The US-Mexico-Canada Agreement – USMCA – agreed by those countries’ trade ministers will replace the existing North American Free Trade Agreement, or Nafta. However, the new US congress must consider the pact and give approval, and this process is likely to last well into 2019.

The 34 chapters – plus annexes and side letters – cover areas such as agriculture, rules of origin, trade remedies, financial services, digital trade, intellectual property, labour, and dispute settlement, but full enactment will require approval in each country’s legislatures.

USMCA follows the US-Mexico trade agreement announced in August, and like that pact, the new trilateral deal has a 16-year term and at any time after a six-year review it can be extended for another 16 years.

Mexico’s new administration welcomed USMCA, but we think that the current Nafta worked better for Mexico. USMCA requires Mexico to make concessions in some sectors, including the motor-vehicle industry, where new rules of origin, including a labour content rule, will apply. The more stringent rules will be phased in from 2020.

Auto parts manufacturers could benefit from the higher regional-content requirement, but the proposal for 40 per cent to 45 per cent of vehicle content be made by workers earning at least USD16 an hour will still leave poorer payers able to provide the remaining 60 per cent to 55 per cent.

However, the new agreement ensures a friendly trade framework for companies operating in Mexico and this is positive for the economy's prospects. Reduced trade uncertainty that supports an investment recovery should boost Mexico’s GDP in 2018 and 2019, following last year’s contraction.

Canada made some concessions to conclude USMCA, but its core objectives were met. And the new agreement should reduce the uncertainty that has weighed on business investment in recent months.

It could also prove to be modestly positive for Canadian consumers if the cost of goods such as milk, poultry, and eggs falls because higher tariff-rate quotas allow increased imports from the US. Raising the threshold at which duties are charged will also help cross-border access for smaller US businesses.

Canadian firms’ ability to compete for US government contracts is unchanged, despite Ottawa’s negotiations for wider access. In accordance with Canada's negotiating stance, Nafta’s main dispute-resolution mechanisms will continue as before, and the Chapter 11 investor-state settlement mechanism was also reformed in line with Canadian preferences.

Canada has agreed to extend patent protections for pharmaceutical companies to 10 years and copyright protections to the life of the author plus 70 years, up from the current life-plus-50 years.

But the macroeconomic implications of USMCA on the US economy should be fairly small and will likely play out over a long period. The rules of origin for the vehicle sector will start to be phased in from 2020, but raising production costs in the US and in the rest of North America relative to costs outside the region could make imports more competitive.

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