NAFTA’s Rocky History Paves a Smoother Road for CUSMA
On December 10th, 2019, a new trade agreement between the countries of North America was signed: the Canada-United States-Mexico Agreement, or CUSMA.
The original version of this trade agreement is known as NAFTA. For twenty-five years, NAFTA eliminated the tariffs on many goods passing between the Canadian, U.S., and Mexican borders, and facilitated trade between the countries of North America. NAFTA had its ups and its downs: while it allowed for better access to agricultural markets across the border, it also encouraged the construction of American manufacturing facilities in Mexico which damaged jobs in the U.S, and pressure on Mexico’s agribusiness sector resulted in an increased use of environmentally-deteriorating pesticides and fertilizers.
These major issues were what called for a revision of NAFTA, eventually paving the way for an updated version of the trade agreement: CUSMA. CUSMA is intended to play into the strengths that each country in the new trade bloc provides: cheap manufacturing in Mexico, and access to high-skilled labor, research, and customers in the U.S. and Canada. This new agreement is also designed to take into consideration the rising prevalence of e-commerce.
What stayed the same?
Canada gets to keep the dispute resolution mechanism for anti-dumping and countervailing duties originally conceived as part of NAFTA, allowing them to send final anti-dumping or countervailing duty determinations to the U.S. for review. Canada was also able to maintain cultural exemptions that protect the creation and distribution of Canadian content. With the U.S., it is notable that Visa provisions have remained untouched with the new deal.
What are some of the major changes with CUSMA?
The North American auto industry is preserved in CUSMA with even stricter regulations than in NAFTA. With CUSMA, 75% of a vehicle’s parts must be made within Canada, U.S., or Mexico (up from 62.5%), and more of these parts must be manufactured by laborers making a minimum of $16/hour. Additionally, vehicles must have a minimum of 70% aluminum and steel content. These changes will provide thousands of new jobs over the duration of the agreement and will keep the auto industry alive and protected in North America.
Canada’s dairy, poultry, and egg industries had tariff rate quotas adjusted that give U.S. exporters greater access to this market—now, the U.S. can export up to 3.6% of Canada’s dairy market, as opposed to just 1%. Additionally, the U.S. will allow more Canadian dairy, peanuts and peanut products, and sugar to cross the border.
Intellectual property now receives greater protection under CUSMA, specifically on the U.S. side. Meanwhile, Canada was able to maintain some of its intellectual property laws.
Some smaller changes to note are that plastics have been reduced such that only 50% of plastics polymers must originate from North America. Chemicals can base their origins on the specific chemical reactions taking place in North America, as opposed to tariff or value shifts. The de minimis threshold, which determines which low-value parcels can be shipped across the border without taxes or tariffs and using only simple customs forms, has been increased to 10%. Courier remissions have increased up to $150 CAD for duty and $40 CAD for GST.
Interestingly, the arrival of CUSMA also brings a new means by which CUSMA can be reviewed and altered over a certain period. The sunset clause was enforced which automatically terminates CUSMA after 16 years, unless all three countries wish to continue the trade agreement, under which circumstance CUSMA is enforced for another 16 years. However, the trade deal is re-examined every 6 years in order to modernize the agreement as necessary.
These aspects of CUSMA have been signed on by all three countries, however CUSMA is not yet put into force. What remains to be done is for all three parties to ratify this deal. This means that, although these changes have been presented and agreed upon, there remains some uncertainty as to the future of the deal. It is possible to expect more changes—but for now, CUSMA seems to be on the right track to providing valuable changes to the Canadian, U.S., and Mexican shared economy, and we can expect this trade deal to continue to protect trade in the North American countries.