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16.6: Trade Policy- Organizations and Agreements

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Learning Objectives

• Explain the origin and role of the World Trade Organization (WTO)
• Discuss the significance and provide examples of regional trading agreements
• Analyze trade policy and evaluate long-term trends in barriers to trade

How Trade Policy Is Enacted: Globally, Regionally, and Nationally

Nations participate in global and regional trade agreements. They also develop their own national trade policies. The purpose of these agreements is to define what constitutes fair trading practices in different contexts.

World Trade Organization

The World Trade Organization (WTO) was established in 1995, as the successor to the General Agreement on Tariffs and Trade (GATT), which was discussed in the last section.  The WTO is committed to lowering barriers to trade. The world’s nations meet through the WTO to negotiate how they can reduce barriers to trade, such as tariffs. WTO negotiations happen in “rounds,” where all countries negotiate one agreement to encourage trade, take a year or two off, and then start negotiating a new agreement. The current round of negotiations is called the Doha Round because it was officially launched in Doha, the capital city of Qatar, in November 2001. In 2009, economists from the World Bank summarized recent research and found that the Doha round of negotiations would increase the size of the world economy by $160 billion to $385 billion per year, depending on the precise deal that ended up being negotiated.

In the context of a global economy that currently produces more than $30 trillion of goods and services each year, this amount is not huge: it is an increase of 1% or less. But before dismissing the gains from trade too quickly, it is worth remembering two points.

• First, a gain of a few hundred billion dollars is enough money to deserve attention! Moreover, remember that this increase is not a one-time event; it would persist each year into the future.
• Second, the estimate of gains may be on the low side because some of the gains from trade are not measured especially well in economic statistics. For example, it is difficult to measure the potential advantages to consumers of having a variety of products available and a greater degree of competition among producers. Perhaps the most important unmeasured factor is that trade between countries, especially when firms are splitting up the value chain of production, often involves a transfer of knowledge that can involve skills in production, technology, management, finance, and law.

Low-income countries benefit more from trade than high-income countries do. In some ways, the giant U.S. economy has less need for international trade, because it can already take advantage of internal trade within its economy. However, many smaller national economies around the world, in regions like Latin America, Africa, the Middle East, and Asia, have much more limited possibilities for trade inside their countries or their immediate regions. Without international trade, they may have little ability to benefit from comparative advantage, slicing up the value chain, or economies of scale. Moreover, smaller economies often have fewer competitive firms making goods within their economy, and thus firms have less pressure from other firms to provide the goods and prices that consumers want.

The economic gains from expanding international trade are measured in hundreds of billions of dollars, and the gains from international trade as a whole probably reach well into the trillions of dollars. The potential for gains from trade may be especially high among the smaller and lower-income countries of the world.

Like the GATT before it, the WTO is not a world government, with power to impose its decisions on others. The total staff of the WTO in 2013 is 629 people and its annual budget (as of 2012) is $196 million, which makes it smaller in size than many large universities.

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Regional Trading Agreements

There are different types of economic integration across the globe, ranging from free trade agreements , in which participants allow each other’s imports without tariffs or quotas, to common markets , in which participants have a common external trade policy as well as free trade within the group, to full economic unions , in which, in addition to a common market, monetary and fiscal policies are coordinated. Many nations belong both to the World Trade Organization and to regional trading agreements.

The best known of these regional trading agreements is the European Union . In the years after World War II, leaders of several European nations reasoned that if they could tie their economies together more closely, they might be more likely to avoid another devastating war. Their efforts began with a free trade association, evolved into a common market, and then transformed into what is nearly a full economic union, known as the European Union. (The EU, as it is often called, has not included a common fiscal policy.) The EU has a number of goals. For example, in the early 2000s it introduced a common currency for Europe, the euro, and phased out most of the former national forms of money like the German mark and the French franc, though a few have retained their own currency. Another key element of the union is to eliminate barriers to the mobility of goods, labor, and capital across Europe.

For the United States, perhaps the best-known regional trading agreement is the North American Free Trade Agreement (NAFTA) . The United States also participates in some less-prominent regional trading agreements, like the Caribbean Basin Initiative, which offers reduced tariffs for imports from these countries, and a free trade agreement with Israel.

The world has seen a flood of regional trading agreements in recent years. About 100 such agreements are now in place. A few of the more prominent ones are listed in Table 2. Some are just agreements to continue talking; others set specific goals for reducing tariffs, import quotas, and nontariff barriers. One economist described the current trade treaties as a “spaghetti bowl,” which is what a map with lines connecting all the countries with trade treaties looks like.

There is concern among economists who favor free trade that some of these regional agreements may promise free trade, but actually act as a way for the countries within the regional agreement to try to limit trade from anywhere else. In some cases, the regional trade agreements may even conflict with the broader agreements of the World Trade Organization.

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National Trade Policies

Y et another dimension of trade policy, along with international and regional trade agreements, happens at the national level. Ideally, these policies do not conflict with the rules of the WTO and regional trade agreements. When there is an apparent conflict, the parent organization must adjudicate it.  The United States, for example, imposes import quotas on sugar, because of a fear that such imports would drive down the price of sugar and thus injure domestic sugar producers. Why is sugar favored, while other products are not? Sometimes a product is protected because of historical practice. Sometimes it’s because a product has a particularly strong lobby. Recall, though, that trade barriers always end up costing a nation more than the benefits received by the protected group.

One of the jobs of the United States Department of Commerce is to determine if imports from other countries are being traded fairly. A common complaint is dumping, which means that foreign imports are being sold at less than their fair market value, i.e. their cost. The Commerce Department estimates a dumping “margin,” that is, the difference between price and cost. If Commerce determines that the import price is less than cost, they find that dumping has occurred.  The United States International Trade Commission—another government agency—determines whether domestic industries have been substantially injured by the dumping, and if so, the President can impose tariffs in the amount of the dumping margin to offset the unfairly low price.

In the arena of trade policy, the battle often seems to be between national laws that increase protectionism and international agreements that try to reduce protectionism, like the WTO. Why would a country pass laws or negotiate agreements to shut out certain foreign products, like sugar or textiles, while simultaneously negotiating to reduce trade barriers in general? One plausible answer is that international trade agreements offer a method for countries to restrain their own special interests. A member of Congress can say to an industry lobbying for tariffs or quotas on imports: “Sure would like to help you, but that pesky WTO agreement just won’t let me.”

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This video provides more information about trade blocs and the ways in which nations make arrangements regarding trade.

An interactive or media element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/mecon/?p=566

Watch this next video for a recent news example of an actual trade agreement between the United States and South Korea.

Long-Term Trends in Barriers to Trade

In newspaper headlines, trade policy appears mostly as disputes and acrimony. Countries are almost constantly threatening to challenge the “unfair” trading practices of other nations. Cases are brought to the dispute settlement procedures of the WTO, the European Union, NAFTA, and other regional trading agreements. Politicians in national legislatures, goaded on by lobbyists, often threaten to pass bills that will “establish a fair playing field” or “prevent unfair trade”—although most such bills seek to accomplish these high-sounding goals by placing more restrictions on trade. Protesters in the streets may object to specific trade rules or to the entire practice of international trade.

Through all the controversy, the general trend for most of the last 60 years is clearly toward lower barriers to trade. The average level of tariffs on imported products charged by industrialized countries was 40% in 1946. By 1990, after decades of GATT negotiations, it was down to less than 5%. Indeed, one of the reasons that GATT negotiations shifted from focusing on tariff reduction in the early rounds to a broader agenda was that tariffs had been reduced so dramatically there was not m uch more to do in that area. U.S. tariffs have followed this general pattern: After rising sharply during the Great Depression, tariffs dropped off to less than 2% by the end of the century. Although measures of import quotas and nontariff barriers are less exact than those for tariffs, they generally appear to be at lower levels, too.

Thus, the last half-century has seen both a dramatic reduction in government-created barriers to trade, such as tariffs, import quotas, and nontariff barriers, and also a number of technological developments that have made international trade easier, like advances in transportation, communication, and information management. The result has been the powerful surge of international trade.

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[glossary-page][glossary-term]common market: [/glossary-term] [glossary-definition]economic agreement between countries to allow free trade in goods, services, labor, and financial capital between members while having a common external trade policy[/glossary-definition] [glossary-term]dumping: [/glossary-term][glossary-definition]selling imports at a price below fair market value, i.e. cost[/glossary-definition][glossary-term]economic union: [/glossary-term] [glossary-definition]economic agreement between countries to allow free trade between members, a common external trade policy, and coordinated monetary and fiscal policies[/glossary-definition][glossary-term]free trade agreement:[/glossary-term] [glossary-definition]economic agreement between countries to allow free trade between members[/glossary-definition] [/glossary-page]

• Modification, adaptation, and original content. Provided by : Lumen Learning. License : CC BY: Attribution
• How Governments Enact Trade Policy: Globally, Regionally, and Nationally. Authored by : OpenStax College. Located at : https://cnx.org/contents/[email protected]:CKP7rqK6/How-Governments-Enact-Trade-Po . License : CC BY: Attribution . License Terms : Download for free at http://cnx.org/content/col11627/latest
• License : Public Domain: No Known Copyright
• Episode 38: Trade Blocs. Authored by : Dr. Mary J. McGlasson. Located at : https://www.youtube.com/watch?time_continue=10&v=YDUq0DINhYk . License : CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives
• South Korea FTA. Provided by : BBC News. Located at : https://www.youtube.com/watch?time_continue=3&v=EAh_eSbGKdI . License : CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives

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• Fiscal Policy

Free Trade Agreement (FTA) Definition: How It Works, With Example

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is a Free Trade Agreement (FTA)?

A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

The concept of free trade is the opposite of trade protectionism or economic isolationism.

Key Takeaways

• Free trade agreements reduce or eliminate barriers to trade across international borders.
• Free trade is the opposite of trade protectionism.
• In the U.S. and the E.U., free trade agreements do not come without regulations and oversight.

Investopedia / Julie Bang

How a Free Trade Agreement Works

In the modern world, free trade policy is often implemented by means of a formal and mutual agreement of the nations involved. However, a free-trade policy may simply be the absence of any trade restrictions.

A government doesn't need to take specific action to promote free trade. This hands-off stance is referred to as “ laissez-faire trade” or trade liberalization.

Governments with free-trade policies or agreements in place do not necessarily abandon all control of imports and exports or eliminate all protectionist policies. In modern international trade, few free trade agreements (FTAs) result in completely free trade.

For example, a nation might allow free trade with another nation, with exceptions that forbid the import of specific drugs not approved by its regulators, or animals that have not been vaccinated, or processed foods that do not meet its standards.

The benefits of free trade were outlined in "On the Principles of Political Economy and Taxation," published by economist David Ricardo in 1817.

Or, it might have policies in place that exempt specific products from tariff-free status in order to protect home producers from foreign competition in their industries.

The Economics of Free Trade

In principle, free trade on the international level is no different from trade between neighbors, towns, or states. However, it allows businesses in each country to focus on producing and selling the goods that best use their resources while other businesses import goods that are scarce or unavailable domestically. That mix of local production and foreign trade allows economies to experience faster growth while better meeting the needs of its consumers.

This view was first popularized in 1817 by economist David Ricardo in his book, "On the Principles of Political Economy and Taxation." He argued that free trade expands the diversity and lowers the prices of goods available in a nation while better exploiting its homegrown resources, knowledge, and specialized skills.

Free Trade Models

Mercantilism.

Prior to the 1800s, global trade was dominated by the theory of mercantilism. This theory placed priority on having a favorable balance of trade relative to other countries, and accumulating more gold and silver.

In order to attain a favorable balance of trade, countries would often place trade barriers like taxes and tariffs to discourage their residents from purchasing foreign goods. This incentivized consumers to purchase locally-made products, thereby supporting domestic industries.

Comparative Advantage

Ricardo introduced the law comparative advantage , which states that countries can attain the maximum benefits through free trade. Ricardo demonstrated that if countries prioritize producing the goods that they can produce more cheaply than other countries (i.e., where they have a comparative advantage) they will be able to produce more goods in total than they would by limiting trade.

Advantages and Disadvantages of Free Trade

Rapid development.

Free trade has allowed many countries to attain rapid economic growth. By focusing on exports and resources where they have a strong comparative advantage, many countries have been able to attract foreign investment capital and provide relatively high-paying jobs for local workers.

Lower Global Prices

For consumers, free trade creates a competitive environment where countries strive to provide the lowest possible prices for their resources. This in turn allows manufacturers to provide lower prices for finished goods, ultimately increasing the buying power for all consumers.

Unemployment and Business Losses

However, there are economic losers when a country opens its borders to free trade. Domestic industries may be unable to compete with foreign competitors, causing local unemployment. Large-scale industries may move to countries with lax environmental and labor laws, resulting in child labor or pollution.

Increased Dependency on the Global Market

Free trade can also make countries more dependent on the global market. For example, while the prices for some goods may be cheaper on the world market, there are strategic benefits for a country that produces those goods domestically. In the event of a war or crisis, the country may be forced to rebuild these industries from scratch.

Free Trade Pros and Cons

Allows consumers to access the cheapest goods on the world market.

Allows countries with relatively cheap labor or resources to benefit from foreign exports.

Under Ricardo's theory, countries can produce more goods collectively by trading on their respective advantages.

Competition with foreign exports may cause local unemployment and business failures.

Industries may relocate to jurisdictions with lax regulations, causing environmental damage or abusive labor practices.

Countries may become reliant on the global market for key goods, leaving them at a strategic disadvantage in times of crisis.

Public Opinion on Free Trade

Few issues divide economists and the general public as much as free trade. Research suggests that economists in the U.S. support free-trade policies at significantly higher rates than the general public. In fact, the American economist Milton Friedman said: “The economics profession has been almost unanimous on the subject of the desirability of free trade.”

Free-trade policies have not been as popular with the general public. The key issues include unfair competition from countries where lower labor costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad.

The call on the public to Buy American may get louder or quieter with the political winds, but it never goes silent.

The View From Financial Markets

Not surprisingly, the financial markets see the other side of the coin. Free trade is an opportunity to open another part of the world to domestic producers.

Moreover, free trade is now an integral part of the financial system and the investing world. American investors now have access to most foreign financial markets and to a wider range of securities, currencies, and other financial products.

However, completely free trade in the financial markets is unlikely in our times. There are many supranational regulatory organizations for world financial markets, including the Basel Committee on Banking Supervision , the International Organization of Securities Commission (IOSCO) , and the Committee on Capital Movements and Invisible Transactions.

Real-World Examples of Free Trade Agreements

The European Union is a notable example of free trade today. The member nations form an essentially borderless single entity for the purposes of trade, and the adoption of the euro by most of those nations smooths the way further. It should be noted that this system is regulated by a central bureaucracy that must manage the many trade-related issues that come up between representatives of member nations.

U.S. Free Trade Agreements

The United States currently has a number of free trade agreements in place. These include multi-nation agreements such as the North American Free Trade Agreement (NAFTA), which covers the U.S., Canada, and Mexico, and the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), which includes the Caribbean nation and most of the nations of Central America. There are also separate trade agreements with nations from Australia to Peru.

Collectively, these agreements mean that about half of all goods entering the U.S. come in free of tariffs, according to government figures. The average import tariff on industrial goods is 2%.

All these agreements collectively still do not add up to free trade in its most laissez-faire form. American special interest groups have successfully lobbied to impose trade restrictions on hundreds of imports including steel, sugar, automobiles, milk, tuna, beef, and denim.

Why Were Free Trade Zones Created in China?

Starting in 2013, China began establishing free trade zones around key ports and coastal areas. These were areas where national regulations were relaxed in order to facilitate foreign investment and business development.

What Is a Free Trade Area?

A free trade area is a group of countries that have agreed to mutually lower or eliminate trade barriers for trade within the area. This allows participating countries to benefit from reduced tariffs, while maintaining their existing protections for trade with countries outside of the area.

What Are the Arguments Against Free Trade?

Opponents often assert that free trade invites foreign competition with domestic industries, causing job loss and harming key industries. In some cases, free trade cause manufacturers to move their operations to countries with fewer regulations, rewarding companies that cause pollution or use abusive labor practices. In other cases, countries with weak IP laws may steal technology from foreign companies.

The Bottom Line

Free trade refers to policies that allow permit inexpensive imports and exports, without tariffs or other trade barriers. In a free trade agreement, a group of countries agrees to lower their tariffs or other barriers to facilitate more exchanges with their trading partners. This allows all countries to benefit from lower prices and access to one another's resources.

McMaster University. " On the Principles of Political Economy and Taxation ."

The Wilson Center. " Chapter 3: Trade Agreements and Economic Theory ."

Federal Reserve Bank Of St. Louis. " Free Trade: Why Are Economists and Noneconomists So Far Apart? "

Kansas State University. " Landon Lecture (April 27, 1978) Free Trade: Producer Versus Consumer ."

European Union. " The European Union, What It Is and What It Does ."

European Union. " Trade ."

European Union. " Types of Institutions and Bodies ."

U.S. Customs and Border Protection. " Free Trade Agreements ."

U.S. Customs and Border Protection. " North American Free Trade Agreement ."

Office of the United States Trade Representative. " Industrial Tariffs ."

Government of Canada. " Free Trade Zones in China ."

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• Trade Agreements
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• United States-Mexico-Canada Agreement

The United States, Mexico, and Canada have reached an agreement to modernize the 25-year-old NAFTA into a 21st century, high-standard agreement.  The new United States-Mexico-Canada Agreement (USMCA) will support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America.

INTELLECTUAL PROPERTY

The United States, Mexico, and Canada have reached an agreement on a modernized, high-standard Intellectual Property (IP) chapter that provides strong and effective protection and enforcement of IP rights critical to driving innovation, creating economic growth, and supporting American jobs.

Key Highlights:   Protections for United States Innovators and Creators

The new IP Chapter will:

• Require full national treatment for copyright and related rights so United States creators are not deprived of the same protections that domestic creators receive in a foreign market.
• Continue to provide strong patent protection for innovators by enshrining patentability standards and patent office best practices to ensure that United States innovators, including small- and medium-sized businesses, are able to protect their inventions with patents.
• Include strong protection for pharmaceutical and agricultural innovators.
• Require a minimum copyright term of life of the author plus 70 years, and for those works with a copyright term that is not based on the life of a person, a minimum of 75 years after first authorized publication.
• Require strong standards against the circumvention of technological protection measures that often protect works such as digital music, movies, and books.
• Establish appropriate copyright safe harbors to provide protection for IP and predictability for legitimate enterprises that do not directly benefit from the infringement, consistent with United States law.
• Provide important procedural safeguards for recognition of new geographical indications (GIs), including strong standards for protection against issuances of GIs that would prevent United States producers from using common names, as well as establish a mechanism for consultation between the Parties on future GIs pursuant to international agreements.
• Enhance provisions for protecting trademarks, including well-known marks, to help companies that have invested effort and resources into establishing goodwill for their brands.

Key Achievement:  M ost Comprehensive Enforcement Provisions of Any Trade Agreement

For the first time, a trade agreement will require all of the following:

• Ex officio  authority for law enforcement officials to stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any Party.
• Express recognition that IP enforcement procedures must be available for the digital environment for trademark and copyright or related rights infringement.
• Meaningful criminal procedures and penalties for unauthorized camcording of movies, which is a significant source of pirated movies online.
• Civil and criminal penalties for satellite and cable signal theft.
• Broad protection against trade secret theft, including against state-owned enterprises.

Key Achievement:   Strongest Standards of Protection for Trade Secrets of Any Prior FTA

In particular, the Chapter has the most robust protection for trade secrets of any prior United States trade agreement.  It includes all of the following protections against misappropriation of trade secrets, including by state-owned enterprises: civil procedures and remedies, criminal procedures and penalties, prohibitions against impeding licensing of trade secrets, judicial procedures to prevent disclosure of trade secrets during the litigation process, and penalties for government officials for the unauthorized disclosure of trade secrets.

DIGITAL TRADE

The new Digital Trade chapter contains the strongest disciplines on digital trade of any international agreement, providing a firm foundation for the expansion of trade and investment in the innovative products and services where the United States has a competitive advantage.

Key Highlights of the Digital Trade Chapter

The new Digital Trade chapter will:

• Prohibit customs duties and other discriminatory measures from being applied to digital products distributed electronically (e-books, videos, music, software, games, etc.).
• Ensure that data can be transferred cross-border, and that limits on where data can be stored and processed are minimized, thereby enhancing and protecting the global digital ecosystem.
• Ensure that suppliers are not restricted in their use of electronic authentication or electronic signatures, thereby facilitating digital transactions.
• Guarantee that enforceable consumer protections, including for privacy and unsolicited communications, apply to the digital marketplace.
• Limit governments’ ability to require disclosure of proprietary computer source code and algorithms, to better protect the competitiveness of digital suppliers.
• Promote collaboration in tackling cybersecurity challenges while seeking to promote industry best practices to keep networks and services secure.
• Promote open access to government-generated public data, to enhance innovative use in commercial applications and services.
• Limit the civil liability of Internet platforms for third-party content that such platforms host or process, outside of the realm of intellectual property enforcement, thereby enhancing the economic viability of these engines of growth that depend on user interaction and user content.

Key Achievement:   Increased  De Minimis  Shipment Value Level

To facilitate greater cross-border trade, the United States has reached an agreement with Mexico and Canada to raise their  de minimis  shipment value levels.  Canada will raise its  de minimis  level for the first time in decades, from C$20 to C$40 for taxes.  Canada will also provide for duty free shipments up to C$150. Mexico will continue to provide USD $50 tax free  de minimis  and also provide duty free shipments up to the equivalent level of USD $117.  Shipment values up to these levels would enter with minimal formal entry procedures, making it easier for more businesses, especially small- and medium-sized ones, to be a part of cross-border trade.  

Increasing the  de minimis  level with key trading partners like Mexico and Canada is a significant outcome for United States small- and medium-sized enterprises (SMEs).  These SMEs often lack resources to pay customs duties and taxes, and bear the increased compliance costs that low, trade-restrictive  de minimis  levels place on lower-value shipments, which SMEs often have due to their smaller trade volumes.

New traders, just entering Mexico’s and Canada’s markets, will also benefit from lower costs to reach consumers.  United States express delivery carriers, who carry many low-value shipments for these traders, also stand to benefit through lower costs and improved efficiency.

FINANCIAL SERVICES

U.S. financial services firms provide services critical to every sector of the economy, including small- and medium-sized businesses.  The United States exported about $115 billion in financial services in 2016, generating around a $41 billion surplus in trade in financial services.

The updated Financial Services chapter includes commitments to liberalize financial services markets and facilitate a level playing field for U.S. financial institutions, investors and investments in financial institutions, and cross-border trade in financial services.  The chapter also preserves the discretion of financial regulators to ensure financial stability.

Key Achievement:   Core Obligations to Prevent Discrimination Against U.S. Financial Services Suppliers

The chapter includes core obligations, such as:

• National treatment, to ensure that U.S. financial service suppliers receive the same treatment as local suppliers.
• Most-favored-nation treatment, to ensure that U.S. financial service suppliers receive the same treatment as those from other countries.
• Market access, which prohibits imposition of certain quantitative and numerical restrictions that would limit the business of U.S. financial services suppliers.

Key Achievement:   First Provision Against Local Data Storage Requirements

For the first time in any U.S. trade agreement, this deal includes a prohibition on local data storage requirements in circumstances where a financial regulator has the access to data that it needs to fulfill its regulatory and supervisory mandate.

Key Highlights Supporting Financial Services

The new Financial Services chapter will include:

• Updated provisions to allow for the cross-border transfer of data and an updated market access obligation.
• The most robust transparency obligations of any U.S. trade agreement, to ensure good regulatory practices in government licensing and other market access authorizations.
• A separate annex on commitments relating to cross-border trade, including application of the national treatment and market access obligation to an expanded list of cross-border services, such as portfolio management, investment advice, and electronic payment services.
• Specific procedures related to investor-State dispute settlement claims with Mexico, including provisions regarding expertise of arbitrators and a special procedural mechanism to facilitate the application of the prudential exception and other exceptions.

Key Achievements: High-Standard Policy and Transparency Commitments, with Robust Accountability Mechanisms

The renegotiated agreement includes a chapter on Macroeconomic Policies and Exchange Rate Matters, with new policy and transparency commitments on currency issues.  The chapter will address unfair currency practices by requiring high-standard commitments to refrain from competitive devaluations and targeting exchange rates, while significantly increasing transparency and providing mechanisms for accountability.  This approach is unprecedented in the context of a trade agreement, and will help reinforce macroeconomic and exchange rate stability.

LABOR                                                                         

One of President Trump’s principal objectives in the renegotiation is to ensure the agreement benefits American workers.  The United States, Mexico, and Canada have agreed to a Labor chapter that brings labor obligations into the core of the agreement, makes them fully enforceable, and represents the strongest provisions of any trade agreement.

Key Achievement:   Worker Representation in Collective Bargaining

The Labor chapter includes an Annex on Worker Representation in Collective Bargaining in Mexico, under which Mexico commits to specific legislative actions to provide for the effective recognition of the right to collective bargaining.

Key Achievement:   Labor Rights Recognized by the International Labor Organization

The Labor chapter requires the Parties to adopt and maintain in law and practice labor rights as recognized by the International Labor Organization, to effectively enforce their labor laws, and not to waive or derogate from their labor laws.

Additionally, the chapter includes new provisions to prohibit the importation of goods produced by forced labor, to address violence against workers exercising their labor rights, and to ensure that migrant workers are protected under labor laws.

Key Achievement:   Enhanced Labor Enforceability

The Dispute Settlement chapter establishes a first-of-its-kind United States-Mexico Rapid Response Mechanism, providing for monitoring and expedited enforcement of labor rights to ensure effective implementation of Mexico’s landmark labor reform at particular facilities while respecting sovereignty and due process.

Key Achievement:   New Labor Value Content Rule

To support North American jobs, the deal contains new trade rules of origin to drive higher wages by requiring that 40-45 percent of auto content be made by workers earning at least USD $16 per hour.

ENVIRONMENT

The United States, Mexico, and Canada have agreed to the most advanced, most comprehensive, highest-standard chapter on the Environment of any trade agreement. Like the Labor chapter, the Environment chapter brings all environmental provisions into the core of the agreement and makes them enforceable.

Key Achievement:   Most Comprehensive Set of Enforceable Environmental Obligations

The Environment chapter includes the most comprehensive set of enforceable environmental obligations of any previous United States agreement, including obligations to combat trafficking in wildlife, timber, and fish; to strengthen law enforcement networks to stem such trafficking; and to address pressing environmental issues such as air quality and marine litter.

Environment obligations include:

• Prohibitions on some of the most harmful fisheries subsidies, such as those that benefit vessels or operators involved in illegal, unreported, and unregulated (IUU) fishing.
• New protections for marine species like whales and sea turtles, including a prohibition on shark-finning and commitment to work together to protect marine habitat.
• Obligations to enhance the effectiveness of customs inspections of shipments containing wild fauna and flora at ports of entry, and ensure strong enforcement to combat IUU fishing.
• First-ever articles to improve air quality, prevent and reduce marine litter, support sustainable forest management, and ensure appropriate procedures for environmental impact assessments.
• Requiring the Parties to adopt, maintain and implement our relevant obligations under seven multilateral environmental agreements (MEAs).
• Robust and modernized mechanisms for public participation and environmental cooperation.
• The United States and Mexico have negotiated a separate Environment Cooperation and Customs Verification Agreement that will help bolster our efforts to combat trade in illegally taken wildlife, fish and timber.

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USMCA Overview

The united states-mexico-canada agreement (usmca).

The United States, Mexico, and Canada updated NAFTA to create the new USMCA. The USMCA is mutually beneficial for North American workers, farmers, ranchers, and businesses. The new agreement, which entered into force on July 1, 2020, creates a more balanced environment for trade, support high-paying jobs for Americans, and grow the North American economy.  

Two-way trade in goods and services between the United States and Mexico totaled USD 863.4 billion in 2022, positioning Mexico as the  second-largest overall U.S. trading partner . During this period, U.S. exports to Mexico totaled USD 362.7 billion, and imports from Mexico totaled USD 500.7 billion (a deficit of USD 138 billion). This large volume of trade directly and indirectly supports millions of U.S. jobs. Mexico is the first, second, or third-largest destination for merchandise exports from over 30 U.S. states. Top U.S. goods exports include electronics, vehicles, fuels, minerals, plastics, and machinery. Mexico was the second-largest export market for U.S. agricultural products in 2022, with total U.S. agricultural exports to Mexico valued at over USD 28 billion.

USMCA vs NAFTA

Learn about  issues addressed in the USMCA agreement .  

Tariffs  

All products that have zero tariffs under NAFTA will remain at zero under USMCA. Canada will provide new and expanded access (via Tariff Rate Quotas) for U.S. exports of  several dairy categories .  

For additional information on tariffs, including USMCA and applied tariffs, visit the  FTA Tariff Tool  and the  FTA Resources Toolbox  on our  FTA Help Center . To learn more about harmonized system codes, visit our  Understanding H.S. Codes page .

Rules of Origin

USMCA includes strong rules of origin for industrial products that will increase regional content and help preserve North American manufacturing, including new rules for  autos and auto parts, chemicals, and steel-intensive products . These rules will help ensure that only producers who use sufficient amounts of U.S. or North American parts or materials receive preferential tariff benefits.

To ensure you are familiar with the rule of origin for your product, please visit  USMCA’s Rules of Origin Chapter .  

De Minimis Threshold to Determine Origin of a Good

USMCA increases the de minimis threshold for purposes of origin from 7 percent to 10 percent, with certain exceptions for textile and apparel goods. For more information, visit Article 4.12 of the USMCA Rules of Origin Chapter .  

To learn more about FTA rules of origin and resources, visit our  Identify and Apply Rules of Origin page on the  FTA Help Center .

Uniform Regulations, General Note, and Implementation Instructions

The Implementing Instructions  provide guidance on the new requirements under the USMCA, including information on claiming USMCA preferential treatment for goods and additional details on the USMCA entry, compliance, and other requirements.

Claiming/Documenting Origin

Once you have determined that your product qualifies for USMCA, you need to declare the product qualifies for preferential tariff treatment.

Declaring origin of the good, the USMCA no longer requires a certificate of origin. Rather, a minimum set of data elements must be submitted to prove origin. These elements may be on an invoice or any other document, except a commercial document issued by a non-party, in accordance with the Uniform Regulations.    

Learn how to make a claim for preferential tariff treatment  and about the nine elements required at a minimum to claim origin under USMCA.  

U.S. Customs and Border Protection has updated its suggested USMCA Certification of Origin template .

Certification is not required for importations valued at $2,500 or less, provided that the importation does not form part of a series of importations that may reasonably be considered to have been undertaken or arranged for the purpose of evading U.S. laws, regulations, or procedures governing claims for preferential tariff treatment.  

Record-keeping requirements still need to be met.

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