Still friends? Review of U.S.-Mexico-Canada trade two years under the 'New NAFTA' (2023)

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(Video) NAFTA to USMCA | Special coverage of the U.S.-Mexico-Canada Agreement

August 11, 2022 - July 1, 2022, marked the second anniversary of the United States-Mexico-Canada Agreement (USMCA). The agreement that replaced the North American Free Trade Agreement (NAFTA) was built on the idea of retaining North America's status as one of the most economically competitive regions in the world.

Many scholars and economists have opined that NAFTA boosted trade and investment flows in North America during its 26 years of existence. The agreement opened markets in trade and services within the region. It helped integrate industries such as the automotive sector. Despite these accomplishments, NAFTA was not free of critics concerned with losses of U.S. automotive jobs and the need for updated provisions.

In 2017 Canada, Mexico, and the United States decided the agreement needed to be refreshed and negotiated the USMCA (also known as the new NAFTA) under the same basic principles of free trade provided in NAFTA but modernizing and adjusting some components.

Now entering into its third year there is enough of a sample size to review how the USMCA has performed and evaluate certain aspects of the complex and dynamic trade relationships in North America under this agreement.

Trade flows show a dynamic and growing region

Canada and Mexico remain the top trading partners to the United States with China not far behind. From NAFTA's entry into force in 1994 to 2020, the year NAFTA was replaced by the USMCA, U.S. trade of goods with Mexico and Canada increased from $343.1 billion to $1 trillion, despite some setbacks. In 2009 and 2020, for instance, trade flows registered a considerable decrease due to the financial crisis and the COVID-19 pandemic, respectively.

Since the USMCA entered into force on July 1, 2020, trade has been consistent with that set by NAFTA. In 2021, trade flows in North America reached $1.3 trillion, and 2022 is on the same pace. From January to May 2022 trade in the region reached $642.6 billion, which compared with the same period in 2021 (i.e., $521.8 billion) represents a 23.15 percent increase. At this pace, it is likely that 2022 will exceed 2021's benchmark.

Source: U.S. Census Bureau

Trade in services has also thrived under NAFTA. For example, U.S. exports of services to Mexico (mainly travel, transportation, business, and financial services) increased from $14.7 billion in 1999 to $30.4 billion in 2021.

Likewise, trade of services between the United States and Canada has been higher. In 1999, the United States exported $23.3 billion worth of services to Canada (mainly travel, professional and management services, intellectual property, and educational services), and by 2021 exports increased to $56.1 billion.

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The transition from NAFTA to the USMCA did not alter trade in goods and services in the region; trade in these areas is still healthy despite some global disruptions in supply chains caused by the pandemic.

Trade disputes under the USMCA

It is not unusual for a dynamic and intense trade relationship to occasionally bounce into the rails as the USMCA has during the last two years. As with any contractual relationship, the key to keeping it intact is a reliable venue to resolve differences. NAFTA often witnessed disputes among the parties in different sectors. Even though the Parties were able to resolve some of them, sometimes it was necessary to settle the dispute through an impartial tribunal.

Ultimately, only three disagreements were settled through NAFTA's dispute settlement mechanism during its first six years of existence. After Mexico and the United States disagreed on the access of Mexican sugar into the U.S. market under NAFTA in 2000, no subsequent panel was successfully established. The sugar dispute demonstrated that the mechanism lacked effective rules to appoint panelists in case of disagreement between the disputing parties and that it was easy for the responding party to block the process.

Not surprisingly, under the USMCA certain grievances still arise and during its first two years the new agreement's dispute settlement mechanism has been successfully tested. The three countries learned the lessons of the past and cured the flaws. USMCA Chapter 31 includes a new dispute mechanism with revised rules which, among other things, maintains a roster of panelists and allows the disputing parties to appoint them if they are not able to agree, or a party refuses to participate in the process.

Source: Table provided by the authors.

So far, three panels have been established. Two of them have issued a final report finding USMCA breaches as shown in the table above. The third dispute was initiated in 2022 and is expected to conclude in November 2022.

Canada — Dairy TRQ. The United States brought the first dispute against Canada on May 25, 2021. The United States claimed that Canada's practice of allocating Tariff Rate Quotas (TRQs) on dairy products (such as milk, cream, butter, and cheeses) was inconsistent with the USMCA. On Dec. 20, 2021, the Panel issued its final report finding that Canada's allocation system breached the USMCA. In response, Canada made some adjustments, but the United States expressed its disagreement. Consequently, on May 25, 2022, the U.S. requested Canada consultations to address, for the second time, Canada's restrictions on dairy products.

Under the agreement, the disputing Parties have 75 days to hold consultations. In case both countries fail to resolve the matter, the U.S. could request the establishment of a panel. Alternatively, the U.S. could impose sanctions on Canada under the 2021 final report. It remains to be seen what the next U.S. step will be after Aug. 8, 2022, when the 75-day consultation period expires.

United States — Solar Safeguard. Canada initiated the second USMCA dispute against the United States for the application of an emergency action (known as a "safeguard") on solar photovoltaic products (such as solar cells and panels). In 2018, under the Trump administration, the U.S. imposed a 30% tariff on solar product imports from all countries, including Canada.

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On Feb. 15, 2022, the panel found that the USMCA required the United States to exclude Canada under the case circumstances. As a result, on July 7, 2022, the United States and Canada announced an agreement to settle the dispute, excluding Canada from the safeguard.

United States — Auto Rules of Origin (ROO). Since the early days of the USMCA, Mexico and Canada have expressed disagreements over the U.S. interpretation of the USMCA ROOs for vehicles. ROOs are essential to ensure free trade in the region because they determine if a good qualifies as originating and thus if they benefit or not from duty-free treatment under the agreement.

In the case of the auto companies in North America, it is essential to have certainty about the application of ROOs to vehicles, which require thousands of parts, and different interpretations resulting in different applications is not desirable.

This dispute among the three countries continued in 2020 and 2021, until Mexico decided on Jan. 6, 2022, that it was time for a USMCA panel to settle the dispute. Canada joined Mexico as a complaining party, and the proceeding is still ongoing. A final report is expected in November 2022.

As the USMCA begins its third year, another dispute among the three countries appears to be heading to a panel. This time it is against Mexico. On July 20, 2022, the United States requested consultations with Mexico regarding Mexico's energy policies. The U.S. contends that through various measures, Mexico favors its energy state-owned enterprises, PEMEX and CFE, over U.S. companies and U.S.-produced energy. On the same date, Canada filed its request for consultations concentrating on the electricity sector.

Unlike the previous disputes, this one is getting media attention because the U.S. and Canada are challenging the most important policy of Mexico's current administration, and the conflict is being unusually politicized in Mexico. The President of Mexico, Andres Manuel Lopez Obrador, known as AMLO, has publicly stated that Mexico's energy sector was not included in the USMCA and, thus, Mexico is not in breach of the agreement.

The reality is that in 2013, Mexico underwent major constitutional reforms to allow private investors to participate in Mexico's energy sector, attracting investments in renewable energies and exploration and exploitation of hydrocarbons. Moreover, consistent with the new legal framework, Mexico negotiated the most important trade agreements in recent years (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership -CPTPP-, Mexico- European Union Free Trade Agreement, and the USMCA), incorporating the 2013 energy reform and the access it granted to private investments.

However, in 2018 AMLO won the presidential election in Mexico, promising to regain control of the oil, gas, and electricity sectors. To achieve that objective, AMLO has adopted policies and changed laws that Mexico's two main trade partners are now contesting. The United States and Canada have long expressed concerns about AMLO's policies in the energy sector to no avail and finally the issue seems to be heading to a USMCA dispute resolution panel.

Over its first two years, the USMCA has certainly been tested. But despite these challenges, the agreement is holding steady upon the foundations rebuilt from its predecessor NAFTA in supporting one of the most vibrant trading regions in the world. In doing so, it has maintained the promise of free and fair trade in the region.

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Mark Ludwikowski

Mark Ludwikowski is a member of Clark Hill PLC and the leader of its International Trade Practice, based in the Washington, D.C., office. He represents corporate and government clients in trade remedy proceedings and customs matters in helping them maintain access to U.S. and foreign markets for their goods and services. He can be reached at mludwikowski@clarkhill.com.

Aristeo Lopez

Aristeo Lopez is a special legal consultant in the firm's International Trade Practice. His practice extends to investment, international arbitration, services, trade remedies, international negotiations, and market access for goods. He also served as Mexico's negotiator of the investment chapters of the CPTPP and the USMCA, among others. He can be reached at alopez@clarkhill.com.

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FAQs

How did NAFTA impact the US Mexico and Canada? ›

In short, NAFTA created a large free-trade zone reducing or eliminating tariffs on imports and exports between the three participating countries (the U.S, Mexico, and Canada). Overall, there was an increase in trade between the three countries, and real per-capita GDP also increased slightly.

Do you think the NAFTA was beneficial or harmful to the U.S. economy? ›

Key Takeaways. Some of the positive effects of NAFTA were increased trade, economic output, foreign investment, and better consumer prices. U.S. jobs were lost when domestic manufacturers relocated to lower-waged Mexico, which also suppressed wages in U.S. manufacturing plants.

What are the criticism against NAFTA? ›

NAFTA and Its Replacement

However, critics claim that NAFTA drained good jobs from America. “Since NAFTA went into effect, U.S. (and Canadian) workers have lost thousands of good jobs as corporations moved production to Mexico, wage inequality has skyrocketed,” the Economic Policy Institute said in 2018.

Is NAFTA still in effect 2022? ›

In September 2018, NAFTA has been renegotiated. This new treaty – known as the United States-Mexico-Canada Agreement – still needs to be ratified for by every nation and will not go into effect for several more years.
...
NAFTA (North American Free Trade Agreement) Countries 2022.
Country2022 PopulationDensity (/km²)
United States338,289,85737
2 more rows

Did NAFTA help or hurt the US? ›

By contributing to the development of cross-border supply chains, NAFTA lowered costs, increased productivity, and improved U.S. competitiveness. This meant shedding some jobs in the United States as positions moved to Mexico, he says, but without the pact, even more could have been lost.

Did NAFTA help or hurt Mexico? ›

Upon passage, NAFTA did bring benefits to Mexico, such as more private investment, but it failed initially to create the jobs that were promised. NAFTA was passed during a time of recession in Mexico, which contributed to the minimal effect of the Act.

What are some positive effects of NAFTA in the US and Canada? ›

With the coming into force of NAFTA, the world's largest free trade area was formed. The agreement has helped grow the size of and increase the standard of living for the middle class in all three countries. Under NAFTA, tariffs on all covered goods traded between Canada and Mexico were eliminated in 2008.

Who benefits the most from NAFTA? ›

Surprisingly, NAFTA is estimated to boost American GDP by 0.5% a year, approximately $50 billion in 2000 (OSTR). Moreover, in 2003, 10 years after NAFTA was established, United States experienced the most significant economic growth ― 38%, compared to 30% in Canada and 31% in Mexico (USTR).

What is NAFTA and how does it benefit the United States? ›

The North American Free Trade Agreement (NAFTA) was implemented in 1994 to encourage trade between the U.S., Mexico, and Canada. NAFTA reduced or eliminated tariffs on imports and exports between the three participating countries, creating a huge free-trade zone.

What problems did NAFTA cause? ›

Due to NAFTA, Mexico lost nearly 1.3 million farm jobs from 1994 to 2004. 5 The 2002 Farm Bill subsidized U.S. agribusiness by as much as 40% of net farm income. 6 When NAFTA removed trade tariffs, companies exported corn and other grains to Mexico below cost. Rural Mexican farmers could not compete.

Was NAFTA considered a success or a failure explain? ›

“ Despite what opponents of trade liberalization such as Pat Buchanan contend, the North American Free Trade Agreement has been a success by any measure. Trade among the United States, Canada, and Mexico has flourished since the passage of NAFTA, benefiting American consumers and exporters.

Is NAFTA a successful agreement? ›

The North American Free Trade Agreement (NAFTA) was created over 20 years ago to expand trade between the United States, Canada, and Mexico. Its secondary purpose was to make these countries more competitive in the global marketplace. It has been wildly successful in achieving both goals.

Is NAFTA still in effect today? ›

NAFTA remained in force until USMCA was implemented.

What is the main purpose of NAFTA? ›

The agreement came into force on January 1, 1994. The goal of NAFTA is to eliminate all tariff and non-tariff barriers of trade and investment between the United States, Canada and Mexico.

What is the name of the agreement that has now replaced NAFTA? ›

The USMCA, which substituted the North America Free Trade Agreement (NAFTA) is a mutually beneficial win for North American workers, farmers, ranchers, and businesses.

How did NAFTA affect workers? ›

The United States lost millions of manufacturing jobs during the NAFTA era, but overall unemployment has been largely stable (excluding the fallout of the Great Recession) as new low-paying service sector jobs have been created.

What is one of the benefits of NAFTA for Mexico? ›

The benefits of NAFTA for Mexico also include new jobs. The increased demand for products manufactured in Mexico has created thousands of jobs across the manufacturing industry and in other sectors of the economy.

What would happen if Mexico left NAFTA? ›

If Mexico were to leave the NAFTA, it would continue to be the low-cost manufacturing venue of choice in North America. US businesses first began manufacturing in Mexico prior to the NAFTA in the late 1960s and will continue to do so in the future if Mexico were to leave the NAFTA.

What happened to Mexico after NAFTA? ›

NAFTA also had a severe impact on agricultural employment, as US subsidized corn and other products wiped out family farmers in Mexico. From 1991 to 2007, 4.9 million Mexican family farmers were displaced; while seasonal labor in agro-export industries increased by about 3 million.

What happened to US exports to Canada and Mexico after NAFTA? ›

As of January 1, 2008, all tariffs and quotas were eliminated on U.S. exports to Mexico and Canada under the North American Free Trade Agreement (NAFTA). Mexico is the United States' third largest trading partner and second largest export market for U.S. products.

What has been the good impact of NAFTA on Canada? ›

Total merchandise trade between the three NAFTA partners more than tripled between 1993 and 2015, amounting to over US$1 trillion. Combined with the CUSFTA, NAFTA had a major impact on the Canadian economy. In 2016, 77.8 per cent of Canada's total merchandise exports were sent to its NAFTA partners.

How do Americans feel about NAFTA? ›

Towards the end of NAFTA, present public opinion on it was positive, with surveys finding that a majority of Americans viewed it as good for the US economy.

How has NAFTA benefited American consumers? ›

U.S. consumers are benefiting from more open access to wider sources of supply. U.S. agricultural exports to North America have grown rapidly since the NAFTA went into effect, and, if recent trends continue, could reach $30 billion per year by 2005--up from $11.6 billion in 1996.

What would happen if the US left NAFTA? ›

Under Nafta, the three countries pay nothing on most goods that cross the border. After the United States exits the pact, the tariffs, or taxes, that Canada and Mexico put on its goods would rise. For some goods, tariffs could go as high as 150 percent. That would cause prices to spike and cut into company profits.

What are 2 major benefits that have resulted from NAFTA? ›

NAFTA boosted trade by eliminating all tariffs among the three countries. It also created agreements on international rights for business investors. That reduced the cost of commerce. It spurs investment and growth, especially for small businesses.

How did joining NAFTA affect the Mexican economy? ›

This led to increased Mexican exports since it enabled traders to sell their goods and services to other nations freely. This increased the aggregate supply, which increased the economy's GDP and improved the overall employment rate. This led to the growth of the overall Mexican economy.

What are some of the benefits of world trade agreements? ›

Free trade agreements don't just reduce and eliminate tariffs, they also help address behind-the-border barriers that would otherwise impede the flow of goods and services; encourage investment; and improve the rules affecting such issues as intellectual property, e-commerce and government procurement.

How did NAFTA impact Canada? ›

Total merchandise trade between the three NAFTA partners more than tripled between 1993 and 2015, amounting to over US$1 trillion. Combined with the CUSFTA, NAFTA had a major impact on the Canadian economy. In 2016, 77.8 per cent of Canada's total merchandise exports were sent to its NAFTA partners.

How did NAFTA impact the United States? ›

Some critics argue that NAFTA is to blame for job losses and wage stagnation in the U.S., because competition from Mexican firms has forced many U.S. firms to relocate to Mexico. Between 1993 and 2014, the U.S.-Mexico trade balance swung from a $1.7 billion U.S. surplus to a $54 billion deficit.

How has Mexico been impacted by NAFTA? ›

NAFTA undoubtedly had a significant impact on the macroeconomic environment facing Mexico, given the decline in trade barriers and increased market access that the agreement provided Mexico. The key provisions of NAFTA and changes in trade barriers between the member countries are documented in Section II.

What was the result of NAFTA for the US? ›

Key Takeaways: The North American Free Trade Agreement (NAFTA) was implemented in 1994 to encourage trade between the U.S., Mexico, and Canada. NAFTA reduced or eliminated tariffs on imports and exports between the three participating countries, creating a huge free-trade zone.

Who has NAFTA benefited Why? ›

With the coming into force of NAFTA, the world's largest free trade area was formed. The agreement has helped grow the size of and increase the standard of living for the middle class in all three countries. Under NAFTA, tariffs on all covered goods traded between Canada and Mexico were eliminated in 2008.

Is NAFTA successful? ›

The North American Free Trade Agreement (NAFTA) was created over 20 years ago to expand trade between the United States, Canada, and Mexico. Its secondary purpose was to make these countries more competitive in the global marketplace. It has been wildly successful in achieving both goals.

How does NAFTA benefit trade? ›

NAFTA boosted trade by eliminating all tariffs among the three countries. It also created agreements on international rights for business investors. That reduced the cost of commerce. It spurs investment and growth, especially for small businesses.

What is the purpose of NAFTA for Mexico? ›

The agreement came into force on January 1, 1994. The goal of NAFTA is to eliminate all tariff and non-tariff barriers of trade and investment between the United States, Canada and Mexico.

How did NAFTA fail Mexico? ›

NAFTA provided no social contract. It offered neither aid for Mexico nor labor, health or environmental standards. The agreement protected corporate investors; everyone else was on his or her own.

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