Replacing NAFTA with USMCA

BY: Jacobien van der Kleij

Remplacing NAFTA with USMCA

PEJOURNAL– The 2,082 paged framework known as the United States-Mexico-Canada Agreement (USMCA), went into force on the 1th of July this year and will constitute according to Trump “the best and most important trade deal ever made by the USA”. And its predecessor, NAFTA, part of Reagan’s 1980 presidential campaign and signed in 1992 by Bill Clinton, will go down in history as the “US worst Trade Deal”.

However, the impetus for a new trade Agreement governing a market with more than 500 million people involved, does not signal an end to trade disputes between the United States, Canada and Mexico. In which extent will this deal make a difference in relation to the previous one? What will the long-term impact be for their close relation? Speaker of the House of Representatives, Nancy Pelosi echoed for example, that “there is no question of course that this trade agreement is much better than NAFTA”. It is time to examine the shift in provisions and advancement made in the new deal, or, if it represents hardly the overhaul that was once advertised.

It is meant to be a “high-standard” agreement that modernizes and stimulates growth in North America, enabling to increase the living standards for the workers in the three members countries[1]. As part of the deal, the U.S. gets tariff-free access to Canada for 57,000 tonnes of chicken by the sixt year of the deal, while the US will be eligible to export up to 21.37 million dozen eggs to Canada. Furthermore, it revises Mexico’s labor law and encourages auto production in North America in order to increase regional value.

Compared to NAFTA, USCMA (or CUSMA in Canada), tends to increase environmental and working regulation, stimulating the domestic production of cars and trucks in North America, whereby automobiles are required to have 75% of components manufactured in North America, rising from 62.5%.

There are new laws on intellectual property protection and right, the internet, investment, state-owned enterprises and currency, revamping the outdated 18 Article under NAFTA 17th Chapter with 89 new articles outlined in Chapter 20 of USCMA. Moreover, the new trade deal demands that 40 to 45 percent of a tariff-free vehicle must come from a so-called high-way factory, in which factories are required to pay their workers a minimum of 16$ an hour by 2023.

All this to help to lower the workload in Mexico, triggering to triple the average wage in Mexico where inspectors are required to investigate violations of the worker’s right. Stronger labor rules would be likely to tackle the main concern in Mexico over the next decade, in an attempt to surge the economic growth in Mexico. However, its economic growth has remained steady with an average of just 1.2 percent[2] since the inception of NAFTA, the lowest GDP measured in the hemisphere.

The unemployment rate in August 2020, meanwhile, remains at levels not seen since 2014, while wages keep sinking and productivity stagnates. [3] All these numbers are far from the large-scale growth where NAFTA had to lead to. [4] Hence there is big hope that USCMA will make a life-long difference, while the International Trade Commission estimated that, if changes are implemented correctly, that this will leader to higher wages in Mexico and a decrease in the pay gap compared to American Workers. [5]

 Even though this all seems well and good, an adequate solution to address climate change is overlooked, and might explain why Bernie Sanders, Chuck Schumer and Kirsten Gillibrand did not vote in favor of the new NAFTA. “It is not going to stop outsourcing, it is not going to stop corporations from moving to Mexico.”, as Bernie Sanders stated.

The emerging wisdom goes that the deal ‘‘essentially represents the status quo with a few wrinkles”, and that the deal is mainly driven by American interests, increasing American dominance over its neighbours. To examine if USMCA represents more than just a name change, we shall focus why Canada and the US wanted to establish region’s largest free trade zone in the first place. Does it only serve as a framework that pursuits domestic self-interest, or does it represent more than that?

Article 102 of NAFTA outlines the objectives of the treaty[6]. These were the following seven goals, designed to assure trade peace between the three countries:

  1. Grant the signatories the “most-favored-nation” status, denoting the equal treatment of all countries.
  2. Eliminate barriers to trade and facilitate the cross-border movement of goods and services.
  3. Promote conditions of fair competition.
  4. Increase investment opportunities.
  5. Provide protection and enforcement of intellectual property rights.
  6. Create procedures and dispute settlement mechanisms to solve the trade disputes in order to resolve trade disputes, whenever a member government is violating an agreement or commitment that are enforced.
  7. Establish a framework for further trilateral, regional, and multilateral cooperation to expand and enhance the benefits of this agreement.

This is the ideal picture, ofcourse. We can ask ourselves how NAFTA fit into the broader debate over trade policy. In 1988 the United States already completed another free trade agreement (FTA), known under CUSFTA, designed to reduce the friction that hampers trade. Before being superseded by the North American Free Trade Agreement in 1994, the CUSFTA generated only a yearly increase in profit of 1.2% in the Canadian manufacturing sector. [7]

Despite other high-profile disputes – the biggest was a battle over US tariffs on softwood lumber[8] – The agreement was a resounding success and led to NAFTA, governing over more than 300 trillion dollar of trade, while Canadan exports to the U.S. reached up to $359 billion dollar, surging from just 110$ billion in 1990. The integration of Mexico aspired to freer trade, stronger and steady economic growth to Mexico, providing new jobs and opportunities for its growing workforce and discouraging illegal migrations. As stated before, the poverty levels remain consistent since 1994 and unemployment rates rose from to 5.1% in September 2020[9] compared to 2.9% in March 2020, even though this can also be affected by other external factors as the coronavirus pandemic.

As for the United States and Canada, Mexico seemed to be a promising market for exports and a lower-cost investment location that could enhance the competitiveness of U.S. and Canadian companies, reduce production inefficiency and expand market access for American food and agriculture. Further provisions of NAFTA were designed to provide U.S. and Canadian companies greater access to Mexican markets in banking, insurance, advertising, telecommunications and trucking.

From a historical point of view, it seemed natural to join jorces, inspired by the economic successes achieved by the European Economic Community (1957-1993). Despite considerable trade growth, Canada and US trade disputes and productive gap have continued to expand, with US productivity growth averaging with 2.4% and the Canadian one only with 1.6%. This all to say that, the main aims mentioned above still remain at the core of the new USCMA agreement, strengthening the dispute resolution system enabling it to improve.

Lastly, the bone of contention that concerns Mexican workers; reaching a minimum of 16$ an hour average rate, bearing in mind that wages in Mexico have fallen below NAFTA standards, and those making the least have been hurt the most, with the minimum wage declining 14 percent in the past decade. [10] Former president Enrique Pena Nieto raised the wages to $4.71 dollar a day in 2017, while president-elect Andres Manuel Lopez Obrador claimed victory in 2018, vowing to improve labor standards, assuring that a ”profound change” is coming.

He pledged commitment to USCMA labor standards by writing a letter to the Trump administration at the end of 2017[11], in which he stated that the labor reforms that are underway today will put Mexico at the forefront of labor rights in Latin America and will guarantee union democracy and the rights of union members as not done in more than three decades. During his 2006 campaign for president however, he cited that the trade deal would have a devastated impact on Mexico’s small farmers, but by 2007 he changed his tune, an attitude that will ensure to allow access from the fossil fuel industry to Mexico’s oil reserves and maintain a strong profile facing his opponents Trump and Trudeau. Committee Chairman Rep.

Richard Neal of the White House responded that he is “very pleased with Mexico’s demonstration of good faith” and the details in the letter regarding Mexico’s strategy for implementation. “Given the high labor and enforcement standards Democrats require from the new NAFTA agreement, I am eager to receive further details from the U.S. Trade Representatives regarding the Trump administration’s preparation to meet our priorities,”. Both Trump or AMLO are getting high remarks for their ignorant handling of the health crisis, so the delivery of USCMA is a perfect distraction to gain political attention. Meanwhile, IMF predicts a 10.5% GDP contraction in Mexico and AMLO’s party is facing critical midterm elections next summer. [12]

Even if NAFTA seems to have fundamentally reshaped North American economic relations by boosting the supply chain in North America, it is more likely that the new NAFTA assured a substantial political achievement. According to Trump, since NAFTA’s adoption, the United States racked up trade deficits totaling more than $2 trillion — and it’s a much higher number than that — with Canada and Mexico. It lost vast amounts of money, and lost 4.1 million manufacturing jobs, and 1 in 4 auto jobs. In which extent will USCMA make an economic difference then?

Free trade 2.0 between the three countries will only do slightly better in regard to the environment – a clear innovation compared to NAFTA – with a full chapter of the USCMA deal specifically tackling environmental issues. [13] Article 24.8, for example, refers to seven ratified multilateral environmental agreements (MEAS) and obligations to respect these commitments, and article 24.9 “Protection of the Ozone Layer” shall “combat illegal trade in ozone-depleting substances”.

Yet in practical terms, it is unclear if this commitment will help the livelihood of small farmers, just as with the old treaty where subsidized corporate agriculture from the U.S. will continue to flow to Mexico. ALMO is aware of this, but he willingly accepted the treaty in order to move to other objectives in his political playfield. What the economic price of this influential trade deal is, is yet unsure. Trump put his nationalistic stamp on the north American Trade USCMA before potentially leaving office, a self-glorifying acronym with U.S. first.

The negotiation process has been a contentious one, with Canada pushing back against tariffs on steel and aluminum imposed by the U.S., along with squabbles over the rules of origin for auto parts, dairy market access, dispute settlement, and cultural exemptions for Canada. Just last week, the Trump administration once again threatened to impose tariffs on aluminum and potentially on a range of other products within the USMCA’s first few weeks. The political negotiations amid a health crisis and economic turmoil, are not over yet.

Indeed, North America’s most immediate economic benefits did not come from the NAFTA, still the new agreement USCMA is a major regional achievement. However, its remains predominantly a political achievement than one that rides out current economic and environmental challenges, with only minor adjustment to promote and increase Small and Medium-Size businesses and investment opportunities[14]. Financial experts acknowledge the difficulty to calculate the USCMA’s precise economic impact.

The International Trade Commission projects an increase of U.S. employment of 0.12% and a rise of U.S. GDP by $68.2 billion by its sixth year. [15] Meanwhile, Trump and AMLO are pushing aggressively for their economies to reopen, ignorant of health expert’s advice to wear masks in public or to implement mass testing. A new economic deal, by all means a strategic political tool so they can save face, will not assure a fivefold boost to the average Mexican autoworker’s wage.

Indeed, USMCA will keep trade and transportation flowing across North America, but it does not guarantee that the consequences of the trade deal already represents faits accomplis. Manufacturers as well as producers in the textile and chemicals industry shall need to invest time to look into the changes of USMCA compared to NAFTA that will impact their duty obligations, and if adjustments to the supply chain are needed or warranted.

Conclusively, the trade deal is more than just a show off; roughly 85% of the USMCA chapters are modernized compared to NAFTA, comprising duties and new (environmental) regulations that the signatories need to take into account. However, it is the name that has made the most impact until now, preserving a three-way-deal and three-way-of pronouncing the deal. It is only a matter of time to say if the deal will help Mexico out of its endless recession, and what the impact will be on American and Canadian productivity in the long run. The three countries are, eventually, better off with a multilateral agreement on the American continent than with no trade deal at all.

Sources

[1]ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/modernizing

[2]citizen.org/wp-content/uploads/migration/impactsonmexicomemoonepager.pdf

[3] tradingeconomics.com/mexico/productivity

[4]fas.org/sgp/crs/row/RL34733.pdf

[5]usitc.gov/publications/332/pub4889.pdf

[6] tcc.export.gov/Trade_Agreements/All_Trade_Agreements/NAFTA_Part1_Chapter1.asp#102

[7] voxeu.org/article/trade-agreements-and-profits-new-evidence

[8]international.gc.ca/controls-controles/softwood-bois_oeuvre/index.aspx?lang=eng

[9]tradingeconomics.com/mexico/unemployment-rate

[10] citizen.org/wp-content/uploads/NAFTA-Factsheet_Mexico-Legacy_Jan-2019.pdf

[11]www.aa.com.tr/en/americas/mexico-s-president-vows-to-improve-labor-standards/1617971

[12] imf.org/en/Countries/MEX

[13] international.gc.ca/trade-commerce/assets/pdfs/agreements-accords/cusma-aceum/cusma-24.pdf

[14] ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/supporting

[15]usitc.gov/press_room/news_release/2019/er0418ll1087.htm#:~:text=The%20Commission’s%20model%20estimates%20that,176%2C000%20jobs%20(0.12%20percent).&text=The%20model%20estimates%20that%20the,sectors%20within%20the%20U.S.%20economy.

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