From NAFTA to USMCA: U.S. Interest and Geopolitics Competition

The United States (U.S.)-Mexico-Canada Agreement formally came into force on October 1, 2018. This trilateral economic agreement replaced the North American Free Trade Area (NAFTA) as a North America regional economic institution. USMCA replaced NAFTA as a long established regional economic institution that has succeeded to liberalize the North America economy, reduce trade costs, increase investment, and build a competitive regional market (Amadeo, 2022). Other than that, NAFTA was successful in establishing agreement on labor rights protection (Burfisher dan Thierfelder, 2001). Despite these remarkable achievements, the U.S. still insisted on reforming NAFTA. This important change happened when the U.S. was led by nationalist leaderDonald Trump. He said that NAFTA was the worst cooperation for the U.S. His administration pushed Mexico and Canada to agree to the proposal that was proposed by the Trump administration (Partingon, 2022). We should question “why does the U.S. put so much effort to change NAFTA into USMCA?” 

To answer this question, we must look at the geopolitical rivalry context between the U.S. and China. As the status quo great power, the U.S. perceives China’s rising economic and military power as a threat. We can see this phenomenon, especially, when Trump won the presidential election in 2016. China’s economic threat is one of Trumps’ several major planks of his presidential campaigns. Trump provided an investigation through the United States Trade Representative (USTR). USTR  insisted that China’s economic rising—through unfair trade practices – costs the U.S. a trade deficit of $500 billion a year and additional intellectual property theft amounting to $300 billion a year (Smith, 2018). Based on that investigation, the Trump administration started to implement a series of protectionist policies toward China’s economy, such as imposing tariffs on over 1,300 of China’s imported products and hindering technological transfer to China to prevent technological theft (Rogin, 2018). China’s government said (as counter-allegiance) that the U.S. is trying to stifle China’s growth and the U.S.’ protectionist policies will have a negative impact on the world (Cheng, 2019). China then responded to U.S. protectionist policies by imposing tariffs on U.S.’ listed products (Rauhala, 2018). The trade war continues with raising each other’s imported products respectively.

As a great power and world hegemony, Trump, as a nationalist leader, doesn’t want to lose on this geopolitical rivalry. This geopolitical rivalry is the urge for the U.S. to reap more benefits from NAFTA. The U.S. is the biggest state in NAFTA’s trilateral agreement and they have more power to push some agreement in NAFTA to make sure that this cooperation would be more beneficial for them. The Trump administration accused NAFTA for being the cause of trade deficit, factory closures, and job losses in the U.S. Dissatisfied with NAFTA’s agreement, Trump insisted on renegotiating the deal and “tear it up” if the U.S. couldn’t get its desired concessions (The White House Archive: President Trump, 2018). There are two changes that are clearly seen as U.S. interest to reap more benefits from the established trilateral agreement.

First changes in automobile manufacturing. The USMCA agreement on this field requires   75% of a vehicle’s parts to be made in one of the three countries in order to remain free from tariffs when moving between the three signatory countries. This number has increased from 62.5% in NAFTA (Lobosco, et al., 2019). This was a U.S. effort to reap more benefits because the U.S. is the most advanced automobile industry compared to Mexico and Canada. It’s hard for Canada, who doesn’t have a national automobile corporation, and Mexico, who doesn’t have a globally competitive one, to produce 75% of their vehicles’ parts in their country alone in order to remain free from tariffs when moving from their country. On the other hand, the U.S. has many globally competitive national automobile corporations, such as Tesla, Chevrolet, Fiat, Ford, etc. The U.S. could more easily produce a product with 75% of the vehicle’s parts made in the U.S. alone. 

This change can be seen as a U.S. effort to dominate the North American automobile market. Their globally competitive automobile products can more easily pass their national borders to Canada or Mexico without tariffs. Whereas Canada and Mexico must struggle to fulfill the 75% requirement to export their automobile products free from tariffs. From this change, the U.S. could gain more benefits from USMCA, compared to NAFTA. This can be seen as a U.S. effort to tackle the influx of Chinese auto parts (Mauldin, et al., 2018). Therefore, the U.S. could strain China’s growth in the automobile industry in order to compete in geopolitical rivalry.

Second major change is in the field of labor. The U.S. accused NAFTA for the entry of cheap labor immigrants from Mexico that attract U.S. corporations. This case made American’s people put more effort in searching for a job. As a result, California, New York, Michigan, and Texas have high unemployment rates (Amadeo, 2022). Same as Mexico, American people did migration to Mexico in search of a job. But, the problem is Mexico’s wage level is lower than America’s so that American people who got a job in Mexico wouldn’t get the same income level as in America (Lobosco, et al., 2019). Furthermore, the spread of cheap labor from Mexico made American businessmen utilize this phenomenon to lower labor wages in the U.S. (Amadeo, 2022). This phenomenon leads to a decrease in American people’s income level.

USMCA strengthened labor standardization—compared with NAFTA. There are additional enforceable labor standards, including a process that allows for inspection of factories and facilities that are not fulfilling USMCA new standards. This standardization opens up more opportunities for labor workers and less opportunities for cheap labor from Mexico. Other than that, U.S.’ Democrats struck a deal to provide an interagency committee that will monitor Mexico’s labor reform implementation and compliance with labor obligations (Lobosco, et al., 2019). We can see this change as an effort for the U.S. to give more opportunity for American labor in order to increase American income, costing Mexico’s cheap labor specialization. This standardization pushes Mexico to increase their labor standard so that Mexican labor will not be as cheap as before.

From the discussion above, we see that change from NAFTA to USMCA serves U.S. interests to gain more benefits in order to compete with China in geopolitical rivalry. Changes in automobile and labor standardization are two points of changes in USMCA that clearly show U.S. interest. As a great power, the U.S. will reap more benefits in USMCA, compared to NAFTA. This effort will also help the U.S. to remain one of the world’s greatest powers and prevent China from being more powerful than the U.S in the world economy.

References

Amadeo, Kimberly. (March 18, 2022). The History of NAFTA and Its Purpose. The Balance. https://www.thebalance.com/history-of-nafta-3306272.

Burfisher, Mary E., Robinson, Sherman and Thierfelder, Karen. (2001). The impact of NAFTA on the United States. Journal of Economic perspectives, 15(1), 125-144.

Cheng, Evelyn (June 2, 2019). ‘The U.S. has backtracked’: China releases official document blaming America for the trade war. CNBC. https://www.cnbc.com/2019/06/02/china-releases-official-document-that-blames-america-for-the-trade-war.html.

Isidore, Chris. (April 18, 2011). How ‘The Donald’ could incite a trade war. CNN. https://money.cnn.com/2011/04/17/news/economy/trump_china_trade_war/index.htm.

Partingon, Richard. (30 Agustus 2018). NAFTA: what is it and why is Trump trying to renegotiate? The Guardian. https://www.theguardian.com/us-news/2018/aug/30/nafta-what-is-it-why-is-trump-trying-to-renegotiate.

Rauhala, Emily (April 4, 2018). China fires back at Trump with the threat of tariffs on 106 U.S. products, including soybeans. The Washington Post. https://washingtonpost.com/world/asia_pacific/china-fires-back-at-trump-with-tariffs-on-106-us-products-including-soybeans-cars/2018/04/04/338134f4-37d8-11e8-b57c-9445cc4dfa5e_story.html

Rogin, Josh. (March 25, 2018). The United States is finally confronting China’s economic aggression. The Washington Post. Accessed on October 24, 2023. https://www.washingtonpost.com/opinions/the-united-states-is-finally-confronting-chinas-economic-aggression/2018/03/25/3e0a2188-2f72-11e8-b0b0-f706877db618_story.html.

Smith, David. (April 4, 2018). Trump plays down US-China trade war concerns: ‘When you’re $500bn down you can’t lose’. The Guardian. https://www.theguardian.com/business/2018/apr/04/trump-china-trade-war-concerns-import-taxes-stock-market.