NAFTA to USMCA: What is Gained?

IMF Working Papers, March 26, 2019

Source details

The United States – Mexico – Canada Agreement (USMCA) was signed on November 30, 2018 and aims to replace and modernize the North-American Free Trade Agreement (NAFTA).
Analytical approach: a global, multisector, computable-general-equilibrium model is used to assess five key provisions in the new agreement.
Key provisions analyzed:
- tighter rules of origin in the automotive sector,
- tighter rules of origin in the textiles and apparel sectors,
- more liberalized agricultural trade,
- other trade facilitation measures,
- (implicitly) interactions with U.S. tariffs on steel and aluminum and Canadian and Mexican import surtaxes.

Aggregate welfare and GDP impacts:
- The provisions together would generate modest aggregate gains in terms of welfare.
- The effect on real GDP is negligible.
Sectoral trade impacts:
- Provisions would adversely affect trade in the automotive sector.
- Provisions would adversely affect trade in the textiles and apparel sectors.
Drivers of welfare change:
- Welfare gains are mostly driven by improved goods market access.
Interaction with tariffs and surtaxes:
- The welfare benefits from USMCA would be greatly enhanced with:
- the elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico, and
- the elimination of the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place.

To maximize welfare benefits from USMCA:
- Consider eliminating U.S. tariffs on steel and aluminum imports from Canada and Mexico.
- Consider eliminating the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place.
Be mindful that tighter rules of origin in automotive and textiles/apparel can reduce trade in those sectors despite modest aggregate welfare gains.

Source: NAFTA to USMCA: What is Gained? — IMF Working Paper No. 2019/073.