What Trump's pledge to redo his own trade deal with Canada and Mexico could mean

Washington CNN —

President-elect Donald Trump's frequent calls for new tariffs on foreign goods may have overshadowed another massive trade commitment he made about a month before the November election: renegotiating the U.S. -Mexico-Canada.

Known as USMCA, the trade deal was negotiated by the first Trump administration and in 2020 replaced the quarter-century-old North American Free Trade Agreement, or NAFTA.

A review of the trade deal was expected in 2026, regardless of Trump's commitment, due to a requirement of the agreement.

But Trump's proclamation warned Canada and Mexico, the United States' two largest trading partners, that he could pursue major changes. And the renegotiation could play a major role in other policy priorities of the president-elect, such as national security, immigration and crime. Even if the USMCA does not directly address these issues, the trade agreement could be used as leverage.

It's a very functional tool for Trump to achieve whatever he hopes to achieve through negotiations, said Francisco Sanchez, who served as undersecretary for international trade under then-President Barack Obama and is currently associated with the Holland & Knight law firm. .

The fact that there is a mechanism to discuss a revision is, I think, to its advantage, he said.

Since winning the election, Trump has pledged to impose tariffs on all goods from Canada and Mexico on his first day in office unless both countries stem the flow of immigrants illegals and drugs across the border, which has already prompted the Mexican president to call. Claudia Sheinbaum and a visit to Canadian Prime Minister Justin Trudeau's Trumps Mar-a-Lago resort.

Here's what the USMCA is doing and how its renegotiation could play out:

What does the USMCA do and how is it different from NAFTA?

NAFTA took effect in 1994 and created a North American free trade zone by eliminating tariffs on most goods traded between the three countries. Previously, Mexico had high tariffs on products made in the United States. The USMCA has maintained the free trade environment.

Trade has grown in the region thanks to economic cooperation and stable rules established by NAFTA and maintained by USMCA, and now supports approximately 17 million jobs across North America.

The USMCA retained most of the fundamental elements of NAFTA. But it also added a new chapter on digital trade, strengthened labor enforcement in Mexico and further opened the Canadian dairy market to U.S. farmers.

One of the main focuses of the USMCA is the automotive industry. The trade deal requires 75% of a vehicle's parts to be manufactured in one of three countries, up from the previous rule of 62.5%, to remain duty-free when traveling within the region . It also requires more vehicle parts to be made by workers making at least $16 an hour.

I think it certainly preserves our ability to maintain a relatively robust auto industry, Sanchez said.

What kind of effect have NAFTA and USMCA had?

It is difficult to isolate the impacts of the trade deal from other economic factors, but economists generally agree that free trade contributes to long-term economic growth. But there are usually winners and losers.

NAFTA was blamed for job losses and wage stagnation in the United States and, despite initial bipartisan support, eventually faced attacks from both Democrats and Republicans.

Carla Hills, a former U.S. trade representative and one of the principal architects of NAFTA, recently said that free trade was not to blame for job losses. If anything, the United States has failed to train those who have lost their jobs for new opportunities, she said at a forum Wednesday in Washington sponsored by the Consumer Brands Association.

NAFTA has become a hate phrase, said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.

He noted that the biggest impact of the USMCA so far has been the name change.

Trade between the three countries has continued to increase since the entry into force of the USMCA in July 2020.

The full impact of the automotive content requirement will not be known until 2027, when it will be fully implemented. During the first two years, the nonpartisan International Trade Commission found that the United States imported fewer auto parts, which helped increase revenue, employment and wages for the auto industry in the country . the United States. But it also increased the cost of producing vehicles in the United States, prompting some American consumers to buy more affordable foreign-made cars.

Trump's past comments suggest he may want to help boost the U.S. auto industry, after imposing 100% tariffs on foreign-made cars during his campaign.

USMCA automotive rules require that a certain share of a car's parts come from one of three countries. So there might be a more effective way to encourage parts manufacturing in the United States.

A provision that would raise wages in Mexico, for example, could help boost U.S. manufacturing. Currently, it may be cheaper to manufacture in Mexico, where workers are generally paid less than in the United States.

The president-elect could also seek help from Mexico to specifically address China to prevent Beijing from circumventing Trump's tariffs by entering the U.S. market through Mexico.

It's very likely that negotiators will consider how to deal with Chinese parts and components, said Gregory Husisian, a partner at Foley & Lardner who chairs the law firms International Trade and National Security Practice.

A lot of these weird, behind-the-scenes things will have as big an impact, if not bigger, than what you see in the news, he said.

Trump may also look for ways to reduce the U.S. trade deficit, one of his favorite economic measures. He says the trade deficit that occurs when the United States buys more foreign-made goods than it sells abroad shows that other countries are profiting from the American economy.

But the trade deficit is affected by many economic factors, including the value of the dollar and consumer demand, and the USMCA has failed to reduce it.

The merchandise trade deficit with Mexico alone increased by more than 78% between 2020, when the USMCA entered into force, and the end of 2023. And the deficit with Canada increased by about 27%. , according to the latest government data.

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