United States-Mexico-Canada Agreement (USMCA) is a regional trade agreement between the three largest countries of North America. It is an updated version of the North American Free Trade Agreement (NAFTA), which had governed commercial relations among the three countries since 1994. The USMCA took effect in 2020, replacing NAFTA. In Canada, it is called the Canada–United States–Mexico Agreement (CUSMA). In Mexico, it is known as the Treaty Between Mexico, the United States and Canada (T-MEC).
In 2017, U.S. President Donald Trump initiated a renegotiation of NAFTA. He thought the agreement was unfair to the United States and indicated he would withdraw from the pact if it was not revised. To avoid a rupture in North American economic relations, Canada and Mexico agreed to most of the U.S. demands for revisions. On Nov. 30, 2018, Trump, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Peña Nieto signed the USMCA. The agreement took effect on July 1, 2020, after the three countries’ governments had formally approved it. Overall, the updates contained in the USMCA modernized the rules governing commerce among the participating countries, but also raised some new trade barriers designed to divert investment from Mexico to the United States.
NAFTA in 1994 created one of the world’s largest free trade zones. It gradually eliminated tariffs (import taxes) on most goods traded between Canada, Mexico, and the United States. Building upon NAFTA, the USMCA removed some remaining barriers to trade. However, it also introduced new regulations making it harder for some goods, such as cars and trucks, to qualify for tariff preferences if they contain parts made outside North America. To avoid incurring tariffs, cars and trucks traded between the three countries must contain engines and other parts produced largely in North America. Additionally, the USMCA requires that a certain percentage of automobile parts come from production plants where workers earn a specified minimum wage or more. The USMCA was the first trade agreement to include such labor value content requirements.
Despite U.S. criticism of NAFTA, the USMCA contains most of the provisions of the earlier agreement. But it also updated and extended trade rules in important new chapters on digital trade, the environment, exchange rate policies, intellectual property rights, and labor practices, among other issues. The chapter on labor, for example, requires adherence to international labor standards established by the International Labour Organization (ILO). It also contains a rapid-response enforcement mechanism to hasten the review and resolution of disputes over labor practices. Additionally, the USMCA includes a sunset clause that sets regular reviews of the agreement and provides for its expiration after 16 years, unless the three countries agree to extend it.
