Unpacking the USMCA for Congressional Approval in 2019

On the sidelines of the G20 Leaders’ Summit in Buenos Aires on November 30, U.S. president Donald Trump, Mexican president Enrique Peña Nieto, and Canadian prime minister Justin Trudeau signed a new United States Mexico Canada Agreement (USMCA) that is intended to replace the North American Free Trade Agreement (NAFTA) as the framework governing North American trade. But what did they agree to? What will it mean for business? And how and when will it be approved in all three countries?
 

An Agreement, Sort Of

What the three leaders signed was a draft agreement. In the United States, under the terms and conditions laid out by Congress in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the White House must now provide Congress with a finalized text, draft implementing legislation, impact assessments of the agreement on trade (by the U.S. International Trade Commission), labor and the environment, and an enforcement plan. With parts of the U.S. federal government shut down due to a budget impasse, including the Department of Commerce, progress on the U.S. International Trade Commission study has been halted, and further delays are possible. Only after all these documents have been submitted will the 116th Congress consider moving forward on approval of the USMCA.

Until then, negotiations continue, not between the three NAFTA countries, but among Washington’s policymakers. Some House Democrats have already signaled that they want to see firm commitments in the administration’s enforcement plan backing up the labor and environment provisions. This could be addressed in the administration’s enforcement plan, or in a side agreement.

Another change came when 46 House Republicans protested a provision of the USMCA draft text, championed by Canada, that would protect workers against “employment discrimination on the basis of sex, including with regard to pregnancy, sexual harassment, sexual orientation, [and] gender identity.” The Trump administration exempted the United States from this provision by inserting a footnote into the draft text.

If Congress does not get the changes it wants incorporated into the package the White House submits, U.S. Speaker of the House Nancy Pelosi can take the administration’s draft implementing legislation and make changes prior to introducing the bill in the House (where the process of legislative approval must begin because the trade agreement makes changes to tariffs, and is considered a “money bill”). In her previous term as House Speaker, Pelosi delayed consideration of the U.S.-Colombia Free Trade Agreement for nearly four years by refusing to allow implementing legislation to be introduced in the House until her terms were met.

The 2015 trade authority legislation guarantees an up or down vote on the USMCA bill after a maximum of 45 legislative days for consideration by the House Ways and Means Committee and 15 legislative days of debate in the House of Representatives; in the Senate, the Finance Committee has 45 legislative days for hearings, and then the Senate has 15 legislative days to debate before it votes. Amendments are not permitted.

Since Congress is not in session seven days a week, only days when the House or Senate is in session are counted as legislative days. Even without recesses for holidays periods, if Congress was in session for three days per week the 45 days for deliberations in committee could take 25 weeks, nearly half the year, before five weeks of debate in the full chamber. Since amendments are not allowed, the House and Senate could consider the legislation at the same time without a need to reconcile two versions of the legislation approved by each chamber. However, should the Senate wait until after the House voted to approve the USMCA before taking up the implementing legislation, congressional approval could stretch out over 60 weeks or more, extending well into 2020.

The timelines in the 2015 trade authority legislation all start with the introduction of the USMCA implementing legislation in the House. Speaker Pelosi can use this as leverage in negotiations with the Trump administration over any issue she likes: from immigration reform to the budget to impeachment.

The Trump administration will call on Congress to approve the USMCA quickly in the State of the Union address on January 29. The administration will likely argue that the U.S. position in ongoing trade talks with China and Europe would be undermined if USMCA is not approved as proof that the United States can complete trade deals.

Trump may also give the required six-month notification to Canada and Mexico of the U.S. intent to withdraw from NAFTA in order to present Congress with a choice between the USMCA and trade chaos and confusion without NAFTA. This would create headaches for business, add to uncertainty, and almost certainly provoke complaints from Canada and Mexico where NAFTA uncertainty have held back economic growth ever since the NAFTA renegotiations began.
 

Details, Details

The timing of the USMCA debate will be determined by more than political considerations. As a practical matter, Congress will need time to examine the agreement and consider its effect on the sectors of the economy that affect their states and districts.

In its current draft form, the USMCA text is more complicated than the NAFTA: USMCA includes 34 chapters, 13 annexes, and 13 side letters while NAFTA had 22 chapters, 9 annexes, and no side letters. NAFTA side agreements were added during the legislative approval process to secure votes, and there could be side agreements on immigration or the president’s proposal for a southern border wall. More importantly, the structure of the NAFTA included general provisions and several chapters that combined provisions relevant to certain sectors; in the USMCA there are provisions that will matter for specific sectors marbled throughout the text.

The only way to assess the probable impact of the USMCA will be to consider its provisions on a sector-specific basis, starting with some of the largest contributors to North American trade. How will the new and more complicated USMCA rule of origin affect the auto industry? In NAFTA, Mexico exempted its energy sector from the agreement, and now the USMCA includes Mexican energy. What will this mean for oil and gas, or for the prospects for renewable energy expansion to meet climate policy goals? When NAFTA was signed, Mexican agriculture operated inefficiently behind market access barriers; today, cross-border trade in agricultural products has grown tremendously, and trade conflict with China has limited farm export opportunities. Will the USMCA provide farmers with new opportunities?

The USMCA includes provisions for sectors not addressed in NAFTA. One of these is e-commerce, not a big sector in 1994 but now subject to data localization rules in some places, privacy protection rules, and small package cross-border shipment headaches. How will the USMCA help or hurt digital trade? Another key sector, pharmaceuticals, is given 10 years of patent exclusivity for new drugs in all three markets. What will this mean for consumers and prices?

Then there are cross-cutting sectors that have been overlooked in past trade agreements. The USMCA has provisions designed to help small and medium sized businesses participate in North American trade but adds requirements that might discourage some business owners from bothering. The transportation sector, from rail to trucking to air cargo, is essential to North American trade particularly to enabling people in remote areas from the Canadian north to the Mexican south to access goods and services affordably; how will the USMCA affect the movement of goods?
 

America First

Congress will need deep-dives into the USMCA provisions as they relate to specific sectors like these in order to make an informed decision on whether to approve the agreement on its economic merits. U.S. partisan politics will otherwise guarantee a debate that has little to do with the USMCA itself and instead focuses on whether Trump can claim victory after promising a better deal than NAFTA or how to position Democrats to recapture the White House in 2020.

Yet as difficult as it will be for the Congress to have a constructive debate about the USMCA, it is unlikely that Mexico or Canada will proceed with their respective legislative approval processes before the U.S. Congress has voted to approve or reject the USMCA. The United States’ neighbors have tough trade politics to contend with, too.

Mexico’s new president, Andres Manuel Lopez Obrador, is a NAFTA critic who inherited the USMCA from his predecessor. He has indicated a willingness to support legislative approval by the Mexican Congress in a concession to the Mexican business community, but difficult issues in U.S.-Mexico relations such as immigration and drug trafficking and President Trump’s wall and his past negative comments about Mexico all give Lopez Obrador ample reasons to back away from his support for the USMCA.

In Canada, a federal election in October 2019 could turn on Canadian voter perceptions of how well Trudeau negotiated with the Trump administration on trade and the USMCA. If Trudeau remains in power with a reduced majority, or is replaced as prime minister, the fate of the USMCA in Canada is not certain.

All eyes will be on Washington and on the 116th Congress as the debate about the USMCA begins in 2019. U.S. representatives’ or senators’ comments on the USMCA will be overheard by Canadians and Mexicans, and criticisms aimed at President Trump may nonetheless cause unintended collateral political damage to leaders in Mexico City and Ottawa, and to U.S. relations with both countries. Good relations, and regional prosperity, will depend on whether we can debate the USMCA’s economic impact on the merits, or let our polarized partisan politics dominate.

Christopher Sands is a senior associate (non-resident) of the Center for Strategic and International Studies and a senior research professor and director of the Center for Canadian Studies at the Johns Hopkins University School of Advanced International Studies in Washington, D.C.

Commentary 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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