The revised version of the North American Free Trade Agreement (Nafta) looks one step closer to becoming a reality this week, after Mexico adopted a set of major labour reforms which will level the playing field somewhat between its workers and those to the north – a key sticking point for US and Canadian negotiators.

The United States-Mexico-Canada Agreement (USMCA) is hoped by the Trump administration to replace the 26-year old Nafta agreement, which the US president has variously referred to as “unfair” and “the worst trade deal ever made”. Signed by Presidents Trump and Peña Nieto and Prime Minister Trudeau in November 2018, USMCA is yet to be ratified by the US legislature, and may yet fail. The Mexican reform, which will see workers’ rights strengthened by the ability to vote freely for union representation, enabling greater bargaining power and better pay, goes some way toward helping, as US House Democrats had set it as a prerequisite to debating the new pact.

Because Nafta already eliminated duties on most qualifying goods and significantly reduced non-tariff measures, there is little room for the new deal to move the needle much further. A report out last week by the United States International Trade Commission (USITC) on USMCA’s likely impact on the US economy in general and US exporters in particular found that it would increase real GDP by just 0.35%, although the USITC did find that overall the new agreement would have a positive impact on all broad industry sectors within the US economy.

The key differences between the new and old deal primarily affect the automobile sector: under USMCA, the proportion of automobile components that must be manufactured in any of the three signatory nations in order to qualify for zero tariffs will be 75%, up from 62.5% previously. Meanwhile, 40-45% of automobile parts will have to come from factories where workers earn at least US$16 an hour – which will likely put an end to labour arbitrage in the auto sector between the US and Mexico.

To get a feel for the political will behind pushing the deal through, GTR spoke to Welles Orr, international trade advisor with law firm Miller & Chevalier. He served as assistant US trade representative in the George HW Bush administration, when the original Nafta deal was struck.


GTR: You were involved with the introduction of Nafta 26 years ago. What is the feeling on the Hill about USMCA? Is this seen as a better deal?

Orr: The USITC report confirms what a lot of people suspected, in that the economic impact of these new changes under USMCA are marginal at best. That is not a big surprise, because basically this is an agreement that is only marginally better, but it revisits things that Nafta didn’t have, like digital trade, e-commerce and intellectual property protection. For better or worse, it tightens up the auto supply rules of origin and marginally it will produce a few more auto jobs in the US. This is not a blockbuster transformative new trade agreement by any means. But on the other hand, it will get support because people realise that Nafta needed to be upgraded, so this is an improvement on that. The feeling is more: ‘Let us get this done and move on to other trade agreements.’

GTR: What is the current sentiment in Washington DC over the likelihood of USMCA being passed?

Orr: There is a sentiment as we start the month of May that the road to passage looks bleak, but there is still time to get it done within this year. Given that the Democrats and the Democratic caucus in the House has conceived of so many problems with the agreement as it stands, it is still unclear from speaker [of the House of Representatives Nancy] Pelosi whether or not the Democrats will demand the reopening of the agreement, which is a non-starter for the Canadians and the Mexicans of course, to address the enforcement provisions of the labour and environmental chapters. That is a big unknown.

Most trade policy people that I work with suggest that there is a way to deal with Democrat concerns about enforcement via side letters, which would mean you wouldn’t technically have to open up the agreement. The administration groupthink on this is fairly of one mind that if this agreement is good enough, the Democrats will support it; they just haven’t had time yet to really roll up their sleeves and read it. And there is some real truth to that.

But there is a window of time that they will need to have, and that is the big unknown at this point, because Speaker Pelosi and the base don’t know what they need to provide their members in the way of cover to trigger what would be the start of the trade promotion authority timeline when the administration transmits the implementing legislation. And that will not happen until Democrats get their questions answered.

GTR: What are the main concerns of the Democrats about USMCA?

Orr:  It is mostly looking like it’s enforcement issues in the labour chapter, but there is a lot of growing angst about the investor state dispute settlement. Republicans and Democrats really have problems with that and that is coming to light now.

It’s up to Speaker Pelosi. If her rank and file do not want to give Donald Trump a win, it is easy to let this drag out so that he doesn’t see this until 2021. I could see that playing out.

 GTR: Is there anything that could swing political sentiment in President Trump’s favour to push this deal through more quickly?  

Orr: What is going to be interesting within this four-to-six-week timeframe going forward is that I think there is going to be a deal on China. And I think it is going to be a big win for Trump. That may change sentiment with some Democrats and others that at this juncture today would not be inclined to want to give Trump anything. Trump just has to deliver a so-called ‘meaningful’ deal, frankly without even getting into the weeds on what it means, and that would be huge for him. It would be the first time any US administration has got the Chinese to agree to roll back so many of their behaviours towards foreign investors and businesses. It would be a landmark deal. That is likely coming together. [US trade representative Robert] Lighthizer and [US treasury secretary Steven] Mnuchin are in Beijing right now trying to wrap it up. A summit is planned based on what they probably think will be a deal in the next four weeks.

In addition, we have got Trump going to Japan. This is less big but still important. He might even pull out a US-Japan free trade agreement. There is a lot in play right now. I would be surprised if there isn’t a very major development that gets delivered sometime in the next four to six weeks.