NAFTA vs the USMCA: Your Guide to Understanding the New Trade Rules

The North American Free Trade Agreement (NAFTA) came into effect in 1994 to eliminate trade barriers between the US, Canada, and Mexico. However, as manufacturing jobs declined in the U.S. almost at the same time as NAFTA’s implementation, many people blamed NAFTA, saying the agreement was shifting jobs to Mexico.

During his presidential campaign, Donald Trump criticized NAFTA calling it “the worst trade deal ever made” and promised to renegotiate the deal if elected. 

After being elected, Donald Trump delivered on his campaign promise and duly negotiated a new trade agreement, the USMCA (the United States-Mexico-Canada Agreement) which came into effect in 2020. The USMCA replaced the NAFTA agreement previously implemented in 1994. 

Understanding the key differences between NAFTA and the USMCA will help you understand the regulatory requirements of the TN visa and help you unlock potential employment opportunities.

What is NAFTA?

The Predecessor of the USMCA

The North American Free Trade Agreement (NAFTA) was an agreement that created a free trade zone between the three major North American countries – the US, Canada, and Mexico.

History and Purpose

President Bill Clinton signed the NAFTA agreement on December 8, 1993, and it took effect on January 1, 1994.

NAFTA’s main purpose was to promote economic integration and growth by eliminating trade barriers between Mexico, Canada, and the U.S.. It eliminated almost all tariffs and trade restrictions between the three countries, creating the world’s largest free trade zone of its time.

NAFTA’s Key Provisions

The main provisions of the NAFTA agreement were as follows:

• Elimination of trade barriers. Before NAFTA, there were high import tariffs on goods traded between the U.S., Canada, and Mexico. NAFTA eliminated these tariffs, thereby encouraging cross-border trade. It also eliminated non-tariff trade restriction barriers like licensing requirements and border processing.
• Creation of trade rules. NAFTA established rules for trade in various sectors (especially automobile and agriculture).
• Intellectual property protection. NAFTA increased protection for intellectual property rights and harmonized standards across the three countries.
• Dispute resolution. It established a dispute resolution process between investors and member states regarding how the agreement should be interpreted and applied.

NAFTA’s Economic Impact

With NAFTA removing trade barriers, cross-border trade soared among member countries. The U.S., Canada, and Mexico could easily access each other’s markets, increasing exports and imports.

NAFTA’s provision of a stable investment environment (where investors are protected) increased investment flow within North America. Companies from the three member countries invested in each other’s markets, resulting in many cross-border mergers and joint ventures. 

By boosting trade and driving investment, NAFTA stimulated growth in member countries. Mexico, in particular, experienced accelerated economic growth. Because of its lower labor costs (in comparison to the U.S. and Canada), manufacturing companies looking to reduce production costs and improve profitability moved there, leading to the growth of export-oriented industries in Mexico.

What is the USMCA?

The United States-Mexico-Canada Agreement (USMCA) is a trade agreement ratified in 2020 to replace the North American Free Trade Agreement (NAFTA).

The USMCA’s History and Purpose

NAFTA became unpopular in the U.S. amid growing concerns that American workers were losing their jobs to lower-paid foreign workers. American production facilities also began leaving the United States seeking cheap foreign labor, resulting in massive layoffs. As a result, President Trump prioritized negotiating a new trade agreement to replace NAFTA.

Negotiations for NAFTA 2.0 started in 2017, leading to the creation of the USMCA. The USMCA came into effect on July 1, 2020, with the aim of updating NAFTA to optimize its trade practices. 

The USMCA’s Key Provisions

Key provisions of the USMCA:

• Updated rules of origin requirements. The USMCA updated the automobile rules of origin requirement mandating that a certain portion of an automobile’s value come from within the governed region. In NAFTA, the required portion was 62.5 percent. The USMCA increases this requirement by 12.5 percentage points, to 75 percent of the automobile’s value.
• Stronger labor standards. The USMCA has stronger labor provisions mandating improved working conditions, better wages, and protection for workers’ right to organize.
• Better environmental protections. The USMCA also reinforces provisions for addressing environmental issues and ensuring that member countries uphold these environmental laws.
• Increased market access. The USMCA retained NAFTA’s tariff-free regime but also updated provisions allowing more U.S. dairy and other agricultural products to enter Canadian markets.
• Sunset clause and review. It also includes provisions for a review of the agreement every 6 years and for the agreement to expire after 16 years unless all parties agree to extend it.

The USMCA’s Economic Impact

The USMCA facilitates more open and fair trade among the US, Canada, and Mexico. It also encourages investment across North America, promoting economic growth.

However, the USMCA’s impact varies across sectors. For example, the digital industry benefits from its provisions for digital trade, but the automotive industry may face more challenges as the provisions for improved labor standards would raise manufacturing costs.

Key Differences Between NAFTA and the USMCA

The USMCA introduced several key updates compared to NAFTA.

Trade Rules and Tariffs

NAFTA gradually eliminated tariffs on most goods, promoting tariff-free trade among member countries. 

The USMCA retained NAFTA’s tariff-free provisions but updated the rules of origin by requiring goods (particularly in the automotive sector) to have a higher percentage of regional content to qualify to be sold tariff-free.

The USMCA further simplified certification of origin rules. Under NAFTA, companies were required to complete a formal certificate of origin, but USMCA allows companies to satisfy this through informal means (such as an invoice).

Also, whereas NAFTA had no sunset clause, USMCA has one that requires a review of the deal every six years and causes it to expire 16 years after its implementation (2036).

Labor and Environmental Standards

Because NAFTA did not adequately cover labor rights and environmental protections, two separate side agreements were negotiated in addition to NAFTA (one for environmental protection and the other for labor rights protection). However, these side agreements were difficult to enforce. 

The USMCA corrected this by including stronger labor standards and environmental protections in the agreement itself. This means violations of these provisions carry the same consequences as violations of trade-related provisions.

Intellectual Property Rights

NAFTA provisions included protection of intellectual property, but they were not comprehensive. The USMCA strengthened intellectual property protections. For example, it increased copyright protection (from 50 years in some cases) to 70 years after the creator’s death. The agreement also established a copyright safe harbor for internet companies to ensure they can’t be held liable for their users’ copyright infringements. 

Digital Trade

NAFTA did not address digital trade issues because the digital economy was less developed when the agreement was signed. However the USMCA addresses digital trade with provisions that facilitate cross-border data flow. For example, it prohibits member countries from imposing data localization requirements that require data to be stored within their borders.

Automotive Industry Standards

The USMCA established more stringent rules of origin requirements for automobiles and automotive parts. Under NAFTA, 62.5% of cars and trucks must be manufactured in one of the three participating countries to be sold free of tariffs. However, the USMCA increased that minimum requirement to 75%. 

In addition, 40 – 45% of the manufacturing work done on eligible vehicles must be performed by workers who earn $16+ per hour.

Is the USMCA Better Than NAFTA?

When announcing that the U.S. had reached an agreement on the USMCA, then House Speaker Nancy Pelosi said, “There’s no question, of course, that this trade agreement is much better than NAFTA.”

But does the USMCA really win the NAFTA vs. USMCA debate? Let’s examine the pros and cons of USMCA.

Pros of the USMCA

• Updated provisions. The USMCA includes provisions covering issues that NAFTA did not address or adequately cover. For example, it addresses digital trade and e-commerce and enhances intellectual property protection.
• Market access. The USMCA improves market access for U.S. agricultural products in Canada, benefiting American farmers and agricultural industries.
• Strengthened labor standards. The USMCA has provisions that improve working conditions and labor rights (especially in Mexico). This raised Mexican wages, evening the playing field for Mexican and U.S. factories.
• Stronger environmental protection. The USMCA includes stronger environmental standards. This includes the provision of $600 million to tackle environmental problems.

Cons of the USMCA

• Increases automobile production costs. In order to drive investment in U.S. auto plants, the USMCA required higher pay rates at Mexican factories. However, this would make manufacturing costs more expensive, increasing the average price of cars.
• Makes long-term investments risky. The 6-year review and 16-year sunset clause could hurt manufacturing companies that make long-term investments. For example, consider that after 6 years, the government reviews the deal and decides to make a change. This could affect a company’s operations where huge investments have been made to align with the initial USMCA provisions.  
• Doesn’t address climate change. Regarding environmental protection, the USMCA clearly wins the debate, due to its provisions enforcing MEAs (multilateral environmental agreements) and regulations combating marine litter. However, it does not address global warming.

Expert Opinions and Analysis

Many experts agree that the USMCA is an improvement over NAFTA. They point out that the USMCA adds important updates (such as digital trade provisions) and addresses many deficiencies of NAFTA (particularly in labor and environmental standards).

However, critics say the USMCA introduces new complexities that could stifle trade and economic growth. A typical example is that the provisions increasing wages in Mexican factories can increase car prices, and hurt the U.S. auto sector by making it less competitive in the global market.

NAFTA vs USMCA Comparison Chart

The table below is a NAFTA vs USMCA comparison chart highlighting the key differences between the two trade agreements.

FAQs on NAFTA vs the USMCA 

The following are some of the most frequently asked questions about the differences between NAFTA and the USMCA.

What are the key differences between NAFTA and USMCA?

Overall, the USMCA addresses new issues not covered in NAFTA (such as digital trade), strengthens labor rights and environmental protections, and increases regional content in automotive goods from 62.5% to 75%.

How does the USMCA affect the automotive industry?

Under NAFTA, 62.5% of cars and trucks were required to be manufactured in one of the three participating countries in order for the vehicles to qualify for tariff-free sales. The USMCA increased this minimum requirement to 75%. Additionally, 40-45% of the work done on qualifying vehicles must be performed by workers who earn at least $16 per hour.

What changes did the USMCA bring to labor standards?

The USMCA strengthened labor laws with provisions aimed at improving working conditions and wages (particularly in Mexico). It also strengthened the enforcement mechanism for labor provisions, with rapid response panels that have the authority to investigate facilities accused of violating workers’ rights. These panels can impose penalties on products made in facilities found to be noncompliant.

Is the USMCA more beneficial for the environment?

Compared to NAFTA, the USMCA is more beneficial for the environment because it has stronger provisions addressing environmental issues. The USMCA also has provisions on environmental enforcement to ensure that the three member countries uphold environmental laws.

How do the digital trade rules differ between NAFTA and the USMCA?

NAFTA did not address digital trade issues because the digital economy was less developed when the agreement was implemented. But the USMCA fully addresses digital trade and has provisions that facilitate cross-border data flow.

What is the impact of the USMCA on intellectual property?

The USMCA strengthens intellectual property protections. Its provisions, among other things, increase copyright protection to 70 years beyond the creator’s life and protect internet companies from their users’ copyright infringement.

For more information please contact us to learn more about the USMCA regulations and navigating the TN Visa application process.