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A Promise of Stability

eye on the news

A Promise of Stability

The USMCA trade deal offers relief from economic uncertainty. December 16, 2019
Economy, finance, and budgets

After nearly three years of uncertainty, North America has at last settled on a replacement for NAFTA. The United States Mexico Canada Agreement (USMCA), following months of negotiations between House Democrats and the White House, is likely to pass. The agreement is far from revolutionary: 90 percent of its provisions read just like NAFTA, and the changes it implements grow out of compromise and negotiation. Though the deal ultimately creates winners and losers, and on balance favors the U.S. marginally more than NAFTA did, neither side “ate the other’s lunch,” to use the words of Nancy Pelosi.

The biggest win is simply that an agreement appears to have been made. Now that businesses in Mexico, Canada, and the U.S. have rules around which they can plan, they will allocate resources more aggressively than when they faced uncertainties, a positive factor for economic growth and employment. Moreover, specific USMCA provisions should help U.S. manufacturing. The deal appears to mandate that 75 percent of a motor vehicle must be made in North America to avoid duties—up from 62.5 percent under NAFTA. This new standard would limit the ability of Asian and European automakers to enter North America duty-free. The USMCA also stipulates that 40 percent to 45 percent of any vehicle must be manufactured by workers earning at least $16 an hour. (The average for manufacturing workers in the United States is $22 an hour.) This provision would likely shift some of the assembly north from relatively low-wage Mexico. The rule change, however, doesn’t ban robots.

Some jobs might migrate north because of promised changes in Mexican labor law. Mexico, as part of the larger agreement, will reform its labor laws to accord with the International Labor Organization in its “Declaration on Fundamental Principles and Rights at Work.” As a result, Mexican workers will have greater freedom to unionize, higher wages, and greater protection against labor abuses. American and Canadian workers, in turn, could gain indirectly because an increase in Mexican labor costs would make the location of Mexican facilities marginally less attractive to business decision makers. Of course, consumers in all three countries will pay the increased labor costs in the form of higher prices.

U.S. agriculture will also benefit, with the new deal reserving up to 3.6 percent of the Canadian dairy market for U.S. producers. Canadian dairy farmers have already lodged complaints, but it’s a boost, however minor, for their U.S. counterparts, principally based in New York, Michigan, and Wisconsin. Despite its marginal economic gains, this provision will give President Trump bragging rights, since he has complained about Canadian dairy restrictions in the past.

The USMCA extends immunity for Internet providers against online content liability. Technology giants fought to include these protections over Democrats’ opposition. In addition, the agreement helps online retailers by raising the threshold amount of duty-free purchases from $50 under NAFTA to $100 in Mexico and $115 in Canada. These provisions would theoretically benefit all Internet-based retailers, but given the state of the industry, the benefits will flow disproportionately to U.S. businesses like Amazon.

Meantime, the American pharmaceutical industry got less than it asked for. Big Pharma wanted 10 years of protection from generics on important biologic drugs—less than the 12 years of exclusivity it has in the U.S., but a step up from the five years and eight years allowed, respectively, in Mexico and Canada. To the delight of generic drug manufacturers, Democrats managed to strip this increased protection out of the deal.

As it stands, the USMCA, unlike NAFTA, has a sunset provision. It will terminate after 16 years and includes interim renegotiations every six years. Given the speed at which economies change, this is sensible. But even six years provides relief from the uncertainties that have beset businesses in all three countries during the period of negotiation—and this relief is the real economic story. The bipartisan International Trade Commission determined that the agreement would boost U.S. gross domestic product some 0.35 percent and add 176,000 jobs over six years. These are modest but genuine gains. More important to business than the USMCA’s actual provisions is the very promise of an agreement—and the economic stability it implies.

Photo by Tasos Katopodis/Getty Images for CABC

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