The USMCA: New, Modestly Improved, but Still Costly
President Donald Trump touts the newly revised United States–Mexico–Canada Agreement (USMCA) as the "most important trade deal" in history. The pact modernizes trading rules, and strengthens enforcement of labor and environmental rights, but is still a net negative for all three economies. Its regulatory mandates, especially in autos, will restrict trade and hurt US industry, confirming the assessment by the US International Trade Commission earlier this year that the pact will cause US growth to decline by 0.12 percent.1
Drawing heavily from obligations in the Trans-Pacific Partnership, the Obama era accord that Trump repudiated in 2017, the USMCA is expected to win House approval this week after the Trump administration negotiated a lengthy protocol with key Democrats. In those negotiations, US trade envoy Robert Lighthizer bowed to congressional Democratic demands to beef up enforcement of labor rights, clarify environmental obligations, and allow Canada and Mexico to retain existing pharmaceutical patent laws. But the hallmark of the USMCA, which replaces the North American Free Trade Agreement (NAFTA) approved in 1993, is the restrictions on auto trade and investment and on auto production that never drew objections from Democrats.
Democrats did not try to renegotiate problematic restrictions on auto trade
The central provision of the new accord increases the regional content required for duty-free treatment and introduces a more complicated process for qualifying automotive, steel, and aluminum products for such treatment. The Trump administration's stated goal was to ensure that more of the vehicles will be produced in North America. But the outcome will be just the opposite. The new content requirements will raise production costs, resulting in higher auto prices, reduced US demand, lower auto exports, and more rapid substitution of machines for workers (see this video for an explanation).
The potential restrictions on steel content have caused some Republican advocates of liberalized trade, like Senator Patrick Toomey of Pennsylvania, to fear the effects on steelworkers in his state and elsewhere. "We put limiting terms on the nature of the steel that can be used in cars," Toomey said, adding that the auto-related trade rules "runs completely contrary to the principles of free-trade agreement." In only one area, involving small gains by American dairy farmers exporting to Canada, does the USMCA actually promote more open trade.
Why did Democrats join with the AFL-CIO to embrace this deal, which House Speaker Nancy Pelosi hailed as "infinitely better" than NAFTA and a "victory for America's workers?" One reason is that it defuses the argument that they do not know how to do anything in Congress except impeachment, and another is that many moderate Democrats feared rejecting something promoted by Trump at this contentious time.
More substantially, the Democrats like the added restrictions on auto trade in the USMCA as well as the tougher protections and enforcement of labor rights and environmental policies. Democrats were not bothered by the pact's regulatory mandates and tighter rules of origin imposing requirements that goods entering duty free must have certain percentages of content produced in the region. Indeed, the final amendments to the accord signed on December 10 added another costly rule: Not only must 70 percent of the steel purchased by vehicle assemblers originate in the region, but virtually all of the steel must be processed entirely within North America.
New protocol strengthens enforcement of labor and environmental obligations
One of Democratic negotiators' big wins is a newly included labor rapid-response mechanism. The United States and Mexico agreed to a binational panel process to review claims that either country is violating freedom of association and collective bargaining rights in facilities in their countries and to issue recommendations to remediate the violations.
But labor's victory was not total. Neither the pact nor the protocol cover bans on forced or compulsory labor, and in another skewed result, only federal statutes in the United States are covered by the USMCA obligations. Accordingly, Mexican labor regulations are subject to the dispute mechanism, but US state right-to-work laws banning compulsory union membership cannot be challenged by Mexico.
The protocol also strengthens enforcement of labor and environmental obligations through discrete changes in other dispute settlement procedures. The original USMCA signed by Trump earlier this year called for general dispute settlement procedures in its labor and environment chapters. The newly negotiated version adjusts the burden of proof in a critical way. In the past, US complaints over these issues have been blocked or delayed by requirements that the complainant first had to prove that trade was harmed by specific labor or environmental commitment violations before seeking resolution. The revised USMCA reverses the presumption: Trade is now assumed to be adversely affected unless the respondent can demonstrate otherwise. That shift increases the prospect of litigation over a broad range of labor and environmental standards.
In addition, the protocol clarifies USMCA obligations to uphold commitments undertaken in previously negotiated multilateral environmental agreements (MEAs) to which they are a party. But contrary to House Democrats' initial claims, the clarification does not require Canada or Mexico to join the seven MEAs listed in the protocol. Canada participates in five of them, Mexico in six, and the United States is a party to all seven. (The MEAs cover such issues as protection of endangered species, ozone regulations, marine pollution, etc.). For whatever reason, the Democrats did not try to include the Paris Accord on climate change that the Trump administration is obstinately opposed to. But the list of covered MEAs can be expanded, so perhaps the three countries can revisit the issue in the future.
With respect to pharmaceutical issues, the protocol deletes several pharmaceutical patent provisions from the Trump-negotiated pact, including a provision that would have benefited drug companies and made it harder for Mexico and Canada to market generic drugs. Under US law, strongly supported by major pharmaceutical companies, generic drugs derived from the same data as more expensive patented drugs cannot be introduced to US markets until 12 years after the original drugs; in Mexico and Canada, the period is much shorter. The USMCA does not force Mexico and Canada into longer periods of what is called "data exclusivity," but it also fails to change US law to shorten the 12-year data exclusivity timeframe. Democrats have long wanted change in US law to better serve consumer interests by making generic drugs more quickly available. But, here again, they did not demand USMCA revisions that would have required changes to US law on data exclusivity. Senate Republicans would have opposed such a change, which could have jeopardized the entire agreement.
Is the USMCA a "win for the people of North America"?
In sum, with the revised provisions in the protocol amendment, Democrats now welcome implementing legislation. Following House approval, possibly before Christmas, the USMCA seems primed to gain final passage in the Senate early in 2020.
Overall, the protocol improves the USMCA but not enough to offset the negative impact on national economies from the restrictive regulations that limit Canadian and Mexican auto plant access to the US market. The only reasonable explanation for acceptance of these terms by Canada and Mexico is that they feared that in the absence of an accord, Trump would carry out his threat to cancel NAFTA. For them, the USMCA is an insurance policy, with an expensive premium, against a catastrophic event.
Signing the pact does not remove the uncertainty about new trade barriers that Trump continues to impose to coerce Mexico and Canada to comply with his demands on national security, immigration, and defense burden sharing, among others. USMCA is not a guarantee of open borders or the free flow of investment and people, not least when Trump is willing to abuse the extensive powers that Congress has delegated to the executive on trade and national security over the past six decades.
From this vantage point, the main "win for the people of North America" is that revisions agreed upon by the House leadership with the US Trade Representative pave the way for final acceptance of the agreement in all three countries, ending the costly uncertainty that long and contentious negotiations have inflicted on the region. Unfortunately, given a US president who sees tariffs as America's main stick to ensure compliance with US demands, peace is not guaranteed.
1 .The USITC projected output gains for the United States, but only when they adjust the pact's effect to account for policy uncertainty resolution and make the dubious assumption that the USMCA will induce more US investment by reducing uncertainty in policies on data, ecommerce, and intellectual property rights, all reforms that Mexico and Canada have already committed to through their participation in the successor to the Trans-Pacific Partnership, known as the CPTPP.