{"id":9885,"date":"2020-02-20T09:43:00","date_gmt":"2020-02-20T15:43:00","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=9885"},"modified":"2020-02-20T10:07:10","modified_gmt":"2020-02-20T16:07:10","slug":"usmca-and-nafta-u-s-and-wisconsin-trade-with-canada-and-mexico","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2020\/02\/20\/usmca-and-nafta-u-s-and-wisconsin-trade-with-canada-and-mexico\/","title":{"rendered":"USMCA and NAFTA U.S. and Wisconsin Trade with Canada and Mexico"},"content":{"rendered":"\n

Following bipartisan support in Congress, in January 2020 President Trump signed the United States, Mexico, and Canada Trade Agreement (USMCA). The USMCA effectively modifies rather than replaces the North American Free Trade Agreement (NAFTA), the original trade agreement between the three nations implemented in 1994. Mexico has ratified the new trade deal, while the Canadian Parliament is currently deliberating ratification. <\/p>\n\n\n\n

Free trade deals have\na primary objective of reducing trade costs by lowering or eliminating tariffs\nand trade restrictions, in addition to making foreign markets more accessible\nfor domestic industries. NAFTA did that, making the Canadian and Mexican markets\nmore accessible to U.S. companies. However, although it was a free trade deal, NAFTA\nregulated<\/em> the free trade with rules of origin requirements which\nspecified that a certain percentage of a product\u2019s content had to be produced\nin North America. If an imported product did not meet the rules of origin\nrequirements, the importer would be subject to tariffs. This would be an\nextremely important provision for the automotive industry. NAFTA regulated<\/em>\nhow auto manufacturers could conduct trade by stipulating that a certain\npercentage of car content had to be produced in North America. The USMCA\nmodifies this arrangement; it does not replace it. <\/p>\n\n\n\n

The effect of the\nUSMCA on the United States? There are some advantages, and some disadvantages.\nBefore we get into that, a little background on trade between Canada, Mexico,\nand the U.S.<\/p>\n\n\n\n

NAFTA<\/strong><\/p>\n\n\n\n

The NAFTA\nnegotiations that were initially started in 1992 under President H.W. Bush came\nto fruition in 1993 when NAFTA legislation was signed by President Clinton.\nNAFTA became effective on January 1, 1994, with the goal of reducing tariffs\nand increasing trade between the three countries. A major goal was to reduce\nMexican tariffs on U.S. exports. According to the Congressional Research Service\n(CRS)<\/em>, before NAFTA U.S. tariffs on imports from Mexico averaged 2% while Mexican\ntariffs on U.S. exports averaged 10%. NAFTA was a big deal – at the time it was\narguably one of the most comprehensive free trade deals ever, it involved three\ncountries and included provisions that covered a variety of new areas for free\ntrade agreements. These included not only trade in merchandise, but also intellectual\nproperty rights protection, services trade, agriculture, dispute settlement\nprocedures, cross-border investment, labor, and the environment. The\nimplementation of NAFTA generally resulted in gradual elimination of nearly all\ntariff and most nontariff barriers on merchandise trade.<\/p>\n\n\n\n

NAFTA was also\ncontroversial, because it was a trade deal between two wealthy countries and a\ndeveloping country. Wages, particularly in manufacturing, are lower in a\ndeveloping country. The concern was that lower wages in Mexico would result in\nthe loss of U.S. manufacturing jobs.<\/p>\n\n\n\n

NAFTA led to a closer economic and political relationship between the U.S., Canada, and Mexico. Since 1994 trade between the three countries has increased significantly as indicated below. Although NAFTA has certainly played a role in that growth, other factors such as fluctuating currency exchange rates have also played a role.<\/p>\n\n\n\n

Trade in Goods with Mexico<\/strong><\/p>\n\n\n\n

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Source: U.S. Census Bureau<\/em><\/figcaption><\/figure>\n\n\n\n

Trade in Goods with Canada<\/strong><\/p>\n\n\n\n

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Source: U.S. Census Bureau<\/em><\/figcaption><\/figure>\n\n\n\n

Table 1 below from\nthe Congressional Research Service <\/em>provides some further insight on\ntrade between the countries. In 2017, the population of the United States was\n327 million, compared to 37 million for Canada and 129 million for Mexico. The\nUnited States is not only larger in terms of population, it is also wealthier. Per\nCapita GDP, adjusted for differences in purchasing power, was $59,330 for the\nU.S., $45,630 for Canada, and only $18,370 for Mexico. Per Capita GDP is a\nmeasure of income per individual in each country. The disparity in Per Capita\nGDP contributes to the trade deficit balance, particularly with Mexico. The\naverage American can buy more stuff from Mexico than the average Mexican can\nbuy from America; and there are almost 3x as many Americans. On average,\nAmericans have more than 6x the annual income than Mexicans. Although there is less\nincome disparity with Canadians, there are almost 10x as many Americans as\nthere are Canadians. Finally, as indicated by the exports and imports of goods\nand services as a percent of GDP, trade has a much greater impact on the\neconomies of Mexico and Canada than it does on the U.S.<\/p>\n\n\n\n

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The overall impact of\nNAFTA on the U.S. economy and jobs? That gets a little harder to measure.\nAccording to the Congressional Research Service<\/em>: \u201cThe net overall effect\nof NAFTA on the U.S. economy appears to have been relatively modest, primarily\nbecause trade with Canada and Mexico accounts for a small percentage of U.S.\nGDP. However, there were worker and firm adjustment costs as the three\ncountries adjusted to more open trade and investment.\u201d That\u2019s another way of\nsaying that given trade with Canada and Mexico, although important, accounts\nfor a relatively small amount of U.S. economic output, NAFTA did not have a\nmajor impact on the U.S. economy \u2013 overall. However, within certain sectors of\nthe economy significant changes did occur \u2013 like the automotive industry.<\/p>\n\n\n\n

The Auto Industry and NAFTA<\/strong><\/p>\n\n\n\n

Although it was\nfloated by the Trump Administration, simply pulling out of NAFTA would have had\nsignificant negative effects on the U.S. auto industry. Two words can sum up\nthe effect of NAFTA on the auto industry \u2013 supply chains. The implementation of\nNAFTA led to a complex development of supply chains by automotive manufacturers\n\u2013 both domestic and foreign. The flow of automotive products between countries significantly\nincreased as automotive manufacturers took advantage of economies of scale in manufacturing\nand assembly plants through specialization. As auto makers searched for the\nmost cost effective and efficient methods to build and assemble autos and\ntrucks, supply chains developed and expanded beyond national boundaries.<\/p>\n\n\n\n

The automotive\nindustry has been one of the primary industries impacted by NAFTA. According to\nthe U.S. Census Bureau<\/em>, out of the $358 billion of imports from Mexico\nin 2019, motor vehicles totaled $75 billion and motor vehicle parts $60\nbillion. Combined, the auto industry accounted for approximately 38% of imports\nfrom Mexico. Exports to Mexico in 2019 included $4 billion of motor vehicles\nand over $32 billion of motor vehicle parts. Combined, the auto industry\naccounted for approximately 14% of exports to Mexico. The auto industry also\nplays a major role in trade with Canada. Out\nof the $318 billion of imports from Canada in 2019, motor\nvehicles totaled $43 billion and motor vehicle parts $16 billion. Combined, the\nauto industry accounted for approximately 18% of imports from Canada. Exports\nto Canada in 2019 included $32 billion of motor vehicles and approximately $28\nbillion of motor vehicle parts. Combined, the auto industry accounted for over\n20% of exports to Canada. (For more information on exports and imports of other\nproducts, click on the U.S. Census Bureau links at the end of this blog.)<\/p>\n\n\n\n

Regarding jobs, although there were certainly some manufacturing\njob losses to Mexico, according to the Center for Automotive Research:<\/em><\/p>\n\n\n\n