gary hufbauer is a non-resident senior fellow at the Peterson Institute for International Economics in Washington.
Published December 18, 2019
In the 2016 presidential debates, candidate Trump dismissed Nafta as “the worst trade deal the U.S. ever signed,” thereby stealing a march on the Democrats’ anti-Nafta left wing. Nafta had often been invoked to explain all manner of miseries, and Trump’s declaration proved to be an act of political genius. It may well have been decisive in the 2016 election, garnering enough working-class votes in battleground states to land him in the White House.
Once elected, Trump used his threat to terminate Nafta as a club in negotiations with Canada and Mexico, both of which were more dependent on the trade pact than the United States. Now, much political theater later, the House of Representatives seems sure to ratify an agreement sometimes called Nafta 2.0 — or derisively, Nafta 0.8 — but officially labeled the US-Mexico-Canada Agreement, or USMCA. The Senate is expected to ratify the new agreement in January or February.
What did three years of sturm und drang achieve? Little of note, in economic terms, but definitely something in political terms. Trump tweeted:
[USMCA] will be the best and most important trade deal ever made by the USA. Good for everybody — Farmers, Manufacturers, Energy, Unions — tremendous support. Importantly, we will finally end our Country’s worst Trade Deal, Nafta!
Trump has often found that making the same assertion repeatedly gives it a sheen of verisimilitude. And so it seems with USMCA. Indeed, others found the game irresistible. Democratic House Speaker Nancy Pelosi claimed her party’s efforts made the USMCA “infinitely better” and a “victory for American workers.” AFL-CIO President Richard Trumka told his followers they had “secured an agreement that working people can proudly support.” Even Sen. Chuck Grassley, whose Iowa farm constituents had been among the biggest winners from the old agreement, chimed that the deal is “going to be so much better than what we had under Nafta.”
With such hosannas, an innocent observer might expect stock markets to roar ahead on the prospect of ratification and for U.S. economic growth to tick up in 2020. In fact, major U.S. and Canadian indexes lost fractional ground the day the Democrats signed on to the USMCA (though the depressed Mexican market did stage a small relief rally). As for growth, in April 2019, the U.S. International Trade Commission published a report claiming the USMCA would create 176,000 domestic jobs (an increase of one-tenth of 1 percent) and raise U.S. GDP by $68 billion (a one-time increase of three-tenths of 1 percent). Most economists (including me) think even those very modest numbers are built on wishful thinking.
Ratification will, however, make one important contribution to the U.S. economy. It will reduce what business hates most: uncertainty. Trump’s multiple trade wars have fomented so much uncertainty that business investment is badly lagging growth in consumer spending, depriving the economy of the balanced expansion that the Tax Cut and Jobs Act of 2017 was supposed to stimulate. That’s one reason U.S. growth prospects seem stuck in the mid–2 percent range rather than the low 3s. And while the new agreement is probably not sufficient to bring investment roaring back, it does feel good when you stop hitting your head against the wall.
Ratification will, however, make one important contribution to the U.S. economy. It will reduce what business hates most: uncertainty. And while the new agreement is probably not sufficient to bring investment roaring back, it does feel good when you stop hitting your head against the wall.
For better and worse, USMCA is more than Nafta printed in a different typeface — though it takes a fair amount of chutzpah to say the changes transformed the “worst trade agreement ever” into the “best agreement of all time.” Here are changes that do matter.
Labor enforcement. The big ask among Congressional Democrats, prodded by the AFL-CIO’s Richard Trumka, was tougher enforcement of labor standards in Mexican factories. Thus, the original USMCA text was tweaked to smooth the formation and operation of arbitration panels, to create a presumption that any violation impacts trade and/or investment, to create slots for labor attachés charged with oversight in the respective embassies, and to form various monitoring committees. Trumka was, however, forced to back down on a demand that U.S. inspectors should sign off on the good behavior of Mexican factories. Mexico saw this as a non-negotiable intrusion on its sovereignty. On the other hand, the new obligations apply symmetrically to the United States and, at some point, Mexico or Canada could bring a case against U.S. right-to-work laws or strikebreaker practices.
Environmental enforcement. As with the labor provisions, the new language is designed to give teeth to environmental standards, creating a presumption that an environmental violation counts as much as the violation of straightforward bread-and-butter provisions of the treaty. Formally, the parties agreed to adopt and enforce multilateral environmental agreements.
Auto trade. USMCA takes a giant (and most unfortunate) step into the realm of managed trade, with strict rules of origin that exclude auto parts from third countries (Asia, Europe, South America) and quotas on autos assembled in Mexico and Canada that are sold in the U.S. market. The quotas will not bind for several years, but the concept of managed trade is now firmly established. In a last-minute tweak, U.S. steelmakers got their pound of flesh with a “melted and poured” provision for steel used in auto production. Again, implementation is delayed — here, for seven years — but the managed-trade precedent is there. And there’s no papering over the reality that the USMCA will make the next generation of autos more expensive for Americans.
Pharmaceuticals. Big Pharma was a big loser in final negotiations between the White House and Congressional Democrats. One provision will allow the sharing of proprietary test data that establishes the safety and efficacy of new drugs. Moreover, language guaranteeing patent extensions for new uses of old drugs was also dropped. Both provisions had been designed to delay competition from generics by preventing generics makers from free-riding on the R&D of pioneer firms.
Digital trade. This is probably the area where the USMCA makes the most significant changes. Basically, Canada and Mexico agreed to preserve or adopt U.S. standards for digital commerce. They agreed not to require “localization” of servers or data analysis, not to impose taxes on electronic commerce and not to bar access to the internet. Despite Pelosi’s last-minute attempt to strip out language ensuring immunity from tort liability for third-party content on digital platforms (e.g., on Google and Facebook), the immunity language remains in the USMCA.
De minimis thresholds. Canada and Mexico were persuaded to raise their very low thresholds for tariff-free and sometimes tax-free imports of low-value shipments. The new thresholds are around $100 — well under the U.S. threshold of $800, below which importers need not run the gauntlet of trade regulation. The increases, though modest, will facilitate cross-border e-commerce sales by small firms. Worryingly, though, the language permits the U.S. to lower its own threshold, a prospect energetically opposed by express delivery firms including UPS, DHL and FedEx.
But It Could Have Been So Much Worse
Canadian and Mexican negotiators can be proud of standing their ground, reaffirming the decades-long project of North American economic integration in spite of bullying by the White House. And U.S. Ambassador Robert Lighthizer, no fan of free trade, can be proud that he threaded the needle between President Trump and Congressional Democrats. For Pelosi, the biggest achievement was using her leverage on one end to persuade the White House to abandon the worst of the political bluster and on the other to persuade Democratic presidential candidates on the left not to trash USMCA.
After three years of negotiations and angst, the biggest change from the old Nafta is a new name. A new name, plus endorsements from improbable leaders, may keep North American economic relations out of the headlines for some time. If so, that’s a worthwhile accomplishment.