NAFTA Flags

Washington, DC – It is somewhat comforting to see that one of the worst things you can say about US-Mexico-Canada Agreement (USMCA) is that the new trade agreement replaces a term that everyone knows and can say with an unpronounceable acronym. How do you say USMCA? Even NAFTA 2.0 would sound better. Hard to pronounce though it may be, if that’s the worst one can say about the agreement, then the business communities in all three countries dodged a serious bullet.

Indeed, the reaction from business has largely been a sigh of relief, recognizing that it could have been much worse, given some of the odd proposals the administration initially floated. You may recall my column from a couple of weeks ago, which talked about the new low bar for trade agreements—forget about growing trade; just do no harm. USMCA certainly meets that standard.

This negotiation has always consisted of two parts—the upgrades and the poison pills. The upgrades were those provisions that brought NAFTA well into the twenty-first century—a chapter on digital trade, intellectual property improvements, and so on. Those were needed, widely supported, and ended up in the agreement, which is good news for everybody.

Also good news is that no one had to swallow many of the so-called poison pills. Chapters 19 and 20 on dispute settlement remain more or less intact, although renumbered. The sunset provision has been suitably compromised and carefully structured to make sure the first review does not occur until after President Trump has left office. Existing government procurement provisions appears to have been retained for Canada, although not for Mexico. One significant casualty is the investor-state dispute settlement provision (ISDS), which will phase out for Canada and be significantly truncated for Mexico. While Ambassador Lighthizer is no doubt happy about that, having opposed it on sovereignty goods, among other reasons, the real winner on that one is Canada, which was far and away the most frequent defendant in ISDS cases. Now aggrieved US companies will have to seek solace in Canadian courts. The trucking provision appears to have been thrown under the bus, as it were, which will please nobody but the Teamsters.

On the market access front, the administration is bragging about increased access to the Canadian dairy market, which is a genuine win, although the harm done to American farmers by Canadian and Mexican retaliation for our steel tariffs far exceeds the dairy gains, and those tariffs remain intact, at least for the time being.

Similarly, the new rules of origin for automobiles may lead to a few more manufacturing jobs in the United States—at the cost of higher car prices. There the administration deserves credit for a clever move. Unable to get agreement to a specific requirement for US content, it resorted to a bank shot—obtaining a requirement that a percentage of production be done by workers earning more than $16 per hour. Since Canadian and American workers already meet that requirement, the effect is more likely to force Mexico to import more US and Canadian content for its cars than it is to encourage them to raise wages. It will also raise car prices and make the US industry less globally competitive at a time when it faces ever-growing global competition. Or, alternatively, it might persuade companies to abandon the effort to comply with enhanced content requirements and all the paperwork that goes with them and instead let their production be non-USMCA qualified and simply pay the 2.5 percent tariff.

The Trump administration anticipated that possibility by adding side letters that attempt to cap (with increased tariffs) Canadian and Mexican auto exports to the United States beyond specified levels. That will not make any difference in the short run, both because the tariffs do not yet exist because the Commerce Department’s section 232 national security study of the auto industry is not finished and because the limits provide allow for fairly significant growth beyond current levels of exports. Later on, however, they could become a significant constraint.

The auto provisions taken together remind me of squeezing a balloon. If you push down in one place, it pops out in another. If you push down on the second one as well, it pops out in a third place. Eventually, you either run out of fingers or the balloon pops. There is probably a lesson there for those who keep adding layer upon layer of protection trying to force people to ignore market realities. We can call it the balloon theory of trade, as opposed to the much more famous bicycle theory.

There is much more—the agreement is, after all, more than 1,100 pages, and experts are still combing through it. The administration, like its predecessors, flagged the good stuff initially, and it will take time for the more problematic provisions to be discovered. There will no doubt be some of those, but the administration deserves credit for bringing the ship into shore with both Canada and Mexico hanging on and with overall modest improvements. The fact that many of its efforts to build an economic wall around the United States did not make it to the finish line is also good news, although the Canadians and Mexicans probably deserve more credit for that than our administration does.

© 2018 by the Center for Strategic and International Studies. All rights reserved.

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