USMCA: Curb Your Enthusiasm

The drumbeat of bizarre political juxtapositions just keeps rolling over us. Yesterday was no exception. First, the House Democrats released its two Article of Impeachment against President Trump focused on "abuse of power" and "obstruction of Congress." An hour later, many of those same Democrats were before the podium announcing they had worked out a deal with the White House to move forward on one of President Trump's signature trade initiatives, the U.S.-Mexico-Canada Agreement (USMCA, or to some, NAFTA2.0).

I suppose the fact that many of us remain flabbergasted (alarmed?) by the daily barrage of these juxtapositions could be read as a source of comfort, cold comfort? Although the impeachment saga routinely sucks most of the oxygen out of the headlines, the USMCA briefly held center-stage. I was struck the generally positive headlines about the bargain struck between House Democrats and the White House were. A rare instance of cooperation between Trump and House Democrats? A sign of some sort of return to a bipartisan consensus on the merits of trade? A template for 21st Century trade agreements?

Hardly. The best I can muster about the USMCA is that it could have been worse.



So, before everyone declares the USMCA a "win-win-win" as Canada's Chystia Freeland did at the signing ceremony yesterday in Mexico City, consider the following:

1) Yesterday's bargain was NOT an example of a new bipartisan consensus on trade. What was concluded yesterday represents a coincidence of interests between the White House and House Democrats. The White House needs a win of any kind, and badly. House Democrats wanted a bunch of concessions on labor and environmental enforcement within the USMCA, as well as concessions on patent protections for biologic drugs. Everyone got what they wanted.

2) The USMCA was not a complete disaster. The USMCA does represent an update to the NAFTA in the sense that important sectors that didn't even exist in 1994 are now covered. However, one of the remarkable things about the USMCA is how little actually changed. When the renegotiations began in 2017, I was certain Team Trump would lay waste to whole areas of the NAFTA; chapters on temporary entry (migration) for business people, Chapter 19 dispute settlement around trade remedy laws, investment, and U.S. support for the NAFTA Side Agreements. Given Trump's preference for sovereignty, his stances on immigration, and his general hostility toward regulation on the environment, I thought these were all toast!!!!

Somehow these survived (sort of), and even strengthened in the case of the environment wherein the Commission on Environmental Cooperation (created by the NAFTA Side Agreements) was further enshrined in the USMCA as the new agreement's institutional foundation.

It seems to me that the rush to get the USMCA done, combined with Trump's general disinterest in the details of his policy initiatives, left a lot of the NAFTA more or less intact.

Moreover, based on the early details of the deal struck yesterday, there are things that advocates of a more progressive approach to trade policy are bound to like. For decades, critics of trade liberalization have complained about the lack of enforcement power within trade agreements on issues like labor and the environment. These two issues, in particular, have been front and center on the global trade agenda since the NAFTA debate in 1994. But the lack of enforcement power built into many of these agreements was a perpetual source of cynicism for critics. Why put those issues there when there are no meaningful teeth to do anything about them. Since 1994, language in trade agreements around the world has become stronger, but mostly in terms of explicit prohibitions against reducing labour and environmental standards to juice your exports. Yet, even here, most agreements had recourse only to the state-to-state dispute settlement mechanisms; in other words, standards diplomacy.

The USMCA suddenly promises something different; some kind of supervisory body that will ensure labour standards are being upheld. The target here is Mexico, but it will be interesting to see if the terms of this new enforcement mechanism will end up having consequences for Canada and the United States that are as yet unforeseen? Mexico has rolled on labor in the USMCA, changing parts of their domestic labor laws and now allowing for an enforcement mechanism. Is it possible we might see this same enforcement mechanism turned toward Canadian and American labour standards issues in the years ahead?

There was also much praised heaped on changes to USMCA Chapter 31 (state-to-state dispute settlement), evidently prohibiting stalling tactics. The NAFTA's Chapter 20 (also a state-to-state mechanism) was basically useless since both disputing states had to agree to initiate formal proceedings. In practice, the accused Party was never interested. USMCA Chapter 31 supposedly changes this dynamic by making the initiation of disputes mandatory.

As Mr. Trump is so fond of saying, we'll see what happens.

3) But the USMCA is also a clear step backward. One of the reasons I am less sanguine about the "cooperation" that brought about yesterday's deal is that the White House and House Democrats were on the same side of the labour enforcement mechanism for essentially protectionist reasons. Everyone wants to see labor standards improve. But I am nervous about using trade agreements to ratchet those standards up. That's partly due to my cynicism about how much anyone really cares about collective bargaining or wage rates for Mexican labor. This is about American labor and restoring some competitiveness for American workers by suddenly raising the costs to qualify for tariff free treatment under the USMCA. Virtually overnight, Mexican labor standards and wage rates will be higher, putting American (and Canadian) workers on a more level playing field. No one is thinking about the impact these provisions will have on Mexican labor not primarily engaged in exporting to the U.S. Those manufacturing facilities currently exporting to the United States already have an advantage in trying to meet the new requirements, are already relatively efficient, and pay higher than prevailing local wages. But what about the impact on other parts of the Mexican economy?

One of the biggest complaints about the NAFTA from business people and economists surrounded the onerous, labyrinth rules of origin requirements that needed to be satisfied to qualify for tariff free treatment. Both of these groups have long advocated measures for simplifying these rules. Advocates of deeper stages of North American integration wanted to see them eliminated entirely by moving to a customs union. That, of course, has been a political non-starter for a long time.

Unfortunately, the USMCA makes rules of origin procedures worse by raising the content requirement for North American production (in autos, for example) from 62.5% to 75% and requiring that production to be produced using labor that is paid a minimum of $US17/hr. And, if reports from yesterday turn out to be accurate, USTR Lighthizer evidently extracted a new concession that steel used in that same production be "melted and poured" in North America.

The publicly named target of all this is China and the prospect of non-North American parts being trans-shipped for assembly in North America--a worry a customs union would resolve, BTW. However, it's also clearly targeted at making some segments of the Mexican market less competitive relative to American labor.

4) The USMCA is much less trilateral than the NAFTA. I suppose we can take some solace from the fact the NAFTA was not exploded entirely. But its replacement does drive a spike through the heart of the weak trilateral ties that developed over the life of the NAFTA. North America has mostly been, and seems destined to remain, a tale of two bilateral relationships. SAD

The Thinnest of Threads

Indeed, the USMCA undermines the idea of trilateralism in several important ways. In the Canada-U.S. context, the new agreement leaves intact Chapter 19; Canada's hard-won dispute settlement mechanisms around trade remedy laws. The USMCA scraps Chapter 19's applicability to the U.S.-Mexico dyad. The USMCA now also has a patchwork set of rules governing foreign direct investment. Elements of NAFTA Chapter 11 and its investor-state dispute settlement mechanism will continue to apply to Mexico, but have been scrapped in their entirety between Canada and the United States. And, rather than fix the uneven access Mexican professionals had to NAFTA Chapter 16's temporary entry provisions, the USMCA merely modifies the earlier, and restrictive, list of professionals to benchmarks around academic training rather than categories of professional.

A bridge too far....

You can find lots of people who will argue Mexico and the United States have a lot of issues between them that don't necessarily concern Canada. Canada need not be at the table for every single discussion between Washington and Mexico City. Indeed, for a good chunk of the summer of 2018, Canada was not at the NAFTA2.0 bargaining table. When observers asked why Canada was sitting things out, the usual platitudes about being in regular contact with Mexican and American colleagues about the progress of the negotiations were offered. I don't buy it.

I've complained about the indifference between Ottawa and Mexico City repeatedly, but there's nothing new here. Indeed, the history of how the NAFTA came into being is emblematic of that indifference. In essence, Canada's participation in the NAFTA was defensive, wanting to ensure Mexico City was not given better terms by the Americans than Ottawa had received just a few years earlier.

Thanks to the USMCA, the future of Canadian and Mexican engagement is likely to be confined mostly to the beaches of Cancun.

As for Tariff Man, well.....