What Trump’s pledge to redo his own trade agreement with Canada and Mexico could mean

By Katie Lobosco, CNN

Washington (CNN) — President-elect Donald Trump’s frequent calls for new tariffs on foreign goods may have overshadowed another massive trade-related pledge he made about a month before the November election: renegotiate the US-Mexico-Canada Agreement.

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

A review of the trade pact was expected in 2026 regardless of Trump’s pledge, due to a requirement in the agreement.

But Trump’s proclamation has put Canada and Mexico – the US’ two biggest trading partners – on notice that he may pursue major changes. And the renegotiation could play a major role in the president-elect’s other policy priorities like national security, immigration and crime. While the USMCA may not directly deal with those issues, the trade pact could be used as leverage.

“It’s a very functional tool for Trump to achieve whatever it is he’s hoping to achieve by negotiating,” said Francisco Sanchez, who served as undersecretary of commerce for international trade under then-President Barack Obama and is currently a partner at the law firm Holland & Knight.

“The fact that there is a mechanism in place to discuss a review is, I think, to his advantage,” he said.

Since winning the election, Trump has vowed to put tariffs on all goods coming from Canada and Mexico on the first day of his administration unless the two nations stem the flow of illegal immigrants and drugs across the border – which already prompted a phone call from Mexican President Claudia Sheinbaum and a visit to Trump’s Mar-a-Lago resort by Canadian Prime Minister Justin Trudeau.

Here’s what the USMCA does and how renegotiating it could play out:

What does the USMCA do and how is it different than 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 some steep tariffs on US-made goods. The USMCA continued the free-trade environment.

Trade has grown in the region as a result of the economic cooperation and the stable rules set by NAFTA and continued by the USMCA, and now supports about 17 million jobs across North America.

The USMCA maintained most of the core elements of NAFTA. But it also added a new chapter on digital trade, strengthened the enforcement of labor rules in Mexico and further opened the Canadian dairy market for US farmers.

One of the biggest focuses of the USMCA is the auto industry. The trade pact requires 75% of a vehicle’s parts to be made in one of the three countries – up from the previous 62.5% rule – to remain free from tariffs when moving within the region. It also requires more vehicle parts to be made by workers earning at least $16 an hour.

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

What kind of effect have NAFTA and the USMCA had?

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

NAFTA got blamed for US job losses and wage stagnation and, despite initial bipartisan support, eventually faced attacks from both Democrats and Republicans.

Carla Hills, a former US trade representative and one of the chief architects of NAFTA, recently said that free trade isn’t to blame for the loss of jobs. Rather, the US “did a poor job” of training those who lost jobs for the new opportunities made available, she said at a forum Wednesday in Washington sponsored by the Consumer Brands Association.

“NAFTA became a hate phrase,” said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.

He noted that so far, the biggest impact the USMCA has had is “the change in the name.”

Trade among the three countries has continued to increase since the USMCA took effect in July 2020.

The full impact of the automobile content requirement won’t be known until 2027 when it’s fully phased in. Over the first two years, the nonpartisan International Trade Commission found that the US imported fewer vehicle parts, which helped boost auto industry revenue, employment and wages in the US. But it also increased the cost of producing vehicles in the US, incentivizing some American consumers to buy more affordable foreign-made cars.

What could a renegotiation of the USMCA mean?

Trump’s past comments suggest he may want to help boost the US auto industry, having floated a 100% tariff on foreign-made cars during his campaign.

The USMCA’s vehicle rules require a certain share of a car’s parts come from any of the three countries – so there could be a stronger way to incentivize the manufacturing of parts in the US.

A provision that pushes up wages in Mexico, for example, could help boost manufacturing in the US. Currently, it can be cheaper to manufacture in Mexico where workers are usually paid less than they are in the US.

The president-elect may also be looking to get Mexico’s help in addressing China – specifically in stopping Beijing from circumventing Trump’s tariffs by entering the US market via Mexico.

“It’s highly likely that the negotiators will be looking at how to deal with Chinese parts and components,” said Gregory Husisian, a partner at Foley & Lardner who chairs the law firm’s International Trade and National Security Practice.

“A lot of these wonky, behind-the-scenes things will have as big or bigger impact than the stuff you see in the news,” he said.

Trump may also be looking at ways to shrink the US trade deficit, one of his favorite economic measures. He argues that the trade deficit – which happens when the US buys more foreign-made goods than it sells abroad – shows that other countries are taking advantage of 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 did not lead to a reduction.

The goods trade deficit with Mexico alone increased more than 78% between 2020, the year the USMCA took effect, and the end of 2023. And the deficit with Canada grew by about 27%, according to the latest government data.

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