Trump’s NAFTA Deal Explained

President Donald Trump has long derided the North American Free Trade Agreement (NAFTA) as a terrible deal. Campaigning for President he vowed to scrap, or at least substantially renegotiate, the trade pact. On Monday, the President announced that the U.S., Canada, and Mexico had reached an agreement on a new version of NAFTA, fulfilling his campaign pledge. The U.S. struck a similar deal with Mexico last month. But, the agreement announced Monday adds Canada, bringing all three North American trading partners on board.

President Trump said at the White House on Monday that “it’s not NAFTA redone, it’s a brand-new deal.” Still, the U.S.-Mexico-Canada Agreement (USMCA), as its now being called, leaves much of NAFTA’s existing provisions in place. However, it does make changes affecting the dairy and auto industries and updates NAFTA’s framework for protecting intellectual property. While undoubtedly a win for the President, for most businesses, the most significant difference between the old NAFTA and the new NAFTA is its name.

What it Does

Under the new agreement, U.S. dairy farmers will have somewhat better access to the Canadian market. It allows U.S. producers to gradually access a greater share Canada’s $16 billion dairy market. The new agreement also increases the proportion of autos that must be manufactured in North America to 75%, up from 62.5% previously, and requires forty to 45% of auto workers to earn more than $16 an hour. Finally, it strengthens intellectual property protections by, among other things, protecting data for biologic drugs for 10-years and minimizing limits on where data must be stored.

The deal includes some concessions to Canada and Mexico as well. The U.S. agreed to largely exempt passenger vehicles, pickup trucks and auto parts from potential tariffs under Section 232, a provision of U.S. law that allows the President to impose trade restrictions to protect national security. It also leaves NAFTA’s dispute resolution mechanism, which the U.S. had sought to eliminate, mostly unchanged. This had been a sticking point for Canada, which uses this process to protect Canadian lumber producers.

However, there is still work remaining. The deal does not resolve contentious questions about the steel and aluminum tariffs that the Trump Administration imposed earlier this year. Also, the new agreement will need to be approved by Congress and that can’t happen until next year. If Democrats make gains in the midterm elections, winning approval on Capitol Hill will be more complicated.

What it Means

In the long term, the deal is expected to have only marginal impact on the overall economies of the three countries. But, in the short term, resolving the trade standoff will remove uncertainty and boost investor and business sentiment. After the deal was announced, stocks rallied as businesses and financial markets, worried about potential for disruptions to supply chains if the stalemate could not be resolved, breathed a sigh of relief.

While the deal is narrower than Mr. Trump might have hoped, it’s significant enough that Republicans can trumpet a win on one of his key campaign promises. Still, the relatively marginal revisions included in the new agreement reflect the gulf between populist rhetoric and political and economic reality. A more sweeping rewrite of NAFTA would have been politically untenable for trading partners and potentially could have resulted in economic disruptions that would prove more damaging than its benefits. The most significant achievement of Mr. Trump’s NAFTA deal may be that it put that genie back in the bottle.

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