Get USMCA done to preserve over 30 years of prosperity

The United States, Mexico and Canada have forged a massive commercial relationship over the past three decades.

The North American Free Trade Agreement (NAFTA) significantly reorientated all three economies. Businesses and farmers built mutually beneficial co-production networks that enabled them to compete successfully against other global trading powers.

{mosads}The new U.S.-Mexico-Canada trade agreement (USMCA) preserves economic advances wrought since NAFTA came into effect in 1994.

It introduces needed modernization, strengthens labor provisions and provides at least 16 years of established rules, enabling the private sectors of each country to plan and invest for the future in a fiercely competitive global marketplace.

Combined, Canada and Mexico are the United States’ largest economic partners. Roughly 14 million U.S. jobs are supported by NAFTA trade, which totals some $1.3 trillion a year. 

That is over 80 percent more than China-U.S. trade. Approximately 50 percent of that trade is in intermediate goods: The three countries are joint producers instead of merely traders.

This underscores, for example, why threats to close the U.S.-Mexico border would be a serious blow to U.S. businesses, farms and the 5 million U.S. jobs supported by commerce with Mexico. 

The Mexico-U.S. relationship has undergone a major transformation. Bilateral trade is six times its size before NAFTA existed, reaching $616 billion in 2017. That is more than $1 million a minute.

From a trade perspective, however, NAFTA needed to be modernized. Formal renegotiation began in August 2017, and leaders signed the USMCA agreement in November 2018. Modernization was relatively easy.

Supporters highlight important updates in:

  • digital trade;
  • intellectual property protection;
  • science-based agricultural standards;
  • regulatory cooperation;
  • financial services;
  • customs;
  • treatment of state-owned enterprises;
  • competition/antitrust investigations; and
  • enforcement provisions.

USMCA incorporates deeper labor and environment commitments and stronger enforcement provisions for them. 

Three controversial negotiating areas were “rules of origin” for the automotive sector, mechanisms for settling disputes and the process for review and possible termination of the agreement.

Experts worry that the new vehicle rules of origin could make auto production less competitive, increase prices and cost jobs. A new IMF study reinforces those worries. Vehicle “rules of origin” specify the characteristics that vehicles must have to be traded in North America without paying tariffs. 

USMCA increases the percentage of required North American content to 75 percent, of which 40-45 percent must now come from locations that pay at least $16 per hour. There is also a new requirement to use steel and aluminum produced in the region. 

The U.S. administration argues that this deal, combined with stronger commitments in the labor chapter, is a big win for U.S. workers, which creates strong new incentives for automakers to manufacture in the U.S.  

U.S. labor unions and congressional Democrats are skeptical, however, asking whether the new agreement and its enforcement provisions will really bring better labor practices in Mexico and a fairer playing field. U.S. unions raised their concerns in a March 26 House Ways and Means committee hearing.

USMCA supporters contend that the labor chapter and commitments by Mexico should satisfy the concerns being raised. Mexico’s new government is committed to significant labor-sector reforms and has introduced robust reform legislation, which should pass by the end of April. Even if the legislation is good, some will question the United States’ ability to enforce USMCA commitments by Mexico. 

The provisions for solving disputes between foreign investors and national governments were also controversial. U. S. negotiators wanted to eliminate that system. U.S. industries argued that they needed the protections.

Negotiators compromised: U.S. investments in energy, infrastructure and telecommunications in Mexico will remain covered by dispute settlement provisions.

Controversy surrounded the rules governing when and how the agreement could be ended. The negotiators agreed to give USMCA a minimum life of 16 years. In the sixth year, the three governments will meet to review USMCA. 

If all agree, they could extend the agreement for another 16 years, or any of the governments can request annual reviews in subsequent years.

Before approving USMCA, Mexico and Canada is seeking removal of the current U.S. tariffs on their steel and aluminum exports. The new IMF study finds big benefits for all three economies if these tariffs are removed. 

Congress awaits a report on USMCA’s economic impact from the U.S. International Trade Commission, which is expected in mid-April. The Trump administration then needs to propose implementation legislation for Congress to consider. 

Supporters hope Congress will approve USMCA this year before the approaching U.S. elections make that impossible. U.S. Trade Representative Robert Lighthizer told Congress on Feb. 27 that not approving USMCA would mean the U.S. has “no trade program” and that it “can’t do trade deals,” sending damaging messages to China and others.

President Trump and Lighthizer have begun meetings to build support for USMCA. Congressional Democrats, however, may hesitate to bring the deal to a vote before the 2020 elections. 

{mossecondads}President Trump previously threatened to withdraw from NAFTA to force congressional action. That would be a high-risk path. Congressional Democrats would likely bring a legal challenge against the president’s right to act unilaterally.

Various studies project very serious costs of pulling out of NAFTA, with potential job losses estimated to range from 1.4 to 4 million for the United States, 1.5 to 10 million for Mexico and 0.5 million to 1.2 million for Canada.

Contrary to conventional wisdom, there is broad public support for NAFTA. The Chicago Council on Global Affairs finds that since 2008 there was more than a 20-percent increase in positive American views towards NAFTA. In early 2019, 70 percent of U.S. respondents agreed that the new USMCA would be good for the U.S. economy.

Given the enormous economic benefits of sustaining North America’s commercial networks, Congress, the Trump administration and the non-governmental stakeholders should make every effort to find an approach that addresses key concerns raised, approves USMCA and produces a mutual “win” for the three countries this year. 

Earl Anthony Wayne is a public policy fellow at the Wilson Center and the former U.S. ambassador to Mexico. 

Tags Canada–United States trade relations Donald Trump Economy of North America Free trade agreements Free trade agreements of Canada Free trade areas International relations International trade North American Free Trade Agreement Presidency of Donald Trump Robert Lighthizer Trade blocs United States–Mexico–Canada Agreement

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