Move over NAFTA. Hello USMCA.
On September 30th President Trump announced a compromise with Canada that followed on the heels of another with Mexico weeks earlier to update the North American Free Trade Agreement (NAFTA). The new agreement is being referred to as The U.S.-Mexico-Canada Agreement (USMCA), a somewhat unpronounceable acronym but one that clearly lists the U.S. first, likely no accident given the President’s “America first” theme going back to his campaign days.
The new agreement makes modest changes, though experts note most of them do favor U.S. interests, as the President insisted on improvements to what he consistently dubbed “the worst trade deal ever”. Starting in 2020 to qualify for zero tariffs, 75 percent (up from 62.5 percent) of auto and truck component parts must be made in one of the three North American countries. Further, at least 30 percent of the work performed on vehicles must be done by workers earning at least $16 an hour, moving to 40 percent on cars by 2023.
U.S. dairy farmers will now be able to sell more of their products to Canada. Canada’s protections for its farmers have harmed not only U.S. dairy interests but its own consumers with abnormally high milk prices for decades. The steel tariffs remain in place as the U.S. and Canada negotiate that issue separately. Other “wins” include increased intellectual property protections and improved environmental and labor rights. As an example, Mexican trucks entering the U.S. must meet higher safety regulations. Many Democrats are applauding the fact that Mexico will allow its workers to create and organize unions.
Trade is one of those issues that has always divided the political parties in odd ways. Mainstream economists are near universal in their praise of free trade and open markets due to the benefits for consumers with more choices and lower prices. The center left and center right has also been strongly pro-free trade in the past few decades. The far left has traditionally been skeptical, fearing union job losses in some industries. Similarly, the far right has often opposed agreements fearing a loss of U.S. sovereignty to entities like the World Trade Organization, who enforce free trade. Small wonder then that Ralph Nader and Patrick Buchanan both vociferously opposed NAFTA in 1993. NAFTA passed the U.S. House by a 234-199 margin, with 132 ‘yes’ votes and 43 ‘no’ votes from Republicans and 102 ‘yes’ votes and ‘156 ‘no’ votes from Democrats.
There will be an official signing ceremony before December 1st, but each country’s legislature must approve USMCA. Ratification is not assured. Republicans, who typically support free trade agreements, are skeptical of the President’s protectionist instincts, and Democrats may seek to deprive Mr. Trump of a win on a signature campaign issue. The uncertainty over the midterm elections is yet another issue. Thus far, though, renegotiating NAFTA has been a “win” for President Trump and the U.S. overall. In noting how Canada and Mexico appeased U.S. demands, Geoffrey Gertz of The Brookings Institute wrote, “the U.S. is more important to their economies than vice versa.”