The United States-Mexico-Canada Agreement (USMCA) looks set to be passed into law by year-end, after the Trump administration reached a deal with House Democrats to move forward with the deal, following months of negotiations.
The 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 has been mired in political disputes ever since, with Democrats and labour organisations raising concerns about labour and environmental rules, as well as protection for intellectual property and digital assets.
With barriers to its passing now mostly overcome, the Democrat-controlled House could now vote to ratify the bill before the end of the year. After that, USMCA then needs to be ratified by the US Senate and by the Canadian legislature, both of which seem likely to happen in 2020.
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. 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.
“The net macroeconomic benefits of the deal will be negligible with the International Trade Commission estimating it could raise GDP by 0.35% after six years,” says Gregory Daco, chief US economist at Oxford Economics. “However, at a time when slower global growth, rising protectionism, lingering policy uncertainty and a strong dollar are constraining activity, the deal prevents a negative impact worth 0.5% of GDP from a dissolution of Nafta.” He adds that the intrinsic importance of the deal is not what it does to modernise Nafta, but rather what it prevents: a potentially disastrous breakdown of trade between the US and its most important trading partners.
For companies trading within North America, this latest development reduces the uncertainty that has dogged them in the year since the deal was originally signed. “While it was always a long shot that the US would leave Nafta without a replacement deal, there remained a lot of uncertainty about Nafta’s future and about the timeline for USMCA,” says Jonas Gamso, assistant professor of international trade and global studies at Thunderbird School of Global Management. “Now US companies that trade intensively with Mexico or Canada, or that have subsidiaries in these countries, can rest more easily, knowing that USMCA will probably go into force soon.”
The Bankers Association for Finance and Trade (Baft), says it supports the swift passage and implementation of the deal. “International trade remains an important engine of economic growth, and banks play a vital role in supporting cross-border commerce,” says Tod Burwell, Baft CEO and president. “Implementation of USMCA will bring greater certainty to importers and exporters of all sizes throughout North America, which will facilitate their ability to invest for future growth and provide goods and services more efficiently.” He adds that, in addition to market access and most favoured nation provisions, USMCA’s financial services chapter contains vital updates for banks engaged in cross-border trade in services, including provisions that guarantee the free flow of data and prohibition of forced data localisation.
However, not all is rosy. The pact includes two key changes: a so-called sunset clause, which will require the three governments to renew the deal periodically, leaving open the possibility that the vagaries of international politics once again put it in danger; and the elimination of many of the investment dispute courts protecting foreign investors from policies in host countries that threaten their investment returns. “Whether these are good or bad additions to the deal are open to discussion, but they both create some risks for US-based foreign investors operating in Mexico and Canada,” says Gamso.
For Steve Nelson, partner at international law firm Dorsey and Whitney, this last point is a feature, rather than a bug. “The interesting feature of this outcome, and its importance as a signal of the likely direction of globalisation going forward, is the rebalancing of interests between the corporates and other stakeholders, including not only labour but also environmental and other interests. Such modifications are inevitably needed as patterns of trade evolve over a period of years under pre-existing trade agreements and as our societies refocus on new challenges to their well-being.”
Whether the new Nafta sets the tone for future US trade agreements remains to be seen. But this latest piece of progress in getting the UCMCA through shows at least that, notwithstanding current domestic stresses in the US as a presidential impeachment vote nears, there remains the political will to get trade deals done.