American Ambassadors Review, Spring 2019
On November 30, the leaders of the United States, Canada and Mexico signed a new trade agreement to succeed the 1994 North American Free Trade Agreement. The United States-Mexico-Canada Agreement (USMCA) modernizes the 25-year-old NAFTA, but the legislatures in all three countries must still approve it.
The new USMCA will preserve the massive trading and shared-production networks that support millions of jobs in the U.S., Mexico and Canada and the ability of North America to compete effectively with China, Europe and other economic powers. Approving USMCA this year is very much in the national interests of all three countries given the $1.3 trillion in trade between them and the many businesses, workers and farmers that depend on the commerce and co-production that interlinks North America. These economic relationships also strengthen the rationale for maintaining strong political relationships among the three neighbors.
There was widespread agreement to update NAFTA to reflect the changes in trade practices and in the three economies since 1994. NAFTA does not cover Internet-based commerce, for example. Other areas required modernization, including trade in services, protection of intellectual property rights (IPR), environment and labor, which is a priority for U.S. unions.
Mexico, Canada and the U.S. tried to accomplish this NAFTA update with negotiation of the Trans-Pacific Partnership (TPP) agreement, but in January 2017 President Donald Trump pulled out of TPP, preferring to renegotiate NAFTA.
Approval of USMCA by the U.S. Congress remains uncertain. A number of Democrats are asking for stronger enforcement commitment particularly regarding labor. Others express concern that USMCA provisions may keep some prescription medical costs high. Business and agricultural associations are urging approval of USMCA because it will provide certainty to continue the cross-continental collaboration that preserves vital intra-North American markets for manufacturing, agriculture and services and helps them out-perform global competitors. In response to democrat and union concerns, USMCA’s advocates argue that it includes significantly stronger labor provisions and enforcement.
Before the agreement moves ahead, however, the three countries must also find a solution to the tariffs the U.S. put on steel and aluminum from Canada and Mexico in 2018 for “national security” reasons. In response, those countries imposed equivalent tariffs on a range of U.S. exports, spreading economic pain across all three countries. Mexico and Canada, as well as key members of Congress, want this problem resolved before approving USMCA.
The U.S. International Trade Commission must also assess USMCA’s economic impact. This report is due in mid-April. The administration must also propose implementation legislation (and guidelines) before Congress formally considers the agreement. Congress will then have a limited time to act on USMCA under existing legislation, but members of Congress could drag the process out. The political window for U.S. congressional approval will close this year, however, given the 2020 U.S. elections. President Trump, USTR Lighthizer and others have begun lobbying for approval, as have Mexico and Canada more quietly.
The months ahead will thus be vital for trade and long-term relationships in North America and for the continent’s ability to weather well future international competition. Given the enormous economic benefits of approving USMCA, the U.S. Congress, the Administration and the non-government stakeholders should engage intensively to find ways to address concerns raised and find a “win-win” way to approval.
Fortunately, the United States public increasingly views trade in North America as positive. According to the Chicago Council on Global Affairs, for example, those seeing NAFTA and now USMCA as “good” for the U.S. economy have grown significantly, rising from 53 percent in 2017 to 70 percent seeing USMCA as “good” this year. This is a solid foundation for rapid approval of USMCA.
History and Results
Since the early 1990s, the United States, Mexico and Canada built massive trading and co-production networks that made Canada’s and Mexico’s export markets number one and two for the U.S. Today, trade and investment among the three countries amounts to $1.3 trillion a year and supports over 12 million U.S. jobs.
Combined Canada and Mexico are the United States’ largest economic partner, and the United States’ is by far the largest economic partner for them. The United States trades more with NAFTA partners than with all 28 countries of the European Union and 1.9 times more than with China. Forty-six of 50 states have Canada and Mexico as their first or second foreign purchasers. The two neighbors buy more than one-third of U.S. merchandise exports and nearly one-third of U.S. agricultural exports. “Intermediate goods” (that contribute to finished products) account for around half of NAFTA trade.
Negotiated from 1990–1993, NAFTA took effect in 1994. It was the most modern and progressive trade agreement in the world and a model for the 1994 Uruguay Round Agreement and for other trade agreements.
NAFTA has been enormously successful in expanding commerce and establishing stable and transparent rules. Trade among the three countries increased some 390 percent, from just over $300 billion dollars in 1993 to more than $1.3 trillion in 2017. NAFTA cross-border investment boomed. In 2015, Canada and Mexico had foreign direct investment (FDI) valued at $388 billion in the United States, and the U.S. FDI in Canada and Mexico was valued at $452 billion.
The Mexico-U.S. relationship underwent the most significant transformation. Under NAFTA’s umbrella, the two governments overcame a history of being “distant neighbors.” They greatly expanded cooperation across a wide range of non-trade issues, while the two countries’ private sectors built crisscrossing trade and production networks.
U.S. trade with Mexico grew six times its size under NAFTA, reaching $616 billion in 2017—more than a million dollars a minute. Mexico sells about 80 percent of its exports to the U.S. and has developed sophisticated export sectors, including vehicles, electronics and machinery and medical devices.
The countries of North America produce together. A 2010 study found that there was more U.S. content by far in imports from Mexico and Canada than from any other countries in the world. A 2018 report underscores how that is still the case for the auto sector. These patterns helped make the NAFTA economic region the most competitive in the world.
NAFTA contributed to enormous reorientation of all three countries’ economies, with positive and negative effects. NAFTA, for example, opened Mexico to U.S. agricultural products, which put many Mexican farmers out of business and contributed to the massive migration from rural Mexico to cities and to the United States. It also spurred modernization of Mexico’s agricultural sector, which now has a trade surplus with the United States that is powered by vegetable and fruit exports, while Mexico is the United States’ third largest agricultural export market.
Some U.S. manufacturing jobs moved to Mexico. However, Mexico trade now supports many more U.S. jobs than it did in 1993. A 2015 study found U.S.-Mexico trade supports some 5 million U.S. jobs, compared to estimates of 700,000 jobs in 1993. Critics often blame NAFTA for U.S. job losses, but technological changes and the rise of China as a global manufacturing power deserve most of the blame.
NAFTA to USMCA
USMCA contains 12 more chapters than NAFTA, including new chapters on labor, environment, corruption and competitiveness. Detailed chapter-by-chapter analyses are available. Pro-USMCA groups highlight important updates in digital trade; intellectual property rights (IPR) protection; science-based agricultural standards; regulatory cooperation; financial services; customs practices; treatment of state-owned enterprises; competition investigations and enforcement provisions. They stress the importance of maintaining access for U.S. exports, reflecting the slogan of NAFTA stakeholders during the negotiations: “do no harm.”
The most controversial issues were where the U.S. proposed significant “rebalancing,” that is, the rules of origin for the automotive sector, agriculture, mechanisms for settling disputes, and the rules governing review and termination of the agreement.
Vehicle Rules of Origin: Specifies the characteristics that vehicles need to be traded without paying a tariff . This includes the percentage of externally produced components and of regional content that allow a good to be treated as “North American” under USMCA.
For the automotive sector, 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 United States initially insisted on higher requirements, while Mexico, Canada and the auto industry argued resisted. The U.S. administration maintains that the final deal, combined with stronger commitments in the labor chapter, is a big win for U.S. workers. They say it creates strong new incentives for automakers to manufacture in the U.S. Nevertheless, specialists worry that the new rules could make North American auto production less competitive, increase prices for domestic consumers and cost jobs.
Agriculture: The United States focused on Canada’s complex production and price control system in dairy. Both the United States and Canada claimed victory. Several studies estimate increased U.S. dairy exports will be marginal.
Dispute Settlement: Three NAFTA chapters cover mechanisms for solving disputes. NAFTA Chapter 11 established a mechanism for settling disputes between foreign investors and the State. U.S. negotiators wanted to eliminate it. U.S. industries, especially energy, argued that they needed the protections afforded by this mechanism. Negotiators reached a compromise whereby U.S. investments in energy, infrastructure and telecommunications in Mexico will remain covered by USMCA dispute settlement provisions. The other dispute resolution mechanisms from NAFTA are unchanged.
Treaty Reviews and Termination: A very controversial issue was the so-called “sunset clause” or the rules governing how to end or extend the agreement. The U.S. first proposed that the new treaty should automatically expire at the end of its fifth year, unless the three countries agree it should continue. This met vigorous opposition. The negotiators finally 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, still leaving open the possibility of a new 16-year extension.
Legislative Approval Needed
U.S., Mexican and Canadian business and farm organizations have welcomed the new agreement, arguing that it will restore certainty to the North American marketplace. U.S. business and trade groups have organized to press for congressional approval. While not perfect, these stakeholders say USMCA provides a workable framework for strengthening trade and investment across North America. U.S. labor unions and their congressional supporters are critical about the labor provisions.
Prospects for approval in Mexico and in Canada seem good, though Canada’s October elections and Prime Minister Justin Trudeau’s political problems may make that harder. However, as noted, both Mexico and Canada seek removal of the current U.S. tariffs on their steel and aluminum exports before approving USMCA, as do some U.S. Congress members.
The main challenge to USMCA is in the U.S. House of Representatives. Democratic members may be reluctant to grant a “victory” to President Trump. A number are seeking additional assurances of stronger enforcement of labor commitments in Mexico and asking for adjustment to provisions they worry will raise drug prices for consumers. Regarding labor in Mexico, President Andres Manuel Lopez Obrador has long championed labor and union rights. He is supporting significant labor reform that is now before Mexico’s Congress, where his party has majorities in both houses. U.S. unions are closely watching. Passage is expected in April. The new law will likely address some of the concerns flagged by Democrats and U.S. unions, but they will still seek commitments about enforcement, if Mexican implementation of USMCA commitments falls short.
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