The Road to Ratification: Democrats’ Resistance to the USMCA

This is part II of our series on the USMCA and its domestic path to ratification by Congress. Read part I.

When the North American Free Trade Agreement (NAFTA) was being renegotiated, the White House hoped that it would reach an agreement with Canada and Mexico before the 2018 midterm elections. This way, the implementing legislation would go before a Republican-majority House and Senate, all but ensuring a quick win for President Trump. However, after negotiations took longer than expected, the resulting United States-Mexico-Canada Agreement (USMCA) now faces a Democrat-controlled House and a Republican-controlled Senate. This presents additional roadblocks to ratifying the trade agreement. Democrats have identified three key precluding concerns with USMCA: labor enforcement, environmental regulation, and pharmaceutical provisions. As President Trump and U.S. Trade Representative Robert Lighthizer work to gather support for the USMCA legislation, these concerns pose a threat to the passage of the president’s signature trade agreement through Congress.

Q1: What are the labor standards under USMCA, and what are Democrats concerns?

A1: When Congress first took up NAFTA in 1993, many unions including the AFL-CIO and unions for machinists and electrical, garment, and mine workers lobbied vociferously against the trade agreement, threatening to withdraw support for any member of Congress who voted for its ratification. Though labor groups have been quieter this time around, there are still many who fear U.S. job losses as the North American market opens further, exposing more U.S. workers to direct competition with Mexican workers. That concern has led leading voices on the issue in the Democratic party to call for stronger labor enforcement in USMCA and domestic labor reforms in Mexico prior to a vote on USMCA.

Democrats lack faith in both the labor enforcement mechanisms negotiated alongside NAFTA and proposed under USMCA, leading them to demand domestic labor law changes in Mexico. The Democratic members of the House Ways and Means Committee wrote an open letter to Ambassador Lighthizer raising issues with USMCA’s labor provisions. They expressed concern that the USMCA’s dispute settlement mechanism is “designed to be easily frustrated and will be ineffective.” This comes after the mechanism negotiated outside of the main NAFTA text did not create formal arbitrations for any of the 39 complaints of non-compliance with NAFTA labor obligations. Given the doubts that USMCA will improve labor standards independently, national legislation in Mexico is seen as the only way to ensure that labor standards will improve.

Through institutionalizing the roles and practices of unions in Mexico, Democrats hope that domestic laws will help to even the economic playing field and avoid some of the most extreme cases of low wages and poor working conditions in Mexico. As Representative Bill Pascrell (D-NJ) said, “Mexico has to make some moves beforehand, to show good faith. We need that, first of all. If they don’t act, there’s no change of getting the votes.” On April 30, labor legislation passed through Mexico’s Congress of the Union, requiring secret ballots during union elections and collective bargaining contract ratification. The legislation will allow workers to more effectively collectively bargain with the hope of improving wages and working conditions and satisfies Mexico’s labor obligations under USMCA. AFL-CIO president Richard Trumka says that this is the first step in enforcing labor rights. The next step is ensuring that “they have the [legal] infrastructure [in Mexico] to support the bill and the resources to do it.” Speaker of the House Nancy Pelosi (D-CA) has taken a similar stance, claiming that she will wait to see if Mexico is satisfactorily implementing the labor reforms before she considers putting USMCA up for a vote in the House.

Senators Ron Wyden (D-OR) and Sherrod Brown (D-OH) have proposed a side agreement be negotiated between the United States and Mexico to put in place additional labor enforcement tools. These could include additional labor enforcement personnel, U.S.-Mexican labor compliant audits, and the power to revoke reduced tariffs for Mexican exporters who violate workers’ right to collective bargaining. Democrats hope that labor violations in Mexico and the incentive for U.S. companies to shift workers to Mexico will be lessened with a side agreement and Mexico’s new labor law.

Q2: Why are the Democrats opposed to USMCA’s IP protections for biologics?

A2: Democrats have voiced concerns about a pharmaceutical provision in USMCA, which they claim would raise prices of vital drugs across all three countries. Under its intellectual property (IP) provisions, USMCA grants 10 years of exclusivity for new biologic drugs. Biologic drugs are produced from living organisms, while traditional drugs are typically manufactured through chemical synthesis. The UMSCA 10-year exclusivity period for new biologics shields these drugs from competition from generic brands or similarly composed drugs called “biosimilars.” While the domestic window of exclusivity in Canada is 8 years and in the United States is 12 years, New Zealand, Australia, Mexico, and Chile have 5 -year limits.

Biologic drugs are derived from living cells and contain a virus, toxin, vaccine, blood, or protein to prevent, cure, or treat a disease or condition. They are also often the most expensive drugs in the United States. There are biologics currently going through clinical trials that could treat diseases such as pancreatic cancer, Alzheimer’s, leukemia, dengue fever, and dysentery. Democrats worry that the exclusivity provision is both an indication of the far-reaching influence of the pharmaceutical industry and a harbinger of pharmaceutical price increases.

President Trump has framed the IP protection of biologics within the USMCA as a way to “make North America a haven for medical innovation and development.” The byproduct of supporting innovation through these means, however, can be artificially high prices protected from usual market forces. As Democrats on the House Ways and Means Committee wrote in a letter to Ambassador Lighthizer, “we believe it is critical that the United States remains the leader in health care innovation. However, we also believe that Americans are entitled to timely access to affordable health care and medicines.” There are many studies that refute the claim that relatively long exclusivity periods for biologics are necessary for innovation. Australian researchers found that the introduction of biosimilars and generics into the market lowered the price of a biologic by 16 percent. With less competition, biologic drug prices can propel upward during their exclusivity period. As Representative Alexandria Ocasio-Cortez (D-NY) said, “One major thing we want to make sure is that the prices of pharmaceuticals don’t go up.” Democrats worry that the longer the exclusivity period, the longer prices of lifesaving drugs will be artificially high.

Brand name pharmaceutical companies, on the other hand, argue that biologics are extremely costly to develop and carry a high risk of failure. Exclusivity periods, those companies claim, are necessary to recuperate the capital spent to develop a new biologic, bring it to market, and make new efforts at innovation worth the time and money. Furthermore, pharmaceutical exclusivity provisions have been included in U.S. trade agreements under the rationale that when trading with countries that have limited support for research and development, more protectionist measures could spur more innovation abroad.

There are also political implications for building the so-called “data exclusivity” provision into a trade agreement. By receiving exclusivity through USMCA instead of a federal statute, Congress cannot amend the exclusivity period through another statute. This ties the hands of Congress. As Senator Elizabeth Warren (D-MA) said, “it takes us out of our ability to negotiate to bring down those costs.” The only way to amend the exclusivity period before ratification would be to correct the base agreement; after ratification, USMCA trade negotiations would have to be reopened.

This is not the first time that biologics exclusivity has come up in trade negotiations. Due to the United States’ efforts, the final draft of the Trans-Pacific Partnership (TPP) included an eight-year exclusivity period for biologics (or five years with additional regulatory procedures that effectively extended the exclusivity period). After the United States withdrew from TPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed by 11 of the remaining TPP negotiating countries, suspended all regulation of IP and biologics. This illustrates the United States’ persistence in standardizing longer exclusivity periods for biologics in trade negotiations and the apparent lack of international support for the tactic. As Canada and Mexico are CPTPP signatories, it also indicates that USMCA’s biologics provisions are solely a product of U.S. requirements. Representative Blumenauer (D-OR) confirmed this: “this [biologics provision] was ignored over the objections . . . of Canada and Mexico. They didn’t want this; they didn’t want this at all.”

Q3: What concerns do Democrats have about environmental protection within the agreement?

A3: President Clinton’s renegotiated NAFTA side letter on the environment was the first of its kind to include environmental protection. The side letter held each country accountable for enforcing domestic environmental laws with noncompliance fines. In many ways, USMCA furthers this movement by including the environment not only in a side letter but as a chapter in the proposed agreement, subject to the agreement’s dispute settlement provisions. USMCA includes obligations and encouragements to protect the ozone layer, marine environment, biodiversity, and forests and bans subsidies that contribute to overfishing. It not only holds each country accountable for current domestic environmental standards (as NAFTA did) but also prohibits the parties from weakening protections in order to encourage trade and obligates each to strive towards improving environmental protection.

Though the language of the agreement seems to benefit the environment, Democrats remain wary about the enforcement mechanism. The NAFTA environment side agreement’s enforcement mechanism never led to meaningful sanctions, and toxic dumping in Mexico increased under the agreement. Many progressives think that the new agreement still fails to include strong enforcement provisions and meaningful standards that would actually protect the environment. The proposed USMCA agreement states that “parties must enforce their environmental laws, while also retaining the right to exercise discretion with respect to enforcement of these laws.” This raises flags about the degree of discretion allowed and creates a potential loophole to avoid sanctions.

Going into negotiations, Canada aimed to make the environment a focal issue. Canadian foreign affairs minister Chrystia Freeland outlined climate change as a key “progressive” element of the negotiations. Canadian prime minister Justin Trudeau said that Canada was “looking for a better level playing field across North America on environmental protections” and wanted policies that reduced greenhouse gas emissions and promised to move toward low-carbon economies. The final agreement, however, does not explicitly mention climate change. The omission of what Democrats and liberal groups have labeled as “progressive” language around trade has also become a sticking point; as the Center for American Progress said, “the complete omission of climate change as a priority to be addressed in trade is a significant failure in the agreement.”

Q4: What is the outlook for USMCA ratification?

A4: Any changes made to USMCA will have to come from side letters or reopening and renegotiating the finalized agreement.

The Democrats’ concerns could be solved with side letters. In NAFTA, however, the labor provisions side letter operated outside of the trade deal’s enforcement mechanism, and only 3 of the 11 labor obligations in the side letter could be enforceable with trade sanctions. As mentioned in their letter to Ambassador Lighthizer, Democrats on the Ways and Means Committee will be wary of side letter solutions, as they may not be well-enforced. To this end, Speaker Pelosi has insisted that enforcement provisions be included within the implementing bill instead of side legislation.

Reopening the agreement is both the most intensive and least-likely solution. Canada and Mexico have repeatedly stated their opposition to reopening the negotiations. President Andrés Manuel López Obrador of Mexico said, “we don’t think that [reopening negotiations] would be convenient for the country. What was achieved and agreed is good for Mexico, and it was accepted by the U.S. and Canada.” Echoing this sentiment, Freeland said, “we’ve done our deal . . . we believe that people need to be very careful around opening up what could really be a Pandora’s box.” If the United States were to pry open this Pandora’s box, the timeline of ratification will extend further, and other aspects of the agreement with which the United States is pleased could be undone.

Beyond Democratic resistance to USMCA, there are other elements that will influence USMCA’s future. These include:

Tariffs on aluminum and steel : In a Wall Street Journal op-ed, Senator Chuck Grassley (R-IA), chairman of the United States Senate Committee on Finance, told President Trump that “if these [Section 232 steel and aluminum] tariffs aren’t lifted, USMCA is dead. There is no appetite in Congress to debate USMCA with these tariffs in place.” Since the op-ed, five other Republican senators have joined Senator Grassley to push back against potential Section 232 auto tariffs. This heralds pushback from Republican lawmakers to trade agreement’s ratification, adding additional threats to the bill’s passage. Mexican officials have echoed this sentiment, stating that “it may be inevitable to delay” ratification of USMCA if the steel and aluminum tariffs aren’t removed.

Election season: With Canadian and U.S. election seasons ramping up, USMCA ratification must happen this year or wait until after 2020. Canadian Parliament will go into recess at the end June, not returning until September when its October prime ministerial elections will be in full swing. Starting in January, the United States will be lost in full presidential election coverage and will not be likely to take up USMCA until after the election. This would likely delay implementation until early 2021 and potentially longer depending on the outcome of the election.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Madeleine Waddoups is an intern with the CSIS Scholl Chair.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Madeleine Waddoups

Intern, Scholl Chair in International Business