The North American Free Trade Agreement 1.0 and 2.0

Gilbert Gagné
Professor and Chair
Department of Politics and International Studies, Bishop’s University
Sherbrooke, Quebec, Canada

Director
Research Group on Continental Integration, University of Quebec in Montreal
Canada

gilbert.gagne@ubishops.ca

Following its recent renegotiation, the North American Free Trade Agreement (NAFTA) has been known as the United States-Mexico-Canada Agreement (USMCA). Concluded in the early 1990s, the NAFTA originated from Mexico’s proposal for a comprehensive preferential trade agreement (PTA) with its big northern neighbour. The United States and Canada already had a PTA, negotiated in the second half of the 1980s. Although a bilateral PTA was at first contemplated, Canada wanted to be included, mainly to ensure its privileged access to its biggest market. Only with US support was Canada able to overcome Mexico’s reluctance to a trilateral negotiation.

In place from January 1994 to July 2020, the NAFTA was ground breaking in many respects and viewed as a model. It then created the largest free trade area, represented the first instance of a PTA grouping both developed and developing countries, and was the most comprehensive PTA ever concluded. Aside from trade liberalization obligations, it encompassed new topics and provisions in trade agreements, such as services, investment, telecommunications, intellectual property, labour and the environment, in the latter two cases, albeit in side agreements.

Nearly all tariffs and most non-tariff barriers on merchandise trade had gradually been eliminated. In absolute numbers, trade among NAFTA parties has more than tripled since 1994. Total yearly trilateral trade in goods and services exceeds US$ 1.3 trillion, which is more than US trade with the European Union (including the UK) or with the whole of Asia. The United States is by far Canada’s and Mexico’s main trading partner, whereas the latter two have fought with China in recent years to be the US main trading partner. Canada and Mexico are also among each other’s main trading partners. Yet, if trade and investment ties have increased substantially, they have tended to do so separately along the US-Mexico and US-Canada axes, with tri-national automotive supply chains as a notable exception.

NAFTA is generally credited for expanding trade and economic linkages among its parties, creating more efficient production processes, increasing the availability of lower priced and choice of consumer goods. At the same time, NAFTA has been blamed for disappointing employment trends, declining average US wages, and not having done enough to improve labour standards (in Mexico) and environmental conditions (within the NAFTA zone).

From its inception, NAFTA was at the centre of polemics in the United States. Although most were directed at Mexico, Canada was not exempted. NAFTA misleadingly came to be associated with all the adverse effects of economic globalization. Amending the NAFTA long proved impossible, owing mainly to diverging priorities among its three parties as to what needed to be addressed. In the end, it took US President Donald Trump’s threat to either renegotiate or break the NAFTA to force its renegotiation. The US Trump administration also had negotiating objectives to “rebalance the benefits” of the agreement and/or curtail long-standing American liberalization commitments. US officials even spoke of unravelling North American and global supply chains, with a view to diverting trade and investment from Canada and Mexico to the United States.

The renegotiation officially started on 16 August 2017 and concluded on 30 September 2018. President Trump’s characterization of NAFTA as a “disaster” and the “worst agreement ever negotiated” may well explain that it changed name for the USMCA. Canada and Mexico stressed NAFTA’s trilateral character, so as to form a united front toward US threats and pressures. Yet, on 27 August 2018, the United States and Mexico announced that they had reached an overall agreement, putting significant pressure on Canada to join or be left out. The episode revealed that despite a quarter of a century of NAFTA’s existence, there was little cooperation between Ottawa and Mexico City, often tempted to deal bilaterally with Washington. In the United States, further negotiations were required, first between the executive and Congress, and later with Mexico and Canada, leading to a Protocol of Amendment, signed on 10 December 2019. Following its approval by the legislatures of its three states parties, the USMCA entered into force on 1 July 2020.

The USMCA retains most of NAFTA’s market opening provisions and other measures, while bringing significant changes in the following areas: automotive rules of origin, so as to incentivize production in North America and especially the United States; agricultural products, including further US access to Canada’s supply-managed dairy sector; investment, mainly with investor-state dispute settlement abolished between the United States and Canada; government procurement, which now only applies between the United States and Mexico; and intellectual property rights, extending to the digital dimension and Internet service providers. Rules on labour, the environment, and dispute settlement are strengthened. In the case of labour, a specific enforcement mechanism for labour rights violations at the firm or facility level is provided between the United States and Mexico as well as between Canada and Mexico. The USMCA also addresses new trade issues, such as trade facilitation, digital trade, state-owned enterprises, small- and medium-sized enterprises, anticorruption, regulatory practices, and currency manipulation. The agreement comprises a 16-year “sunset” clause, although parties may agree to extend it through periodic review procedures.

The USMCA represents an update of, and some tinkering with, the North American integration model, based on cross-border trade, investment and production, aimed at increasing regional economic competitiveness. Protectionist and populist features have been incorporated, alongside a rebalancing of corporate and public interests. As a tailor-made PTA, reflecting the particular North American context at the time of its conclusion, the USMCA is unlikely to become the 2020s gold standard for PTAs, as the NAFTA was in the 1990s. After a little more than two years of implementation, the rules of origin for the automotive sector and Canada’s dairy obligations have notably been subject to disputes, while the United States-Mexico Facility-Specific Rapid Response Labour Mechanism has been far from inactive.

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