III. USMCA-What it means to Employers
Chapter 23 of the NAFTA 2.0 is dedicated to the issue of labor. This chapter establishes that all the parties should recognize, adopt, and follow the following rights:
-Freedom of association and the effective recognition of the right to collective bargaining;
-The elimination of all forms of forced or compulsory labor;
-The effective abolition of child labor and, for the purposes of this Agreement, a prohibition on the worst forms of child labor; and
-The elimination of discrimination with respect to employment and occupation.
The USMCA contains specific provisions impacting each of the countries that is a party to the agreement. For example, within the USMCA, there is a provision requiring México to create adequate legislation to ensure freedom of association as well as requirements relating to collective bargaining and labor relations. Additionally, the car manufacturing industry will be impacted by the updated agreement as it provides that a significant percentage of work performed on car manufacturing must be completed by workers earning at least $16 an hour, or about three times what the typical Mexican autoworker currently makes.
Canada’s dairy industry will also be impacted by the USMCA. Under NAFTA, United States farmers had limited access to the Canadian market as a result of tariffs and set quotas on dairy products exported to Canada. These restrictions are eased under the new agreement, thus opening up opportunities in the Canadian market for the United States dairy industry.
While the agreement was officially reached on September 30, 2018, the USMCA will not become effective until ratified by the legislatures of the United States, México, and Canada. The anticipated date for each country’s respective legislature to pass the agreement is sometime in the middle of 2019. One important difference between NAFTA and the USMCA is that the USMCA expires in 2034; NAFTA was a perpetual agreement.
IV. Forecast and Conclusion
While it is early to make concrete predictions on the true impact of the USMCA, there will no doubt be some impact to employers across the three countries. For example, those in the automotive industry will need to grapple with increased salary requirements for their employees in México, which may ultimately impact consumer cost. Some analysts predict that the automotive industry will shift manufacturing to Asia in order to reduce costs. This, along with other provisions regarding collective bargaining and labor relations, may be a generating force for labor-related issues for employers, particularly in México. Additionally, the United States dairy industry may see an uptick in labor demands as a result of the new market opportunities in Canada. While these changes may be gradual, growth and updated labor dynamics as a result of the USMCA should be addressed with the guidance and counsel of legal professionals.
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The Shifting US-China Trade Landscape