The U.S.-Mexico-Canada Agreement (USMCA) went into force last Wednesday, replacing the North American Free Trade Agreement (NAFTA). Much of the media attention has been on whether USMCA marks an improvement over NAFTA. But there’s another question to ask. The original NAFTA made its debut alongside the birth of the World Trade Organization (WTO), but USMCA is coinciding with an assault on the Geneva-based institution. Does this pose problems for USMCA? Yes.
First, some background.
For all its faults, both real and perceived, NAFTA was a bold deal back in 1994. It took a 1989 bilateral U.S.-Canada trade deal and extended it to Mexico. It covered trade in services and intellectual property. It tackled regulatory issues that frustrated North American supply chains. And it included dispute settlement, changing the conversation about the enforcement of trade.
None of this happened in a vacuum. NAFTA’s design, like the WTO’s, reflected an effort to fix what had been wrong with the General Agreement on Tariffs and Trade (GATT). Coverage of non-tariffs stood out in this regard. But dispute settlement was especially salient. GATT’s text had set out a “diplomatic” process that was largely left undefined until 1979. It came across as being comical. Until 1989, for example, a respondent could stop the plaintiff’s case from being heard. Worse, until 1995, the respondent could stop an adverse ruling from seeing the light of day.
Getting dispute settlement right was a big deal. GATT’s “birth defects” were thought to have motivated U.S. unilateralism, particularly the use of Section 301. Within a year of NAFTA, the WTO offered its own fixes. These were heady days. Talk centered on the “victory” of law over politics. And why not? Enforceable rules at two institutions meant more market access, and a more predictable global economy, right?
The reality was more complicated. Canada’s interest in the 1989 bilateral agreement owed largely to its belief that the deal would insulate it from U.S. unilateralism and Washington’s frustration with Europe. This didn’t happen. Congress soon disliked NAFTA’s dispute settlement for trade remedies, the fear being that Canada was getting around these by carving out its own body of case law. GATT had worried about inconsistencies as well, quizzing Canada and the U.S. on what would happen if NAFTA and GATT reached different verdicts on similar cases. And Canada had promised to get Chile in on the deal, but this didn’t happen.
But through the highs and lows of the NAFTA experiment, there was the WTO backing up trade among the US, Canada and Mexico.
Think of the WTO as the base on which NAFTA could try to do more. NAFTA, like other trade deals, is supposed to be “WTO+,” meaning its coverage builds upon the WTO, and then goes further and deeper. There’s a debate over how much of NAFTA was WTO+ or WTO-, but the point is that the WTO backstopped NAFTA. That’s why it’s possible to observe that 80 percent of Mexico’s trade with the U.S. falls under the WTO, not NAFTA.
USMCA needs the WTO even more than NAFTA did. In fact, the same can be said about U.S.-UK, U.S.-Kenya or any other trade deal that Washington pursues in the future. The texts are inextricably intertwined. They have to be. Negotiators want to focus on WTO+ provisions, not on reinventing the wheel.
But this requires attention to those inconsistencies that perplexed GATT about the 1989 U.S.-Canada bilateral and annoyed Congress about trade remedies dispute settlement in NAFTA.
It’s called “forum shopping,” the idea being that a plaintiff could file either regionally or multilaterally, but just once. The fear, which is far greater today than it was in 1994 because of the 303 trade deals in force around the world, is that USMCA and the WTO might disagree. The problem is that the WTO is not the supreme court of international trade, so any inconsistency is going to make trade less predictable.
To deal with this, USMCA’s chapter on labels, licenses and certification, for example, is written to prevent forum shopping where the dispute is strictly over text “incorporated” from the WTO. This is because labels, licenses and certification impact over 90 percent of U.S. exports, such that any inconsistencies, in terms of lost predictability, would be too costly.
And that’s the point. USMCA needs the WTO. It uses WTO rules, and even the WTO’s interpretation of those rules, on key provisions. USMCA and the WTO are complements, not substitutes.
How times have changed. NAFTA debuted alongside optimism about the future of the WTO. USMCA came into force when existential questions about WTO’s future are being raised.
The irony is thick. Having updated the text, USMCA will fall short if it can’t lean on the WTO to the same extent that NAFTA did.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.