Oct. 9, 2018 at 3:00 a.m. PDT   
      
   The 5 surprising things about the new USMCA trade agreement   
      
      
   There’s a new U.S.-Mexico-Canada trade agreement after more than a year of   
   high-stakes drama. President Trump’s fingerprints are all over the deal,   
   announced Sept. 30, a renegotiation of the North American Free Trade Agreement   
   (NAFTA), which took    
   effect in 1994.   
      
   Trade deals typically aim to boost commerce among countries. What’s   
   different about the U.S.-Mexico-Canada Agreement (USMCA)? Trump’s signature   
   innovations showcase new attempts to make this type of deal result in less   
   trade, not more. Here are four    
   novel, trade-restricting elements:   
      
   1. New rules for how to make a (North) American car mean less trade in autos   
      
   The Trump administration demanded a new approach for how automakers in Mexico   
   and Canada must build cars and trucks to continue selling to U.S. consumers   
   without having to pay import tariffs. The USMCA tightened NAFTA’s already   
   complex “rules of    
   origin” — the requirements to qualify for the zero tariff — and mandated   
   that even more parts be sourced from North America, even if the parts are   
   costlier than those available elsewhere. And for the first time, a minimum   
   amount of a car must be    
   produced by workers earning above a certain wage.   
      
   What is NAFTA, and what would happen to U.S. trade without it?   
      
   Here’s what this means. The wage rule disincentivises investment and   
   production in Mexico, where pay scales are lower and production is less likely   
   to qualify. This, by itself, is likely to reduce U.S. auto imports from Mexico.   
      
   But a second effect involves how these rules work to reduce auto exports to   
   the rest of the world from Mexico, Canada and the United States. Constraining   
   access to auto parts makes North American production costlier and the   
   region’s cars less    
   competitive. In Asia or Europe, automakers are not subject to Trump’s rules   
   of origin.   
      
   2. Get ready for more auto tariff- and trade-related ripples   
      
   Higher costs also mean U.S. consumers will pay more for cars built in North   
   America — and this could trigger more imports from Asia and Europe. But a   
   surge in German-built Volkswagens and Japanese-assembled Nissans would seem   
   likely to push Trump to    
   follow through on his threats to raise tariffs on such vehicles from 2.5 to 20   
   or 25 percent. And the basic provisions of the USMCA do not protect carmakers   
   in Mexico and Canada from the fallout of Trump imposing such tariffs.   
      
   Here’s why. Some companies may discover that satisfying Trump’s new wage   
   and content rules is too costly and decide to assemble cars in Mexico and   
   Canada that are “nonconforming” with those regulations. The Mexican   
   government has estimated that    
   30 percent of current exports to the United States are nonconforming. For   
   those cars, the tariff is the regular duty applied to other countries — such   
   as in Europe or Japan — that do not have special trade deals with the United   
   States.   
      
   Because Trump may increase that duty well above 2.5 percent, Mexico and Canada   
   negotiated two distinct areas in the USMCA to try to shield cars being   
   assembled in their markets from facing those tariffs. Each negotiated a side   
   letter allowing exports at    
   the lower rate if Trump imposes “national security” tariffs after   
   completion of its ongoing investigation under Section 232 of the Trade   
   Expansion Act of 1962. And Mexico negotiated a separate Annex 2-C to allow its   
   cars continued access to the U.S.    
   market if Trump raises the U.S. tariff above 2.5 percent for other reasons.   
      
   But Trump’s negotiators closed two additional loopholes that will limit such   
   trade in the event that Trump increases this tariff. First, Mexico can access   
   the 2.5 percent tariff only if it satisfies the original NAFTA rules for   
   autos, including that 62.   
   5 percent of the value of a car be made from North American parts. This means   
   companies assembling in Mexico cannot import more engines or drivetrains from   
   Asia or Europe to keep costs low. Second, the number of Mexican cars coming   
   into the United States    
   under this scenario is limited to 1.6 million units per year.   
      
      
   3. Canada will have to limit its dairy exports   << =====   
      
   At his USMCA Rose Garden remarks and news conference, Trump stated: “Dairy   
   was a dealbreaker. And now for our farmers, it’s, as you know, substantially   
   opened up much more.”   
      
   True, the deal gives U.S. farmers a bit more dairy access to the Canadian   
   market. But the USMCA also introduced trade-restricting elements for three   
   specific products: milk protein concentrates, skim milk powder and infant   
   formula. In particular, Canada    
   agreed to impose export taxes if its global exports reach a certain size.   
      
   The U.S. filed a WTO dispute to save jobs — by increasing imports from   
   China. Here’s why.   
      
   Few countries ever agree to constrain use of their taxes on exports. One   
   notable exception is China, but for the opposite reason. Under its WTO   
   accession in 2001, the United States and other countries demanded that China   
   agree to limit the use of export    
   taxes for raw materials and rare earth metals. When China violated those   
   terms, seeking to limit exports and keep these materials for Chinese   
   producers, the United States challenged Beijing through formal WTO dispute   
   channels.   
      
   But demanding that Canada impose export taxes effectively would limit, not   
   encourage, its trade with the rest of the world. And the United States itself   
   could not commit to imposing a U.S. export tax for any product — export   
   taxes are forbidden under    
   Article I, Section 9, of the U.S. Constitution.   
      
   4. No trade deals with China      << ====   
      
   Finally, Article 32.10 signals the consequences of negotiating a potential   
   free-trade agreement with any nonmarket economies — that is a code word for   
   “China.”  The Trudeau government in particular has made overtures toward   
   China as part of an    
   attempt to diversify its imports and exports, partly in response to the   
   uncertainty of the U.S.-Canada trade relationship triggered by Trump’s   
   tariffs on steel and aluminum, as well as threats to rip up NAFTA and impose   
   duties on autos.   
      
      
   Trump has announced massive aluminum and steel tariffs. Here are 5 things you   
   need to know.   
      
   Under the USMCA, Canada would need to inform Trump three months before   
   beginning to negotiate with China. And in the event that Canada and China   
   reach a deal, Trump could terminate the USMCA with six months’ notice.   
      
      
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