Updated for relevancy: October 3, 2024

The landmark United States-Mexico-Canada Agreement (USMCA) took effect on July 1st, 2020. Having been ratified by all three nations, the USMCA replaced the former North American Free Trade Agreement (NAFTA), which had been in effect since 1994. The transition marked a significant shift in North America’s trade policy landscape.

Many have called the USMCA a new NAFTA, or NAFTA 2.0—and for good reason. Like the old agreement, USMCA ensures the prosperity and cooperation of all three countries. The USMCA also modernizes much of the work NAFTA set out to do. However, there are some important differences between the old and new deal. This guide walks through the changes between the agreements and the pros and cons of USMCA, breaking down what to expect moving forward.

USMCA vs. NAFTA: Biggest Differences at a Glance

As noted above, the USMCA is largely a continuation of the original NAFTA. It seeks to promote and protect free trade between the three countries that make up North America. Many of its provisions are simply updates to a few decades-old rules.

That said, USMCA does contain some major differences, such as:

Building Labor Protections in Mexico

Labor was and still remains cheaper in Mexico than it is in the United States. However, the USMCA levels the playing field with additional protections for workers in Mexico.

• Violation of labor laws is punishable by the cancellation of shipments
• Products of forced labor are barred from importation
• Workers can organize and bargain collectively

Reducing Protections for Drug Companies

Under NAFTA, drug companies enjoyed protections for lucrative sub-divisions of the pharmaceutical industry. These protections have been removed—but this loss is balanced with gains elsewhere, such as copyright safe harbors.

• A 10-year protection against generic biologics has been removed
• Copyrights are now 70 years, up from 50 under NAFTA

Increasing Protections for Technology Firms

Technology and data companies now enjoy increased protections related to intellectual property and privacy concerns. For example, when it comes to digital trade:

• Governments can no longer request source code from tech companies
• Duties on electronic transmissions are prohibited

Incentivizing North American Manufacturing

USMCA increases NAFTA’s efforts to keep production in North America rather than in competing nations across Europe and Asia. Due to this, the United States backs the push for U.S. business owners —including those with small and medium-sized enterprises—to invest in industrial buildings in Mexico for their companies. This aspect of the trade agreement works to open up more market access for all three countries involved in the new trade deal.

For example, to qualify for zero tariffs, automakers must:

• Produce 75% of a vehicle’s content in North America, up from the 62.5% that had been required under NAFTA
• Utilize high-wage factories (i.e. those paying a $16 dollar per hour minimum average salary) for at least 40-45% of the parts for a vehicle
• Ensure that 70% of the steel and aluminum used in a new vehicle must be melted and poured within North America

Dismantling a Controversial Arbitration System

One of the biggest yet most obscure changes comes to the Investor-State Dispute System (ISDS), which enabled companies to sue cross-border governments over their right to conduct business in a given country:

• No such mechanism now exists between the U.S. and Canada
• Specifications for Mexico-U.S. cases have been drastically restricted

Some of these regulations offer sharp contrast from existing NAFTA analogs. Others introduce concepts alien to NAFTA. But the spirit of the new agreement is the same as that of the old—updated for the needs of the 21st century.

USMCA Pros and Cons

What do these updates look like in practice? The changes outlined above are composites outlining the most significant of the many smaller-scale updates and revisions that USMCA offers. As with any change, compromise is involved, and the benefits in one area are counterbalanced by costs in others.

Here are a few of the major pros and cons of the new agreement:

USMCA Pros

The pros of USMCA involve various boosts to productivity and trade within North America, as well as protections for vulnerable individuals and industries:

• Decreased or eliminated tariffs reduce costs of production and trade, which ultimately lowers retail prices for consumers and increases profits for companies.
• Increased protections for workers in Mexico mean increased opportunities for American workers as wage gaps decrease. Strict labor laws set in place with the new deal ensure labor rights and fair pay for work, in particular in Mexico.
• Restructured protections for healthcare and data markets keep firms competitive while maintaining incentives for growth.

USMCA Cons

The cons of USMCA involve reduced protections for certain industries, as well as general costs involved with stronger labor protections:

• Drug manufacturers can no longer enjoy monopolistic control over biologics
• Higher-wage factory regulations may entail modest increases to production costs

Overall, the pros of the USMCA come from restructured protections and incentives that will make production in North America more profitable and efficient. Simultaneously, these protections also maintain ethical boundaries and prevent the exploitation of our laborers.

These same protections may entail costs and other frictions, which can amount to cons. But these are a small price to pay for a sustainable manufacturing and trade future in North America. On balance, the pros of the new agreement outweigh the cons.

With that in mind, the last question is:

Who Benefits from USMCA?

Everyone. We all benefit from rules that match the current free trade agreement.

While NAFTA offered many advantages earlier on in its lifespan, it needed updates to keep up with the times. Benefits are abundant in the new USMCA, for various stakeholders within North America and beyond.

To recap, some of the biggest beneficiaries include:

• Workers
• The environment
• North American manufacturing
• All data and healthcare stakeholders

A New Era of Trade

The shift from NAFTA to USMCA, completed in past years, brought about substantial changes that are still influencing trade dynamics today. The USMCA enhances provisions on digital trade, intellectual property, and financial services, sectors not fully accounted for under NAFTA. The agreement also redefined rules of origin, particularly for the automotive industry, requiring a greater portion of vehicles to be manufactured in North America.

Impact on Various Sectors

• Rules of Origin: USMCA’s stricter rules have increased regional content requirements for automobiles from 62.5% under NAFTA to 75%, ensuring more components are sourced within North America.
• Digital Trade: The USMCA established new standards for digital commerce, ensuring data can be transferred across borders freely and prohibiting customs duties on electronic transmissions.
• Financial Services: Enhanced cooperation and protection for financial service providers, promoting greater access to markets and ensuring a level playing field.
• Intellectual Property: Strengthened protections that include copyright safe harbors and extended copyright terms to 70 years, fostering a more robust environment for innovation and creativity.

Modernizing Trade for a Connected World

With a focus on leveling the playing field, USMCA introduced mechanisms to support small and medium-sized enterprises and improve labor conditions. These changes aim to ensure that economic growth benefits more people and that workers in all three countries enjoy better working conditions and wages.

The Path Forward: Compliance and Opportunities

While some of the provisions in the USMCA may technically raise production costs in certain industries, the benefits of labor, environmental, and privacy protections far outweigh these costs. This goes for both the short- and long-term outlook of all three countries. With the implementation of the new agreement, this will change the course of global trade significantly and for the better.

Our modern era calls for modern trade agreements, and USMCA updates the original NAFTA to meet the moment. If you are thinking about manufacturing in Mexico, or you already do and want to learn more about how these changes might impact your business, contact us today!