What Manufacturers Need to Know about NAFTA 2.0

The industry supports the new U.S.-Mexico-Canada Agreement, but it’s yet to be ratified. Here’s why.

What Manufacturers Need to Know about NAFTA 2.0, Photo Credit: Getty Images
What Manufacturers Need to Know about NAFTA 2.0, Photo Credit: Getty Images

By now, manufacturers have heard about the United States-Mexico-Canada Agreement (USMCA), which promotes fair trade between the three countries, but they may not be sure how it affects their business. Well, that depends entirely on whether or not it is ratified.

The USMCA is an effort aimed at modernizing the 24-year old North American Free Trade Agreement (NAFTA). The foundation of NAFTA, which is a duty-free, quota-free treatment for trade in goods, has created a highly integrated and robust supply chain between the U.S., Canada, and Mexico. And, many people say it has worked, so why fix it? Others—especially President Donald Trump—think it’s stagnant. Early on in his administration, Trump railed against NAFTA and called out both Mexico and Canada for taking advantage of U.S. on trade.

USMCA, otherwise known as NAFTA 2.0, is a renegotiation of that deal and addresses new issues emerging around digital trade, as well as stricter labor and environmental standards, and intellectual property (IP) protections. While USMCA was agreed to and signed by leaders of all three countries in November of 2018, only Mexico has ratified the deal to date. Canadian Parliament and the U.S. Congress have yet to pass the agreement.

What does this mean to manufacturers? First, there are concerns that if USMCA is not passed by Congress,it is possible that President Trump could withdraw from NAFTA. That could mean tariffs as high as 15% on manufacturing equipment shipped within the NAFTA region. “Passage of the USMCA is the best way to ensure that trade flows freely between Canada, Mexico, and the U.S., and that economic growth and prosperity continues in North America,” says Shawn Jarosz, president and founder of TradeMoves, an international trade and customs advisory firm.

According to the National Association of Manufacturers (NAM), Canada and Mexico purchase one-fifth of the total value of U.S. manufacturing output – more than the next 10 trading partners combined. These exports support about 2 million American manufacturing jobs and 43,000 small- and medium-sized businesses.

Next question: If USMCA is so good for manufacturingin America, why won’t Congress ratify it? According to Jarosz, Democrats are seeking tougher enforcement of labor and environment commitments and a broader dispute settlement mechanism under the new agreement—which appears to be at the center of what’s holding up the deal. “There are a number of new provisions in USMCA targeting labor reform in Mexico and the U.S. enforcement of those provisions. Democrats want to make sure there are effective accountability and enforcement mechanisms in place going forward,” she says.

By the way, both Canada and Mexico seem to be in agreement that USMCA is a positive move.

Prime Minister Justin Trudeau has indicated that Canada is just waiting for the U.S. to pass USMCA before it makes its move to ratify the agreement. And Mexico was quick to react as the first to pass it. That’s because about 56% of total imports to Mexico are from the U.S., and close to 80% of total exports are to the U.S., noted Luis Domenech, managing director at Market Intelligence Latin America, S.C. (MILA), a company that helps organizations enter and expand in the Mexican and Latin American markets. “So if there are taxes imposed to 80% of Mexico’s exports, it would really hurt the economy,” he says.

If USMCA comes together—and Jarosz predicts it could be ratified as early as the fall and implemented in 2020—it will act as a great equalizer and enable more innovation in the industry, say the manufacturers I spoke to.

“We have competition in Canada,” says Craig Souser, CEO of JLS Automation, an OEM of robotic case packing systems. “We can compete, we’re not worried about that, we just don’t want them to have an unfair advantage,” he says, noting the need for the same rules to be applied at home and abroad. “Just level the playing field and we, at JLS, will take care of the rest.”

Sharron Gilbert, president and CEO of Septimatech Group, a packaging line machine builder based in Waterloo, Ontario, had a similar reaction: “Our particular business interest is with dairy, and my perspective is this could potentially open up opportunities for our customers who are producers of goods to become more competitive, change package formats, innovate new products and improve operational efficiencies. And U.S. customers can explore new market opportunities to grow and enter into the Canadian market place.”

As of today, August 21, 2019, USMCA is still in limbo, but I’m hoping that ratification is right around the corner.

 

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