U.S. President Donald Trump got the biggest win of his administration on trade policy last week by reaching an agreement with Speaker of the House Nancy Pelosi on terms for the U.S.-Mexico-Canada Agreement (USMCA), the pact that will replace the North American Free Trade Agreement (NAFTA), which governs more than $1.2 trillion of trade among the three countries. Counterintuitively, it may have taken the passions generated by the impeachment process to get USMCA through Congress. The accord is far less than advertised, although all involved agree that it is an improvement on its predecessor. Most importantly, it provides stability and certainty for businesses and that alone is reason to applaud the deal.
Trump called NAFTA, adopted 25 years ago, “the worst trade deal ever negotiated,” blaming it for the losses of millions of American jobs during that quarter century. He promised to pull the United States out if a new pact could not be agreed. That threat, along with the imposition of tariffs, spurred the governments of Canada and Mexico to come to the table and they concluded a new accord after a little over a year of talks. Agreements among the three governments are not the end of the negotiating process, however. U.S. law requires that trade deals be ratified by Congress, so every administration must ensure that its deals enjoy majority support from the legislature. In essence, a second set of negotiations is required, one that is internal to the U.S. political system.
Democrats demanded changes to the draft signed by the three governments, and those negotiations — between the Trump administration and Democratic legislators — were concluded last week. The Democrats’ chief concern was ensuring that the new deal raised labor standards, to prevent jobs fleeing to Mexico to exploit lower wages and worse working conditions. The revised deal also strengthened environmental protections — again to prevent a race to the bottom — and opened the Canadian dairy market to U.S. products. It reduced the amount of time that certain biologic drugs enjoy intellectual property protection, improves protection of other forms of intellectual property, and tightens rules on currency manipulation to prevent governments from using that tool to help businesses maintain competitiveness.
Of particular relevance to Japanese companies, which export about $40 billion of autos and parts annually to the U.S., is the revision of local content requirements for automobiles. To qualify for zero tariffs, a car or truck must have 75 percent of its components manufactured in one of the three countries; NAFTA only required 62.5 percent local content. In addition, at least 30 percent of the labor on cars and trucks must be done by workers earning at least $16 an hour, about three times the going rate in Mexico. That percentage will increase to 40 percent for cars by 2023. The U.S. also provided a side letter assuring Ottawa and Mexico City that it would refrain from using tariffs against auto parts imports.
Pelosi called the new agreement “infinitely better” than the original USMCA, adding that Trump would not even recognize it for all the changes. Other Democratic legislators went so far as to say that “this is our deal.” The White House was magnanimous, saying that there was plenty of credit to go around.
For all the backslapping, most economists agree the changes are minor improvements from NAFTA. The International Monetary Fund, for example, concluded the economic effects would be “negligible.” One study indicates that only 50,000 of the 6 million jobs lost since NAFTA was passed would be replaced by the new pact. The real gain is stability for businesses that need consistency and predictability in the business environment to make their long-term plans.
The agreement between the two ends of Pennsylvania Avenue is a reminder of the political dynamics at work in the U.S., and a key factor is the electoral calendar. Trump wants a trade deal to be able to tell voters he is keeping promises and returning jobs to the U.S. After excoriating NAFTA, he had to be able to offer an improved accord. Democrats want to prove that they are not consumed by impeachment and can still get things done; moderate Democrats are especially eager to say that they are addressing pocketbook issues and can do deals with the president. That is especially valuable in swing states, those that voted for Trump in 2016 and then backed a Democrat in the 2018 midterm elections.
That thinking will shape USMCA’s progress through Congress. The House will likely take it up this week after voting on impeachment so legislators will be able to go home to constituents with an achievement that is not partisan. The Senate looks set to consider it next year, after the impeachment trial in that chamber. Passage is certain. A restoration of order to regional trade relations is welcome, but there was no reason to have to endure the uncertainty, confusion and pain in the first place.
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