The Future of USMCA

The dancing around the United States-Mexico-Canada Agreement (USMCA) became a tiny bit more frenetic last week due to statements by various U.S. officials that the United States and Canada were close to a trade deal and a statement by Canadian Prime Minister Mark Carney that said, essentially, not so fast, and, by the way, don’t expect anything before the midterm election. Some of this is no doubt pre-election wishful thinking on the U.S. side. It would have been a pleasant October surprise to have a deal before the election, and, failing that, why not tell everyone there may be a deal and hope they remember that when they go to the polls, particularly in Maine and Michigan. Carney decided not to play that game, so realistically, not much has changed since talks officially broke down last August. Informal talks continue, but agreement appears to be elusive. A similar, more formal dialogue is going on with Mexico. There are periodic announcements by all sides that agreement is close, but there remains no resolution. In both cases, relief from Section 232 tariffs, particularly on steel and aluminum, is a primary objective.

The ongoing back-and-forth, however, provides an opportunity to have a broader discussion of what kind of agreement the United States wants and what might make the most sense—two different things, as it turns out. Historically, agreements among the three countries have focused on market integration. The starting point—the U.S.-Canada auto agreement in 1965—followed by a bilateral free trade agreement between the United States and Canada in 1988, the North American Free Trade Agreement (NAFTA) in 1994, and its successor USMCA in 2020 were each designed to promote trade and joint economic growth in all three countries. The theory was that greater market integration building on differing comparative advantages would promote growth throughout North America. That theory became controversial, particularly with respect to NAFTA, which was attacked at the time as a boon to investment in Mexico at the expense of jobs in the United States. There was some truth to that criticism, but I think most economists today would agree that while the agreements produced winners and losers in all three countries—as all trade agreements do—and probably led to more growth in Mexico and Canada than the United States, overall, all three countries benefited.

USMCA was intended to redress what Trump perceived as an imbalance in the trilateral relationship by moving jobs back to the United States, particularly in the auto sector. In the process of revising the rules of origin for autos, the three countries ended up agreeing on definitions that would promote North American content at the expense of European or Asian content, and which were intended to increase overall U.S. content. So many things have happened to the auto industry since then, most notably the growth of electric vehicle production, that it is difficult to attribute trends to a single cause, but it does appear that while USMCA did not produce massive shifts of jobs and factories back to the United States, it did result in the movement of some parts and components production.

It now appears that the Trump administration has two main objectives in renegotiating USMCA. One is to prevent the other two countries from becoming a “back door” for Chinese imports into the United States. The other is to refocus rules of origin requirements to promote U.S. content rather than North American content, primarily in the auto sector but also elsewhere.

The first goal is a sensible one, given the challenge the security risks and Chinese overcapacity pose to all three economies, and if that were the only goal, agreement should be possible. However, if it is also linked to the second goal—increasing U.S. content—there is trouble ahead, because there the chief losers will be Canada and Mexico rather than China. This is already evident in the debate over Section 232 tariffs, which are clearly intended to promote U.S. production at the expense of the rest of the world, including Canada and Mexico.

That takes us back to the basic question of what this agreement is for. If the three countries still want it to facilitate market integration among themselves and at the same time set up a security and economic wall against China, that’s an attainable goal, probably best achieved through a customs union that maintains a common external tariff, at least against China (because the United States seems to be abandoning the most-favored-nation principle), along with expanded technology transfer and investment controls. That would be a winner for the three countries and a loser for China. If, instead, the United States is determined to make USMCA an agreement that advantages it at the expense of the other two countries, then agreement is likely not possible. The resulting uncertainty as the 10-year review period continues would be bad for all three economies, but an agreement on Trumpian terms would be worse because of the massive supply chain disruptions it would cause. The past agreements—the Canadian ones, NAFTA, and USMCA—have succeeded in their primary objective of market integration. Unwinding that at this point would be a disaster for all three countries.

William A. Reinsch is a senior adviser (non-resident) and Scholl Chair emeritus with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. He can be reached at [email protected].