Worley Blog

USMCA CREEPS INTO LAW

Posted on: December 17th, 2019 by Clifford F. Lynch

 

As almost everyone probably recalls by now, early in his election campaign, President Trump advocated the renegotiation or complete dissolution of the North American Free Trade Agreement (NAFTA) and continued to push the idea after he was elected. First conceived in 1987, NAFTA was finally signed into law in 1994, and has been very instrumental in increasing trade among the U.S., Mexico and Canada. With a combined GDP of $20 trillion, NAFTA was the world’s largest free trade agreement, and today trade among the countries exceeds $1 trillion.

President Trump however, described it as the “worst deal ever”, citing the loss of jobs in the U.S. as industries have moved across the borders, primarily to Mexico. On the surface, this appears to be true. For example, 20% of North American auto production takes place in Mexico. On the other hand, NAFTA resulted in the creation of several million U.S. jobs, a fact that critics tend to dismiss. In any event, the treaty was renegotiated, and after many painful months, an agreement was reached. The new deal is particularly significant since it provides for protection of intellectual property. Entitled the U.S. – Mexico – Canada – Agreement (USMCA), the new pact was approved by Mexico and Canada, but languished in the House of Representatives until last week. It must be ratified by both the House and the Senate, but the House had insisted on changes even though our negotiators had already signed off on it.

In spite of the fact that the goal had been to get the agreement into law by the end of the year, the House has been so focused on the impeachment of President Trump, they accomplished little else. They were successful in getting some changes made, and Speaker Pelosi has said the new trade pact “will be infinitely better than what was proposed by the administration.” There is some disagreement over that statement, but the bill is ready to go to the Senate. The catch is that Congress adjourns this Friday, and there is no way the Senate can act by then. In fact, Senate Majority leader McConnell has said they would not even consider it until after the impeachment. Now of course, after sitting on it for a year, the Democrats are blaming the Republicans for delaying it.

The Brookings Institute has said that the changes from NAFTA are mostly cosmetic, with most of the provisions of NAFTA remaining intact. Since the president had called NAFTA the “worst deal ever” however, it was important to get a new name and make some changes. USMCA is scheduled to become effective in 2020, and reviewed every six years. It could expire in 2036, or be extended until 2052. And it does contain a few important new provisions. For the first time, law enforcement in any of the three countries can stop suspected counterfeit or pirated goods, pirated movies, or cable signal theft, and violations will result in substantial civil and criminal penalties. Other rules are included that will protect intellectual property rights and provide for stiff penalties

Starting next year, 30% of automobile production must be by workers making at least $16 per hour. In 2023, the percentage rises to 40. Since this is about three times the average Mexican automaker wage, this could push automobile manufacture back to the U.S. However, there has been a significant shift of auto manufacture to Mexico, and the cost of moving back to the U.S. may be prohibitive. In addition, auto manufacturers will not experience tariffs if 75% of a vehicle’s components are manufactured in the U.S., Canada, or Mexico. This is up from 62.5% in NAFTA.

Another major change involves labor reform. There will be enforceable labor standards in Mexico and a process for monitoring them, including the allowing of inspections of factories. Benchmarks for compliance will be established. Strong environmental provisions also have been added.

Although most of the new provisions seem to involve Mexico, Canada will allow American dairy farmers to export $560 million worth of dairy products into Canada. That is about 3.5% of Canada’s $16 billion dairy industry.

The next few weeks will tell the tale. In spite of some Republican concerns, the deal is expected to pass the Senate with bipartisan support.   In a marked contrast to President Trump’s “worst deal ever” comment, White House press secretary Stephanie Grisham, called USMCA the “biggest and best trade agreement in the history of the world.”

Since this will be our last blog before Christmas, I want to wish all our readers the very best of holiday seasons.