This article was first published by Exporter Today on 19 October 2018.
Tracey Epps takes a look at the more well-publicised provisions of the recently signed United States-Mexico-Canada Agreement and their implications for New Zealand exporters.
On 30 September, the US, Mexico and Canada announced conclusion of the United States-Mexico-Canada Agreement (USMCA), a ‘new’ agreement to replace the North America Free Trade Agreement (NAFTA). Signing is expected to take place in November, and then it will have to obtain Congressional approval.
Reviews of the new agreement are mixed. President Trump has hailed it as “the single greatest agreement ever signed”. Others are, not surprisingly, more circumspect. Governor John Kaisch (R-OH), for instance, described the deal as “really frankly a marginal improvement over NAFTA, it’s no big change”.
So what is different? And will the changes have any implications for New Zealand?
Signed in 1994, NAFTA was designed to free up trade and investment between the US, Canada and Mexico. It also sought to ensure intellectual property protection, and introduced limited rules on labour and environment.
"Trade agreements should be living documents, adjusted as required to meet the demands of a changing society and economy."
Over the past two decades, it has led to close integration of the three countries’ economies. Trump’s claims that NAFTA was the “worst trade deal in the history of the country” appear largely based on his view that it has undermined US jobs and manufacturing. Supporters counter that while some jobs may have been lost due to imports, the increased trade has benefited the US economy as a whole. Either way, it made sense to update NAFTA. Trade agreements should be living documents, adjusted as required to meet the demands of a changing society and economy.
Some modernising changes have been made. New provisions deal with matters such as digital trade and the potentially trade-distorting role of state-owned enterprises. Many provisions are based on TPP, while others are new, such as those on currency manipulation, and some go further than TPP (such as in the intellectual property chapter).
Below I discuss some of the more well-publicised provisions, and those of particular interest to New Zealand.
Car manufacturing: under USMCA it will be harder for cars to obtain preferential tariffs. Rather than 62.5 percent of production having to take place within North America as was the case under NAFTA, now 75 percent of production will have to do so. This means less possibility for companies to outsource parts of production to Asia or elsewhere. In addition, 40 to 45% of car and truck parts must be made by workers earning at least $16 an hour (likely to incentivise production in the US or Canada).
Time will tell as to how industry will respond to these provisions. Some have suggested that if qualifying for USMCA preferences requires companies to redesign their supply chain, they might decide to forgo the benefit altogether, in which case they might just import even more non-North American parts.
Dairy products: Canada has agreed to open a small percentage of its domestic market to US dairy exports (3.59%, only slightly more than the 3.25% it has agreed to open under CPTPP). It has also agreed to change aspects of its controversial milk pricing system. This may help New Zealand as our daily industry argues that the system has allowed the Canadian industry to sell products cheaply on the world market, negatively impacting New Zealand’s export earnings. The Canadian Government has promised compensation to its dairy farmers (the Government has been accused by industry of “bleeding Canada’s dairy sector”) so the final impact for New Zealand will have to be assessed as the Agreement is implemented and we see what that compensation looks like.
Wine: Canada has agreed that British Columbia will change its policy on allowing grocery stores to stock foreign wine. Under current policy settings, only local wine may be sold on grocery store shelves, which the US has argued in the WTO gives local wine a competitive advantage over imported wine. New Zealand has supported the US complaint. Depending on how the USMCA provisions are implemented in practice, this outcome could be of benefit to our own wine industry in the Canadian market.
Investor state dispute settlement (ISDS): the controversial ISDS system will be phased out as between Canada and the US, but will continue to apply in a limited capacity as between the US and Mexico (so long as investors first try to resolve issues in domestic courts). This is an interesting development and it will be interesting to see the flow-on effects in other international negotiations – will other countries follow suit in reducing the use of ISDS?
China: a novel provision requires that if any USMCA Party enters into a free trade agreement with a ‘non-market economy’ (read: China), the others could terminate the USMCA in favour of a bilateral agreement with each other. US Trade Representative, Robert Lighthizer, explained that if one of the USMCA countries entered into an FTA with China, it “potentially could change the economics of the deal from our point of view” and the US would want to revisit the agreement.
This is a far cry from New Zealand’s approach of being open to negotiating FTAs with both the US and China and it will be interesting to see whether this US approach has any impact on our own trading relations with the US.
Sunset clause: there is a sunset clause that says the agreement will end in 16 years, unless the Parties agree otherwise when they formally review the agreement in six years. From a business perspective, this adds unwanted uncertainty and also seems unwarranted given that countries are always free to renegotiate agreements in any event (as the very existence of the USMCA proves).
Some have argued that, in light of the protectionist rhetoric from the White House, the conclusion of a deal that is in essence “NAFTA plus TPP plus a few tweaks” (Richard Hass, Twitter) is a positive development.
On the other hand, Trump has shown that bullying can get results and this in itself should serve as a warning to others, New Zealand included, that bilateral negotiations with the US may be a fool’s errand.
Tracey Epps is a trade law consultant with Chapman Tripp.