The U.S.-Mexico-Canada Agreement: Economic Impact and Barriers to Implementation

Manatt on Washington
 

By Ned Waters, Federal and Legislative Analyst, Federal Government Affairs and Public Policy | Andrew I. Rudman, Managing Director, Monarch Global Strategies

Inside the USITC Report

On April 18, the U.S. International Trade Commission (USITC) released its long-awaited report on the likely economic impact of the U.S.-Mexico-Canada Agreement (USMCA). Negotiated by the participating nations over a period of 13 months, USMCA—dubbed the “new NAFTA”—updates portions of the North American Free Trade Agreement (NAFTA), which has been in force since 1994. This report was originally slated for release by March 15, 2019 (105 days from the date on which the agreement was signed), but the analysis at USITC was suspended during the 35-day-long government shutdown that began in December 2018 and stretched into this year.

USITC found that ratifying USMCA would provide a marginal economic benefit to the United States, increasing the GDP by $68.2 billion, or 0.35 percent, by its sixth year. USMCA would also create 176,000 U.S. jobs, increasing domestic employment by 0.12 percent over the same time period. The report also concludes that trade with Canada and Mexico would increase—with exports rising by 5.9 percent and 6.7 percent, respectively. Imports into the U.S. under the agreement are also projected to rise by 4.8 percent from Canada and 3.8 percent from Mexico. These numbers represent the midpoint of USITC’s statistical model, which assumes that ratification of USMCA will significantly reduce policy uncertainty and stimulate growth.

USITC’s default model, which considers only concrete trade barriers such as tariffs, quotas and labor regulation changes—not the possible ripple effects—finds that USMCA passage would decrease the U.S. GDP by $23 billion and reduce employment by 53,900 jobs, or .06 percent. On the other end of the spectrum, USITC’s high-impact model produces an increase of $235 billion to the GDP and 588,900 jobs added.

One should also note that this analysis does not take into consideration the cost of the U.S. unilaterally withdrawing from NAFTA, as President Donald Trump has threatened if USMCA is not ratified. USITC has not released any independent analysis of that scenario, although a study released by Trade Partnership Worldwide and the Business Roundtable contends that withdrawal would cost the U.S. 1.8 million jobs in the first year and that GDP growth would be .5 percent lower than under NAFTA.

Looking at a specific industry sector highlighted in the report, the analysis is varied. The automobile section of USMCA is perhaps the updated agreement’s largest departure from NAFTA. USMCA tightened country-of-origin rules, stipulating that 75 percent of an auto’s components be manufactured in either Mexico, the U.S. or Canada to qualify for zero tariffs. This is a significant increase from the 62.5 percent level under NAFTA, but below the Trump administration’s initial position of 82.5 percent. The administration also compromised by dropping its demand that 50 percent of that content be from the U.S. Additionally, USMCA’s labor provisions state that by 2023, 40 to 45 percent of automobile parts must be made by workers who earn at least $16 an hour (a major concession from Mexico), with Mexico also agreeing to pass a package of labor reforms (discussed below).

Due to these changes, the report concludes that USMCA’s automotive provisions would help the broader economy, but also lead to higher car prices for consumers and decreased auto sales in the U.S. This analysis from USITC, which is an independent agency, has already received some pushback from the Trump administration, which views the auto section as its biggest victory in the negotiations and has messaged extensively on the positive impacts for the auto industry in its pitch to skeptical lawmakers. In fact, perhaps anticipating this mixed news on a marquee issue, the Office of the U.S. Trade Representative (USTR) offered its own analysis shortly before USITC’s report was released, contending that USMCA would lead to $34 billion in new auto investment in its first five years and 73,000 new jobs in that sector alone.

Overall, it seems all parties have gotten some, if not all, of what they wanted from the report. For the White House, the projected economic gains, while marginal, are actually higher than USITC has estimated for many previous free trade agreements, including the U.S.-Korea agreement and the Trans-Pacific Partnership, the latter from which the Trump administration withdrew on its third day in office. For skeptical Democrats in Congress, the minimal economic gains projected by USITC’s report, particularly when compared to the president’s often hyperbolic messaging on the deal, mean they can and will continue to call for reopening negotiations to reach a deal with greater impact. It also means that the administration lost some leverage in talks with House leadership on both scheduling a vote and whipping the 20 or so Democratic “yeas” needed to pass USMCA as it becomes more difficult to say that a 0.35 percent hike in GDP over six years is a critical issue for this Congress.

Will It Pass? Congressional Consideration

In the near term, the biggest impact of the report is simply its existence. Now that USITC has completed its responsibility under the Trade Promotion Authority law of 2015 (TPA-2015), the administration can submit at any time a draft statement of administrative action (SAA) and a copy of the final legal text of the agreement. Both must be submitted to Congress at least 30 days before the administration can submit implementing legislation to the Congress.

Here’s how that process works. Implementing legislation is automatically introduced to both chambers and referred to the committees of jurisdiction: Ways and Means in the House and Finance in the Senate. In each chamber, the committees can take up to 45 legislative days to report the bill out; otherwise, it is automatically discharged. From there, the House must act first since all revenue bills originate in this chamber. (Trade agreements affect tariffs and are therefore revenue bills.) The House must vote on the bill no more than 15 legislative days after it is reported out of committee. If the vote is passed, the Senate Finance Committee has a maximum of 15 legislative days to look at the bill before it is sent to the full Senate for another maximum 15-day period.

If the Congress takes the full time allotted by TPA-2015 on each stage of this process—as the House, at least, undoubtedly will—a final vote on passage is unlikely before fall. Even if the SAA and final text are submitted today, the House has only 43 legislative days on its calendar before departing for the August recess, during which time neither the House nor the Senate has legislative days on its calendar.

Beyond these procedural hurdles, passage of USMCA through the Congress is not assured. In the House, where traditionally free trade-averse Democrats have the majority, there are major concerns about the strength and enforceability of the labor provisions, the environmental issues and the ten-year period of exclusivity for expensive biologic drugs. This final provision would shield drugmakers from competition from cheaper generic versions for longer than is possible under current law in Mexico and Canada. Currently, biologics in Canada and Mexico receive just five and eight years, respectively, of exclusivity. More important for the U.S. Congress, this provision also effectively blocks domestic efforts to lower prescription drug prices by shortening the exclusivity period in the U.S. from the current 12-year level, as doing so would violate USMCA (if it is adopted).

Senior Democratic lawmakers, including Ways and Means Chairman Richard Neal, have called for negotiations to be reopened in light of their objections to the agreement as currently constructed. While this is extremely unlikely, these lawmakers argue that if this deal is going to be a once-in-a-generation update of NAFTA, they would like to see more of their priorities reflected in the final text. One such proposal, advanced by Senators Brown (D-Ohio) and Wyden (D-Ore.), would permit inspections of Mexican factories accused of poor working conditions. Mexican Ambassador to the U.S. Martha Bárcena responded that Mexico would accept such a provision only if the United States would also permit a team of labor inspectors from Mexico to see whether the tomato growers in Florida are complying with labor laws, particularly the labor rights of undocumented workers.

These issues, combined with the general distrust many House Democrats have of anything coming out of the Trump administration, have led some analysts to doubt whether USMCA can pass the House this year at all. If this issue remains unresolved past this summer, political considerations in the U.S. and Canada could delay ultimate passage until after the countries’ upcoming presidential elections.

Assuming the agreement does get through the House, passage in the Senate is more likely but still not without its obstacles. The most prominent issues for the Republicans who hold the chamber (and who need only 50 votes to pass USMCA) are the ongoing Section 232 steel and aluminum tariffs on Canada and Mexico, among others. Senator Chuck Grassley, who chairs the Senate Finance Committee, has publicly told the administration that it must lift these tariffs on Canada and Mexico before Congress begins to consider language implementing USMCA. He reiterated his stance in an op-ed published in The Wall Street Journal two days ago. Similarly, Senator John Cornyn, a senior Republican and former member of leadership, has said that it might be “impossible to get the votes on USMCA … as long as the 232 tariffs are still outstanding.” Unless these trade barriers are removed, they argue, the U.S. will not enjoy the full benefits of this updated agreement. Instead, key U.S. industries will still suffer not only from higher prices on these metals but also from the retaliatory tariffs put in place by Mexico and Canada. Additionally, both Mexico and Canada have made explicit that they will not ratify the agreement unless the Trump administration removes the 232 tariffs.

Beyond the Border: Mexican and Canadian Domestic Concerns

As noted above, ratification of USMCA also hinges on adoption of updated labor laws by the Mexican Congress, which was originally prescribed a January 1, 2019, deadline for action. Missing that deadline but moving forward nevertheless, Mexico’s lower chamber adopted labor reform legislation on April 11 and the Mexican Senate adopted the identical bill on April 29. The reform, which was intended to modernize Mexican labor laws and make them more consistent with U.S. and Canadian practices, includes provisions to require secret ballot union votes and proof of workers’ consent for contracts. In addition, it eliminates conciliation and arbitration boards and replaces them with federal tribunals and establishes an independent body to register unions. It also contains provisions that will protect workers’ human rights and gender equality and eliminate workplace discrimination. During his daily press conference today, Mexican President Andrés Manuel López Obrador (AMLO) said passage achieved two goals. The reform benefits Mexican workers by establishing democracy within unions through a guarantee of free and secret ballots and also demonstrates that Mexico complies with its commitments.  AMLO said “it is now up to the legislators in the United States to approve the free trade agreement which matters a great deal to us.”

The continued application of Section 232 tariffs to Canadian and Mexico exports of steel and aluminum may lead to delays in the ratification process in both countries, although passage, when USMCA is finally put to a vote, is almost certain. Senior officials in both governments (and the United Steelworkers, which represents union workers in the U.S. and Canada) continue to push the United States to lift the tariffs. U.S. Trade Representative Robert Lighthizer has indicated that resolution of the steel and aluminum tariff issue is his highest priority after China, fueling hopes for resolution by mid-May. The current reported sticking point that is impeding resolution is a U.S. proposal to replace the tariffs with export quotas. Canadian and Mexican officials have publicly rejected quotas, which they argue are inconsistent with the spirit of USMCA. It is unlikely that either country would schedule a ratification vote (thus surrendering leverage in the negotiations) prior to resolution of this matter; Canada has been quite explicit on this point. Further complicating the timing, the Canadian Parliament is expected to rise (or go on recess, in U.S. terms) on or about June 21 and is not scheduled to return until after the October federal election.

Major obstacles, both foreign and domestic, complicate ratifying USMCA this year. In the U.S., a complicated timeline and policy differences plague the House, while the Senate continues to chafe at the same protectionist measures that both Canada and Mexico strongly object to. These issues, along with political considerations in all three countries, make it very difficult to confidently predict not only when USMCA will be ratified, but whether it will be.

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This article was co-authored by Andrew I. Rudman of Monarch Global Strategies (previously ManattJones Global Strategies). Monarch is a strategic consulting firm with over 15 years of experience providing senior corporate executives with market and political intelligence, strategic advice and stakeholder engagement support to drive market entry and business expansion efforts in North America, with a particular emphasis on Mexico.