Analysis of USMCA trade agreement (aka NAFTA 2.0)

While Donald Trump portrayed the new US-Mexico-Canada trade agreement as the best in modern history (it should at least be an improvement on NAFTA) it looks largely like pro-trade/globalisation business as usual with some weak tweaks.

Stephen Jacobi:

Despite tweaks here and there, USMCA is unlikely to disturb unduly the extensive integration between the three amigos in North America, except perhaps in terms of the motor vehicle industry where the changes are a little more extensive. Mostly though some of the world’s most competitive supply and value chains will continue as before and that is a good thing for industry, workers and consumers in that part of the world.

Financial Times: Nafta Is Salvaged From Trump’s Wrecking Ball

It could have been a lot worse. When Donald Trump arrived in the White House, it was on the back of frothy rhetoric about the awfulness of trade agreements. He had a special animus against the North American Free Trade Agreement with Mexico and Canada, which he called “the worst trade deal maybe ever signed anywhere” and which he promised either to change fundamentally or to destroy.

Nearly two years later, Nafta has suffered neither of those fates. Late on Sunday night the US and Canada agreed to revise the deal, clunkily renamed the US-Mexico-Canada Agreement. To be sure, the agreement is generally the worse for these revisions. The US Congress, which needs to approve the deal, should try to improve it, or at least not impair it further. But thanks largely to the determined effort by Canada to keep the pact alive and functional, severe damage has been averted.

Scott Lincicome (@scottlincicome) via Twitter says the agreement is more for (Trump’s) political purposes than practical trade improvements:

“By no means is this a perfect (even great) update to an old FTA. BUT it’s not devastating, maintains free-ish trade in most goods/services, modernizes, and reduces uncertainty.”

“For the US, it’s a missed opportunity to liberalize further & probably makes us less competitive. But the bigger issue is: was the last 21 mos of uncertainty/hostility worth what’s basically “NAFTA+TPP+minor good/bad changes” when you could have just had TPP (maybe even amended)?”

Seems obvious to me the answer is “no,” especially since we’re now gonna do the same song-and-dance with Japan and will (for now) miss out on the TPP’s much-larger AsiaPac integration (and China balancing – the clear, unstated point of much of this).

Meanwhile, the 232 tariffs/retaliation remain, & POTUS may be emboldened to use more “national security” threats to get “deals” that are worse than what we could’ve had BUT help him politically (at our allies’ & long-term expense). That may be the worst USMCA precedent of al.

2) There’s actually some trade liberalization in this deal! (Crazy, I know) Canada opens its dairy market a little (keyword: a little – 0.34%); the US in exchange opens up a little on dairy, peanuts, & sugar. Good for consumers (though not ideal free trade). De minimis raised too.

3) NAFTA was old and needed updating; this deal – just like TPP (more on that later) – includes new, relatively-uncontroversial “modernization chapters” on things like SMEs, e-commerce, non-tariff barriers, etc. Needed to be done, though one can quibble on the margins.

4) Finally, it seems (see caveat above) the USA’s WORST demands – procurement, mandatory US content, 5-yr sunset, guest worker visas, “seasonal” trade remedies, safeguards, etc – were either removed entirely or softened to the point of being practically harmless.

I imagine the US dropping these demands, perhaps more than anything else, is why the deal (which looked dead) got done. Remove the “poison pills,” and the bad/ugly stuff is annoying but (probably) worth nixing the uncertainty & keeping NAFTA alive.

Now, the Bad:

1) Ex investment, the deal includes (and in some cases even expands) many of the “regulatory” FTA provisions often criticized by free marketers because they are intrusive, costly or even protectionist: labor, environment, IPR, etc. Some like IP go beyond TPP.

Whether you like these things or they’re dealbreakers is really gonna depend on your litmus tests & the specific provisions. For me, I don’t see anything in these chapters (so far!) that makes me hope the deal dies in Congress.

2) The deal doesn’t kill most of the protectionism NAFTA left. Eg, many US/Canada agriculture (even dairy) restrictions; services & investment “non-conforming measures” (incl the US Jones Act, sigh). Big missed oppty to *expand* trade in a once-a-generation negotiation.

It also doesn’t fix NAFTA’s broken dispute settlement system (Grumble: maybe if certain parties weren’t so focused on making the deal more protectionist, arguing about “national security” & tweeting insults, they could’ve fixed this stuff. Bah.)

3) The 232 side letters. Yes, quota levels are so high 232 tariffs might never apply to Canadian/Mexican autos/parts, but cmon: these are still quotas that still contemplate NATIONAL SECURITY tariffs on CARS in the NA supply chain. That’s bad on multiple (law, econ, principle) levels.

And the 60-day “consultations” letters implicitly accept a finding that NATIONAL SECURITY TARIFFS could apply to close allies and integral parts of our industrial base. I get the politics, but, systemically, this stinks. This should be a blanket exemption. Full stop.

Finally, the Ugly:

1) Rules of Origin. The automotive ROO are managed trade on steroids, requiring originating (duty free) vehicles/parts to have high levels of not just total regional content, but also steel/aluminum purchases, & “high wage” labor. Many other onerous regulations.

Libertarian principles aside, this will likely decrease the competitiveness of the NA auto sector, accelerate offshoring of small car production & increase consumer costs. It also creates new precedent for other US FTAs & cements these rules into the North American supply chain.

2) The glaring omission: US steel/aluminum NATIONAL SECURITY tariffs, plus Can/MX retaliation, remain in place. So the pain (for almost everyone) continues, even though Trump got his “trade deal” – wasn’t that the point? I guess not (not yet at least).

BIG PICTURE:

By no means is this a perfect (even great) update to an old FTA. BUT it’s not devastating, maintains free-ish trade in most goods/services, modernizes, and reduces uncertainty. YES, Trump caused the uncertainty, but it’s better than where we were 2 months ago

Some of the worst provisions, moreover, are delayed or just side letters or could be amended in the future (ROO by proclamation in the USA). Seems Can/MX “caved” in that they found a deal they could live with and just wanted Trump to Leave North America Alone. OK.

For the US, it’s a missed opportunity to liberalize further & probably makes us less competitive. But the bigger issue is: was the last 21 mos of uncertainty/hostility worth what’s basically “NAFTA+TPP+minor good/bad changes” when you could have just had TPP (maybe even amended)?

Seems obvious to me the answer is “no,” especially since we’re now gonna do the same song-and-dance with Japan and will (for now) miss out on the TPP’s much-larger AsiaPac integration (and China balancing – the clear, unstated point of much of this).

Meanwhile, the 232 tariffs/retaliation remain, & POTUS may be emboldened to use more “national security” threats to get “deals” that are worse than what we could’ve had BUT help him politically (at our allies’ & long-term expense). That may be the worst USMCA precedent of all.

Stephen Jacobi (Executive Director of the NZ International Business Forum) has a New Zealand perspective in “The greatest FTA ever negotiated”

The deal does have some implications for New Zealand interests though:

  • US dairy farmers will gain some additional access to the Canadian market, not a great deal more than under the former TPP and certainly not enough to bring down Canada’s extensive supply management for dairy
  • Canada will phase out its “special milk class 7” scheme under which Canada was able to supply subsidised milk powder to global markets – that will be welcomed by New Zealand exporters
  • Canada will rein in British Columbia’s scheme to allow sales of BC wine in supermarkets, while imported wines were relegated to speciality stores – this was a WTO dispute in the making and will assist NZ exporters. It remains to be seen whether Canadian restrictions on the distribution of wine in other provinces will be reformed
  • The operation of controversial investor-state dispute settlement (ISDS) will no longer apply between the United States and Canada (but will continue between the United States and Mexico)
  • The US has extended the intellectual property provisions of the former TPP which were stripped out of CPTPP.

The latter two elements make it both easier and harder to negotiate a future FTA between the US and New Zealand. While the elimination of ISDS will be welcomed by the NZ Government, intellectual property remains a real sticking point.

Implications for China and Asia/Pacific:

One other provision is potentially hu-uge. The USMCA parties have agreed to consult and potentially withdraw commitments if one of them negotiates an FTA with a non-market economy (read: China). This is unusual for an FTA and calls into question future Canadian and Mexican support for the Free Trade Area of the Asia Pacific (FTAPP) which has been on APEC’s agenda for over a decade.

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3 Comments

  1. Blazer

     /  October 3, 2018

    I see the new agreement leaves out the word ‘free’ which is good.
    As they say its quite minor tweaking but will satisfy Trump politically.Just needs Mexico to pay for the wall…and…!

    Reply
    • Griff.

       /  October 3, 2018

      Any thing satisfies trump politically.
      He lies and his support base believe him without question.

      Reply
  2. Rickmann

     /  October 4, 2018

    The recent “successful conclusion” of the USMCA (NAFTA 2) U.S., Canada and Mexico trade agreement seems to have been greeted largely with sighs of relief and comments about how much Trump has ranted and carried on over what are perceived as small updates and changes to the existing NAFTA agreement and that we can now all go back to business as usual. That is, it is just a cosmetic makeover and another example of Trump’s perfidy. As usual, the commentariat (you know, the one’s who said Trump would not make it through the primaries) is completely missing the point – which is that this is not narrowly about trade and never has been. It’s about power, China and the Thucydides Trap.

    Amidst all the talk of the details relating to concessions etc., most seem to be missing a special clause which would give Washington a near-veto over any attempt by Canada or Mexico to agree to a free-trade deal with a “non-market economy”, which is a major threat to China’s position in the global trading system. It stipulates that any of the three parties to the deal has the right to be informed about any negotiations on a free-trade agreement with a “non-market economy” at an early stage, and can “review” any such deal signed by another member. If one of the three were to sign a free-trade deal with a non-market country, either of the other two would have the right under article 32.10 to terminate the trilateral USMCA with six months’ notice and form its own bilateral deal on the same terms. Despite repeated Chinese demands that they do so, the US and European Union have refused to classify China as a “market economy” – a technical distinction in the World Trade Organisation framework that would reduce the ability of Washington and Brussels to impose trade sanctions on Beijing. Although the new stipulation does not name any specific country, one does not have to be a genius to see that it is aimed at China. With the power to review and then impede or effectively veto a possible free-trade deal between China and Canada or Mexico, the US can block potential “backchannels” for Chinese products to enter US markets via its neighbours and gain a significant advantage in weakening Beijing’s negotiating power in future trade talks.

    The clause would effectively end any dalliance between Canada and China – Canada’s second-largest trading partner after the United States – over a possible free-trade deal. The two countries agreed in 2016 to study the feasibility of such a deal, although it was not taken further and the Chinese government’s announcement in March of its existing and potential future free-trade deals did not mention Canada. But the clause has wider implications than scuttling any future China-Canada deal. If the US were to insert a similar clause into trade deals it is negotiating with the EU and Japan, it would mean Beijing’s best hope of trading with the EU, Japan and Canada to offset an extended trade war with the US would be quashed. It could, in effect, create a new partnership hemming in China, much as the 12-country Trans-Pacific Partnership was meant to do when it was signed in 2016, before being scrapped by you know who. Or the Cold War containment of the USSR (remember it ?) by NATO, SEATO and CENTO and other military/political concoctions of which this writer was a part.
    Thus, the veto clause, presenting a near-insurmountable obstacle to possible free-trade deals between China and major US trading partners, was not a pressing issue only a few months ago when Washington and Seoul were revising their bilateral trade agreement. But the US now appears to see it as a necessary part of any new trade deals and is being seen, for example, by Kotaro Tamura, a former senator and parliamentary secretary in charge of economic and fiscal policy in Japan’s cabinet office, as the new blueprint to contain China in terms of trade, with Washington using the “non-market economy” clause as a loyalty test for its major trading partners, including New Zealand, which may find it needs to renegotiate its FTA with China.

    With updated trade deals in North America and South Korea in hand, and Washington negotiating with Japan and the EU on new ones, its ultimate design would be a new US-led global trading system underpinned by a series of bilateral agreements the successor to the old Bretton Woods system. China looks increasingly isolated despite its repeated claim that it is the true protector of global free trade and multilateralism centred on the World Trade Organisation. A US-led trade system that excludes China would be the worst-case scenario for Beijing because such a structure could lead to fundamental realignments of international economic relations and global value chains, which in turn could curb China’s economic rise.

    So far, China has signed 16 bilateral free-trade deals, including those with Australia, New Zealand, Iceland, South Korea, Singapore and the 10-nation Association of Southeast Asian Nations, in total accounting for about a quarter of China’s total foreign trade. Tidlers, but China has no free-trade deal with Canada, Mexico, Japan, Europe or the US.
    Such US moves would have enormous ramifications in terms of drastically changing supply chains all over the world. Some industries, such as garment and shoe manufacturing, had already started to move out of China to other developing economies with lower labour, energy and rental costs. To some extent this has been underway for some time and Chinese businesses have started to join the exodus, with US tariffs the final blow to their ability to make a profit at home. In this regard, the shoes and clothing I have just bought in Tokyo were made in Cambodia and Bangladesh, not China.

    Thus it would seem that Trump seems to have changed his early tactic of quarrelling with all of the US’ major trading partners simultaneously and is instead pursuing a new trade stance to unite Europe, Japan and Canada into an economic alliance against China. With regard to changing tactics, please see my previous post of theAtlantic article on modern Trumpian politics as a TV reality show writ large – very large – and the need for constant activity and turnover in characters to maintain viewer interest. In this way, the USMCA may signal an end to Trump’s trade position of picking fights with anyone and everyone allowing Washington to focus its fire on the nation it perceives as the real trade enemy: China. Note also that while political divisiveness in the U.S. is allegedly at historic highs, both in society at large and between and within the main parties, the one thing on which there is an almost unanimous bi-partisan agreement in Congress is the Chinese Threat.

    Finally, another “minor”point is that the agreement has to yet be ratified by the counties parliaments in the months/years ahead – which is not exactly a foregone conclusion. The man signing on the behalf of Mexico is doing so on his last day in office after which he is to be succeeded by a new president of a very different political stripe. In Canada we have a Prime Minister who, while being young, with perfectly coiffed hair, cool socks and a cute smile, (sort of like NZ’s except that our PM has amazing teeth and a cute baby to trot out for photo ops) but is rapidly losing power at the provincial level in a country with a very weak centre. Canada is confederal where the provinces have far more power than the national authorities on most issues. To which can be added that it is also officially bi-lingual and bicultural so that the the Quebecois (French speakers) have the ability to veto all kinds of things at the national level-and they are already reacting strongly to the dairy aspects of the deal. It means that what seem to be irrelevant, even petty, topics (such as dairy products) at the provincial level tend to shape Canada’s national and even international policies. Policies like trade. Note also that Canada only signed a comprehensive internal free trade agreement governing trade between its provinces in 2017. And of course, there is Trumpian America where politics is increasingly a reality show writ large. In this bizarre theatre marked by the above mentioned divisiveness but widespread bi-partisan agreement on China being the greatest threat to the U.S., America’s trade stance vis a vis China is likely to remain irrespective of the results of the mid term elections in November.

    Reply

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