President Donald Trump’s biggest trade achievement, the U.S.-Mexico-Canada Agreement, goes into effect Wednesday, replacing NAFTA and ending his threat to break apart the three-nation free trade zone.
The pact is far from an assured success. It’s also landing amid rising trade tensions with Canada and widespread concern about Mexico’s ability to enforce labor protections. Plus, any economic benefits and job gains are years away.
Here’s a look at what could come next as the three nations implement thousands of pages of complicated rules:
Trump’s still threatening new tariffs on Canada
The USMCA is taking effect in the middle of brewing tensions between the U.S. and Canada over a recent Trump administration threat to slap tariffs again on imports of Canadian aluminum.
The U.S. is pressing for Canada to impose quotas to slow the surge of its exports of the metal or face a 10 percent duty. Reimposing the tariffs, which were lifted in May 2019, would likely prompt retaliation from Canada on U.S. exports.
Business leaders on Tuesday, in a clear message to Trump, urged the three countries to resist imposing tariffs “and other barriers or measures that will undermine the objectives of the comprehensive trade agreement and weaken North American competitiveness.”
“Duty-free trade will underpin the success of the agreement,” leaders of the U.S.' Business Roundtable, Business Council of Canada and Consejo Mexicano de Negocios said in a statement.
Meanwhile, Senate Minority Leader Chuck Schumer and other lawmakers have already begun to worry that Canada will evade its commitments to open up its tightly controlled dairy market to U.S. producers.
Canada, for its part, has dismissed that concern.
“We have always been fully compliant with all of the commitments that we have made under our [free trade agreements], including to the United States and that’s not going to change,” Canadian Ambassador to the U.S. Kirsten Hillman told POLITICO.
Expect fights with Mexico
Some of the biggest points of contention are between the United States and Mexico. U.S. Trade Representative Robert Lighthizer said last month that he already anticipates heated fights with Mexico on labor, biotechnology, intellectual property and energy — all issues of strong interest to lawmakers on Capitol Hill.
The problems stem mainly from recent actions by the Mexican government and Congress that make it harder for American companies to send their exports and invest in Mexico.
Mexico’s Environment Ministry under President Andrés Manuel López Obrador hasn't approved import permits for agricultural biotechnology products, like genetically modified organisms, or GMOs. Mexican law allows them to be sold but the country has largely banned U.S. companies' access to the Mexican market since López Obrador took office in December 2018.
Lighthizer, speaking at a House Ways and Means hearing, said he expects to use the USMCA to force Mexico to start approving U.S. exports of such farm goods.
The U.S. refinery industry is also asking Lighthizer to fight a recent Mexican government move to change investment rules to favor state-owned oil company Pemex at the expense of U.S. producers. Lighthizer said he expects to “require equal treatment” from Mexico.
Mexico has a heavy lift on labor issues
Mexico promised to finish carrying through on its new labor laws, as required under the new trade deal. The labor reforms give Mexican workers the right to vote in independent unions and cast secret votes. The Trump administration, Democrats and labor unions are expected to pay close attention to whether Mexico meets those commitments.
House Democrats and labor unions have already begun to press Mexico to deliver. On Tuesday, a group of 59 Democrats, some of who voted for the USMCA, urged Secretary of State Mike Pompeo to push for the release of Mexican labor lawyer Susana Prieto, who was arrested last month on what critics say are phony charges of inciting riot, threats and coercion.
House Ways and Means Chairman Richard Neal said separately on Tuesday that “Mexico must do better” to ensure workers’ rights are upheld.
Mexico says it is working in good faith to improve its labor conditions.
“Without any doubt, we will have some challenges because there are areas in which we are behind the U.S. and Canada and we will have to catch up,” Mexican Ambassador to the U.S. Martha Bárcena told POLITICO in an interview.
Changes to auto manufacturing
One of the biggest differences between NAFTA and USMCA is stricter rules on how North American autos and auto parts qualify for reduced tariffs. Trump has long believed such a move will help bring back American jobs from abroad.
The new rules, which aim to increase car production within the region, will require automakers to make significant and costly changes to how they make their cars. Auto manufacturers are being given three to seven years, depending on the type of car, to fully comply with the complicated new regulations.
The U.S. International Trade Commission has estimated that the new provisions will lead to a net increase of 28,000 full-time U.S. jobs. Employment in the auto-parts industry will rise, but slightly fewer Americans will be making finished vehicles because the added manufacturing costs will lead to higher prices, thus reducing consumer demand, the ITC said.
An economic payoff could be years away
Trump has touted the USMCA as “the best and most important trade deal ever made by the USA,” but the deal is not expected to significantly increase trade within the region.
Much of the framework for it comes from NAFTA, which already eliminated most tariffs between the U.S., Mexico and Canada.
The USMCA will grow the U.S. economy by $68.2 billion, or 0.35 percent, by the sixth year it is in effect, according to the ITC.
Still, many officials and trade experts say the USMCA’s biggest strength is its "modernization" chapters, which, in part, take stock of how the internet has changed trade since NAFTA began in 1994.
The revised deal, for example, prohibits the three countries from slapping duties on digital products like movies, books or other streaming material — a win for tech companies like Netflix and Amazon.
North American officials and economists agree that the USMCA going into effect is good news as it takes away the years of uncertainty arising from Trump’s threat to withdraw from NAFTA altogether.
“The resilience of the North American marketplace and the reliability of our supply chains is going to be essential to getting all three countries to a place where we can recover from the challenges that we're facing,” Hillman said.
But business leaders have cautioned that it’ll be tough to capitalize on new benefits and comply with the rules as companies struggle to recover from the pandemic.
“The Covid-19 pandemic and economic downturn may make adapting to these new rules even more challenging,” the heads of the U.S. Chamber of Commerce, Canadian Chamber of Commerce and Mexico’s Consejo Coordinador Empresarial said on Wednesday.