Let’s talk NAFTA… What WAS it, what IS it, and why?
WHAT WAS NAFTA ORIGINALLY?
NAFTA stood for “North American Free Trade Agreement” and was put into place by President Bill Clinton in 1994. It ensured that Mexico, Canada, and the U.S. would all cooperate on agreed terms of commerce and trade.
WHAT DID THEY CHANGE IT TO?
They changed it to “USMCA” which stands for “United States-Mexico-Canada Agreement.” Doesn’t sound like a big difference, right? Well the difference is in the details, as they say!
The major components that were changed are:
- The auto industry is a big one. Under the new rules, 75% of car parts must be made in the US, Canada, or Mexico to qualify for no tariffs (taxes put on imported goods), the original NAFTA said only 62.5%
- It may sound like that’s not a big change but for the auto industry overall, it’s actually a big change!
- Trump has also mentioned wanting to put heavy tariffs on foreign auto parts, but Canada and Mexico both received assurances from the administration that they won’t be tariffed.
- 30% of work done on cars made, must be done by workers being paid at least $16/hr. Then a few years after, it will rise to 40% under the new rules.
- Auto industry experts predict this will cause the price of cars to rise as they will now be more expensive and car selection will decrease as they will be more difficult to produce in North America.
- Dairy farmers will also be impacted. Canada has a very complicated dairy production system… So their prices are high. They also restrict how much foreign dairy can come into their country. The new rules put restrictions on how much dairy can be exported FROM Canada and it also gets rid of rules about Class 7 dairy products. Class 7 is basically powders/ proteins/ formulas (ew). Canada used to have intense rules about these but the Trump administration lobbied to get rid of these rules so that the US could sell them these products.
- The drug industry will also undergo some changes. Under the new rules, US drug companies can now sell new drugs to Canada for 10 years without generic competition. NAFTA only guaranteed 8 years.
- Steel was also a priority in this new agreement. President Trump opted to put a 25% tariff on Canadian steel so US steel will be much cheaper to buy within the US.
WHY DID THEY CHANGE IT?
Think about the big industries effected by these changes – Auto, farming, steel, and drug industries. Workers in these industries (especially the first three) were some of Trump’s most staunch supporters. He is doing them a solid and trying to make changes they have been wanting. Throughout his 2016 presidential campaign, he vowed to champion these tariffs and has made good on his word.
OTHER IMPORTANT NOTES:
- Most of the rules will not come into effect until 2020
- USMCA be reviewed after 6 years to make sure everyone still agrees on the parameters
- The conclusion of these negotiations was a landmark win for the Trump administration
- Many believe this may be used as a blueprint for tariffs on China
- These changes were not made overnight. In fact, intense negotiations have been going on for over a year
- These rules govern $1.2 trillion!!!!
- One thing Canada and Mexico really wanted going in was protection from automobile tariffs in section 232… However, they were not granted these protections granted under USMCA but President Trump made a side agreement to try to protect them
- A so-called “sunset clause” was put into effect in the deal that essentially puts a 16 year expiration date on the agreement if it is not renewed
Congress still need to approve these new rules (as well as the governments of Canada and Mexico) and it likely will not happen until 2019 where there will be a lot of new faces in congress. Stay tuned!