USMCA agreement nearing reality…with a remarkable feeling of status quo

The US-Mexico-Canada free trade agreement will become a reality, now that US House of Representatives has voted to approve the treaty through implementing legislation. That’s welcome news for all those who support global trade. It calms those who feared that the Trump administration would restrict cross-border commerce, impose crippling tariffs on goods from Mexico and attempt to scuttle the North American Free Trade Agreement without anything to take its place.

Even “the danger of termination of NAFTA would have been very disruptive,” said Gary Hufbauer, an economist with the Peterson Institute of International Trade and a former deputy assistant secretary for international trade and investment policy at the US Treasury. He added: “Either Trump is going to be reelected next year or a Democrat will. But either way, I think you can see five years of peace with respect to trade with Mexico.”

However, don’t expect the new agreement, when it’s finally implemented — a schedule that remains uncertain — to magically boost and transform trade in the region. Its impact won’t be overly dramatic. At best, the USMCA reforms trade, significantly with regard to labor and some environmental conditions. But it doesn’t open up new markets to any degree. Nor does it significantly ease conditions that will propel cross-border trade.

“The USMCA is a marginal improvement over NAFTA,” wrote Daniel Ikenson, a director in the free-trade-boosting Cato Institute’s center for trade policy studies, “better in some areas, worse in others, about the same in most.”

Added Jeffrey Weiss, trade group partner at the law firm Venable, and a former deputy director for policy and strategic planning at the US Commerce Department: “One of the things that you need to realize about trade agreements is that most of the chapters really don’t move the needle economically, because they essentially draft text that simply reflects what everyone is already doing or wants to do.”

In fact, a study by Canada’s CD Howe Institute in July predicted GDP in the three countries will actually decrease a bit over what NAFTA would bring, had it continued in its present form. Under USMCA, Mexico would suffer the most compared to NAFTA, while the US would be only slightly negative. The US government’s International Trade Commission (ITC) was only a bit more upbeat in its assessment earlier this year. It predicted the agreement would add 0.35% to the US GDP after six years of implementation compared to the status quo.

To be sure, economists, trade specialists and policy makers are all pouring over H.R.5430, which passed the House on December 19. So, some of the details have yet to be factored into the overall trade equation. The implementation schedule remains up in the air as well.

Automotive manufacturing has garnered some of the most intense focus, and for good reason. Three-way automotive trade has developed into highly integrated production scheme, one of the most complex supply chains in the world today. An auto part may cross and re-cross a border on average some four to seven times before a vehicle is produced, according to various estimates.

The US imported $73 billion of cars from Mexico and Canada last year, and a whopping $77 billion in auto parts, $59 billion of which came from Mexico. In turn, the US exported $63 billion worth of cars parts to Mexico and Canada, all according to US Commerce Department data. According to a Center for Automotive Research study last year, “the United States sends over 71% of the country’s motor vehicle exports to either Canada or Mexico.”

Under the USMCA, mandated North American content for vehicle production to be eligible for duty-free status will increase from 62.5% to 75%. Perhaps more importantly, at least 40% of that content must be produced in factories that pay workers a minimum of $16 per hour. That’s a provision designed to make US manufacturing more competitive and to boost the living standards of Mexican workers.

Another part of the agreement calls for 70% of the steel and aluminum used in auto production be North American sourced. And, “core” parts, such as engines, transmissions, chassis and axles, must also meet the 75% North American sourcing requirement.

The impact of all this, however, will be mixed. According to the International Trade Commission study, the new agreement will result in a net increase of only 22,000 jobs in the US. It could boost the building of new auto parts factories, but in Mexico, and by Chinese manufacturers concerned about the US-China trade wars.” Compared to other third countries that might provide alternatives to China — Brazil, Chile, Indonesia or wherever, it’s just a lot easier to deal with Mexico,” said Hufbauer.

Because of the new content rules, the price of new vehicles in the US will increase as well, anywhere from $100 to more than $600 each, according to the study. Some believe it will actually dampen demand for new cars coming from North America.

“Autos is complicated, because you clearly are making all the jobs associated with autos higher-paying and you’re creating more North American jobs when it comes to steel, and that’s a good thing,” said Weiss. “But I also think it’s unavoidable that you’re making those vehicles more expensive.”

That could lead, Weiss said, to more imports from car producers outside the region. It’s the law of unintended consequences at work.

The cross-border transport aspect of the new trade agreement is equally as complicated. “There are only very limited gains in trade facilitation,” wrote Dan Ciuriak Ali Dadkhah and Jingliang Xiao, in a CD Howe briefing paper in July. “Meanwhile, more stringent border enforcement promises some border thickening, especially for goods entering the United States.”

Most notably, Mexican trucking again came up short in the new agreement. Under NAFTA, Mexican trucking companies were supposed to have delivery, drop-off access to the entire US, much as do Canadian trucks. But, led by the Teamsters, truck driver labor opposition in the US delayed full implementation of those provisions until 2015 and then permission was granted only sporadically. Most Mexican trucks drop their goods near the border, where they are picked up by American trucks.

Under USMCA, the US “reserves the right” to limit Mexican access to long-haul carry inside the US if the government determines such access would cause even the threat of material harm to US operators or drivers. Expect the unions to oppose any liberalization of access and expect Washington to cooperate.

Likewise, commercial air and maritime will retain their national exclusivity. That’s no surprise given the strength of the US airline industry and the sacrosanct nature of the Jones Act.

In his critique of USMCA, Ikenson took aim at this lack of competitive fervor. The USMCA has “the distinction of being the first US trade agreement that doesn’t include any significant new US market-opening provisions.

There are some improvements on the margins. Dairy got a bit of a nudge, when Canada and the US agreed to further pry open their markets a bit. But a study by the Brookings Institution pointed out that American dairy exports to Canada would increase by a scant 0.59% of total Canadian dairy sales over the current 3% before steep tariffs are levied.

Nowhere does the new agreement mandate improvements in infrastructure under the guise of smoother trade flows. Individual governments are doing some work in this regard, although it’s by no means across the board. “On the logistics front, there are improvements at border crossings, maybe not as many as there should be, but all three governments are spending money to improve the congestion,” said Hufbauer.

Weiss, for one, points to the environmental provisions within the USMCA as something of a precedent for future trade agreements that could tackle transportation-related infrastructure. Under the USMCA, the North American Development Bank, a two-decades-old, binational US-Mexico financial institution funded by the two governments, will be charged with financing projects related to environmental infrastructure on the border. There’s nothing to prohibit a future trade negotiations, either related to Mexico and Canada or elsewhere, from including infrastructure development and financing mechanisms as well. “Drainage and nonpoint pollution is not strictly trade related, but supply chain infrastructure actually is,” Weiss said.