Monday, 1 October 2018

NAFTA2.0,... Ahem, USMCA?

So, we have a deal. But what's in it? Is the North American sky about to fall as I argued in my last post? Has the North American Idea been thrown overboard by Donald Trump, once and for all? Is the new NAFTA2.0 a retrograde descent into economic nationalism?
Name will take getting used to

Here are a few quick (possibly inaccurate) thoughts on some of the provisions of what's officially being called the United States Mexico Canada Agreement.

What's in a Name?

The first thing to change is the name of the Agreement. Trump thinks the NAFTA label came with too many negative associations. Indeed, NAFTA1.0 has been a political football from the start. The irony of Trump's complaints about the NAFTA name is that he contributed mightily in a very short time to creating those negative associations; worst agreement ever negotiated, our negotiators were really stupid, the world is ripping us off...

I don't think USMCA is going to stick, except among public officials who are compelled to use the name. Moreover, I am a little worried that if things go sideways at any point, this particular acronym will be framed as "United States Made Canada do it."

General Impressions

After having spent an afternoon looking at the text of the USMCA, comparing it with the NAFTA1.0, as well as the Trans Pacific Partnership (TPP) that Trump withdrew from in January 2017, I am struck by how un-revolutionary the USMCA actually is. Indeed, I would argue that the new USMCA draws about 80% of its DNA directly from the TPP.

Moreover, I am struck by how much of the basic DNA of NAFTA1.0 also remains. I don't know how the negotiators pulled it off, but the USMCA is in many ways the kind of NAFTA1.0 that preserves key parts of North American Idea-- mostly, anyway. I have some caveats to that below.

More worrisome is the hyperbole and expectations of the USMCA that are already being heaped on the Agreement. As I watched par of Trump's Rose Garden press conference this afternoon, my first reaction was that he and USTR Lighthizer were raising expectations far too high. I get the temptation to do so. It's an election year, the President wants to give "his people" some wins, and the USMCA seems the perfect vehicle. After all, the President got tough with Canada and Mexico, forced them to the table, and drove a hard bargain that neither country could turn down. Lighthizer himself should know better than to promise the return of jobs to American factories as a direct result of the USMCA.

It was precisely these kinds of unrealistic promises in the midst of a similarly buoyant U.S. economy that put the NAFTA on it's heels before implementation even began. Thereafter, incessant debates about how many jobs the NAFTA created or destroyed occupied lots of people, but never reached a conclusion.

Oh, and there's the little thing called the U.S. Congress that still has to weigh in and a little election November 6 that could hand the House to the Democrats. There are reasons to think the USMCA might still make it with a House of Representatives in Democratic control in January 2018, but about the only thing I'm certain a Democratic House would endorse from the current White House is an offer to resign.

Oh, and no end to Trump's steel and aluminum tariffs, at least not yet....


Let's start with institutions. There are none. Just like the NAFTA, the USMCA pools no sovereignty. This was expected, but also speaks to my caution about what the USMCA can reasonably be expected to do or cause. To those who want to see the USMCA get through all three legislatures, I recommend caution in how you talk about it.

Dispute Settlement, Chapter 19, now Chapter 10

Canada stuck its heels in the ground, much as it did under similar circumstances in 1987, and insisted upon a dispute settlement mechanism to discipline so-called trade remedy laws (domestic laws aimed at dealing with foreign dumping or subsidies). In spite of serious American reservations to all of this, it looks like Canada got its wish. Chapter 19 of NAFTA1.0 is now Chapter 10 of the USMCA. I have expressed my reservations about Chapter 19 elsewhere in this blog. I'm not so sure it should occupy the status Canada seems to accord it, but they've got their dispute mechanism. It looks to me like USMCA Chapter 10 will operate just as NAFTA Chapter 19 did; panels will decide whether domestic laws were applied properly. Panels will not determine who's subsidizing and who is not, nor will panels be able to force either country the change course.

Importantly, I am very disappointed Mexico does not seem to be covered by the dispute settlement mechanisms of Chapter 10. This is a mistake, and just the first example I found in which the USMCA is less trilateral than the NAFTA. SAD.

Chapter 10 is not the only set of dispute settlement mechanisms in the USMCA. Contemporary US trade agreements (including the TPP) had a chapter dedicated to a general dispute settlement mechanism covering the entire agreement, supposedly triggering high-level technical or political intervention to resolve things. In the USMCA, it's Chapter 31. 

Investment, Chapter 11, now Chapter 14

At first, I was very surprised to see investment survive in the USMCA, transformed into Chapter 14 of the Agreement. Then I had another look. I'm quite disappointed to see that the United States and Canada have dropped the so-called Investor-State Dispute Settlement mechanisms in NAFTA Chapter 11 in favor of more wishy-washy exhortations against expropriation. There's now no binding means by which firms operating in each other's countries can defend themselves against actions around property rights that are discriminatory on the basis of the fact the firm is technically foreign. Chapter 11 generated a huge stink. But the texts of agreements subsequent to the NAFTA continued to include ISDS as well as modified language that could short-circuit what were, indeed, abuses under Chapter 11. I expect American business interests will put up a vigorous fight over this and apply pressure to have ISDS re-inserted. I hope they are successful. As a number of recent Chapter 11 cases suggest, the way Canada deals with property rights is more uneven than we think. Moreover, given the current occupant in the White House, a binding check on the exercise of nationalist economic policy seems prudent. But that's just me. My take on investment rules generally, here.

Chapter 14 compounds my disappointment in terms of trilateralism. My read of Chapter 14 is that Annex-D will continue making investment flows between the United States and Mexico subject to ISDS provisions. I'm surprised by this too, since Team Trump's argument was that ISDS effectively incentivized the outflows of U.S. capital into Mexico, taking jobs with it. It's possible that Annex-D reflects some U.S. distrust of the incoming Mexican Administration of Lopez Obrador, a noted economic nationalist, but we'll have to wait and see what the reporting is on this.

Either way, I don't like the way Chapter 14 has unfolded. Make investment trilateral, or don't do it at all.

Temporary Entry, Chapter 16 stays

As I've noted elsewhere in this blog, NAFTA Chapter 16 was the only part of the NAFTA that liberalized labour mobility. It did so only for a limited list of professionals, but was unique because a brand new visa category was created to deal with it; the TN Visa. Frankly, given the politics of immigration in the U.S. these days, I am shocked the USMCA even includes Temporary Entry.

The USMCA is shockingly similar to the NAFTA; nearly word for work. What remains to be seen is whether the old TN Visa disappears. Some news outlets are reporting the TN Visa stays as is. I suppose the U.S. Congress would have to formally eliminate it, but wouldn't that happen when the NAFTA's implementing legislation was superseded by legislation implementing the USMCA? It seems the USMCA places no limits on measures (paperwork, visa applications, etc) to limit entry of people, and it's unclear whether crossing will be as easy as it once was for business people (the text suggests more restrictions), and, importantly, whether equal access for professionals will be extended trilaterally.

Under the NAFTA, Chapter 16 wasn't accessed equally.

Rules of Origin, Chapter 4

All I really need to say about the USMCA is that Chapter 4 covering rules of origin is 234pgs long. Only time will tell whether making the rules of origin more complicated (75% content for autos, 40% of which will eventually need to use labour paid at $16/hr or higher) is going to make the North American auto sector more competitive, or repatriate (to the United States, of course) a single job. Indeed, economists universally decry rules of origin (to say nothing of many of the business people who have to deal with the paperwork) as inefficient. Most of the administrative work since 1994 under the NAFTA was aimed at simplifying rules of origin, not making them more difficult.

Others have written more articulately and succinctly about this than I can, but I would argue there are many uncertainties on the horizon about how this is going to work out.

Sunset Clause, Chapter 34

Pretty, but not in trade
This might be among the worst of the new USMCA's provisions. As written, the Agreement lasts only 16 years. After 6yrs, there will be a "reevaluation" and provision for exiting or extending at the end of the 16yrs. This is a patently bad idea. Imagine Alberta and British Columbia agreeing similar terms for their trading relationship? What firms would engage in any cross-border activity if they could envision the end of a stable set of governing rules after 16yrs? Good grief.

The Environment, Chapter 24

I like this chapter. Not only does the USMCA enshrine a fair bit of language about the relationship between trade and the environment now common in many trade agreements, it does so in a way the NAFTA never did. As I've written about elsewhere, the NAFTA Side Agreements were a surprising innovation that attempted to stick handle the, then, emergent nexus of trade and the environment. The Commission on Environmental Cooperation eventually became more robust than the three governments intended, but it nevertheless remained outside the core text of the NAFTA. Under the USMCA, the environment is now core. Moreover, Chapter 24 retains some utility for the CEC by having citizen complaints about the environment referred to the CEC for investigation and reporting.

Given Mr. Trump's views on climate change, I was a little worried about this one.

Miscellaneous Provisions

Interestingly, the USMCA contains a chapter (33) on macroeconomic and exchange rate policy. This is a new thing in trade agreements since broader macro and exchange rate policies are normally the purview of central banks and shaped by things well beyond trade policy. Indeed, trade policy wonks have generally been loathe to go there. However, the rhetoric around trade deficits these days is that currency valuations are part of the problem. Some argue the main culprit in this area is China, but even here the U.S. Treasury has repeatedly declined in recent years to name China as a currency manipulator. How this one plays out will be something to watch.

There's also a newish chapter on anti-corruption (27), newish only in the sense that it's a first for North America. However, apart from a few nods to some international conventions on corruption and a vague commitment to actually cooperate to address it-- unclear how that would work-- there are no real teeth in this chapter. Looks like "check the box" stuff to me.

Another very interesting provision of the USMCA is Article 32.10 covering the conclusion of future FTAs with Non-market economies (err.. China). This one could be interesting given the stated interest of Canada and others to engage China in some sort of free trade relationship. My read of 32.10 is that the conclusion of an FTA by a USMCA Party with a non-market economy (China) would be grounds for the other two USMCA Parties to withdraw from the USMCA.

Canada also managed to carve out more extensive language in the USMCA around cultural industries (Article 32.6) than it was able to do under the NAFTA back in 1994. I suppose this could be seen as a victory for Canada given America's long-standing disdain for "culture" as an excuse for protection. However, the willingness to give on this might be a byproduct of where some see the future of multimedia heading-- digital rather than traditional airwaves and paper publishing.

There's lots of significant stuff in other parts of the USMCA that I have not yet waded into;
  • Canada has evidently agreed to multiple additional years of intellectual property protections to patent holders under Chapter 20-- that could have big implications for Canadian R&D and generic drug manufacturing; 
  • there's been some harmonization of the so-called de minimus value below which small parcels will be assessed duties or taxes (Chapter 7);
  • no extensive energy chapter as in the NAFTA except the assertion of Mexico's Constitutional sovereignty over its petrochemicals industry (Chapter 8); 
  • Chapter 3, Agriculture, including the infamous supply-management arrangement. That's going to take a while since the disciplines are as complex as supply-management itself, but it doesn't look like Canada "gave away the farm" on this. Supply-management lives on.
  • 12 "Side Letters" covering everything from wine, bulk water, and tariffs based on U.S. national security investigations.

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