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December 16, 2019

NAFTA vs. USMCA - Something New Or A Rebranding?

Jennifer Baker

After many years under the current North American Free Trade Agreement (NAFTA), the house finally passed the United States-Mexico-Canada Agreement (USMCA).  Manufacturers this week began reviewing to see what, if any positive changes are in the new agreement.

Under NAFTA many manufacturers moved to Mexico, sometimes literally within miles of the US border. With lower labor costs and no duties to pay when shipping back into the United States, consumers were hopeful this would lead to lower prices with the same quality of goods currently received.

From car parts to washers and dryers, many factories moved to Mexico where production lead to longer lead times, a decrease in quality and no real cost cutting.

USMCA is now set to replace NAFTA as the chief trade agreement between the US, Canada and Mexico, but what real benefits are there to USMCA?

Will this new agreement benefit the average American or will this be more of the same and perhaps worse than NAFTA?

Under NAFTA and USMCA a good is still manufactured and shipped to Canada, Mexico or the US with no duties paid at any border crossing.

Under USMCA a minimum portion of an automobile is required to be produced by workers earning at least $16.00 per hour. It is hoped this price will drive jobs back to the United States as that hourly rate is much higher than the current hourly rate in Mexico.

If only auto parts were manufactured in Mexico this might in fact, help repatriate jobs back to the US, but many parts made in Mexico are not solely for automobiles.  With the manufacturing costs to bring a plant back to the US, many companies will simply pay the increase in wages rather than the heavy cost to transfer jobs back.

Labor unions also receive new protections in USMCA to protect unions organizing in Mexico. Unions typically drive increases in wages along with changes to the work structure of a manufacturing plant.

USMCA could well lead to increases in the prices of goods now produced in newly unionized shops.  It could also see increases in lead times to market by union negotiated work hours at manufacturing facilities.

Most union shops offer standard overtime at time and a half.  The shop can only ask for volunteers willing to work extra and limit overtime when needed, to work through increased demand times.

The new trade agreement is said to increase dairy consumption of US products in Canada, a large market previously unavailable.

Will this be the much-needed boost to the dairy industry which has been decimated in recent years or will Canadian consumers reject dairy products from the US for locally produced items in Canada?

Hopefully, the hidden details to USMCA will provide some benefit to investing in manufacturing again in the US and not more of the same NAFTA we have seen transfer jobs out of the United States since the 1994.

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