USMCA Endgame 2019

As fall approaches, the United States-Mexico-Canada Agreement (USMCA) negotiated to replace the North American Free Trade Agreement (NAFTA) is entering the endgame. Either the U.S. Congress will begin legislative approval following the August recess or the uncertainty over North American trade will extend for another year. NAFTA would remain in place but under the threat that President Donald Trump would announce U.S. withdrawal from the agreement, triggering a battle in U.S. courts that would add further risk to regional trade.

The USMCA is a compromise, as all trade agreements are, but negotiators could not arrive at a consensus on what to call it. In the United States, it is the USMCA, but in Canada, the order has been changed to put Canada first (as it were). Ottawa refers to it as the Canada-United States-Mexico Agreement (CUSMA) in English and Accord Canada-États-Unis-Mexique (ACEUM) in French. In Mexico, the Spanish version is El Tratado entre México, Estados Unidos, y Canadá (T-MEC).

Yet all sides agreed on one thing: The words “free trade” do not appear in anyone’s version of the name. Unlike the numerous trade agreements negotiated and signed since 1945, the USMCA is not designed principally to liberalize government restrictions on trade and investment. Instead, it adds new conditions for tariff-free treatment of goods at the border and encourages supply chains to contract so that more production and employment is re-shored to North America, and within North America, it concentrates more economic activity in the United States. Even new elements in the agreement, such as digital trade and intellectual property, shift Canada and Mexico into alignment with U.S. policy preferences in these areas.

The resulting USMCA confounds traditional expectations from trade deals. In her 1999 assessment of NAFTA’s effects, my colleague at Johns Hopkins University’s Nitze School of Advanced International Studies Anne O. Krueger found that trade creation as a result of NAFTA exceeded trade diversion for a net positive impact on the economies of North America. Many of the provisions in the USMCA are intended to promote trade diversion, and only a few might advance trade creation. The USMCA is not “NAFTA 2.0” but a different kind of trade agreement with a different objective.

Two new assessments have come from the think tank community that apply traditional analyses of trade liberalizing agreements to the USMCA. Economists Dan Ciuriak, Ali Dadkhah, and Jingliang Xiao estimated that Canadian GDP could drop by 0.4 percent under the USMCA in a paper published by the C.D. Howe Institute in Toronto. In Washington, Jeffrey Schott at the Peterson Institute for International Economics argued that the USMCA was a bad deal and urged Democrats in the House of Representatives to vote against implementation.

Will House Democrats follow Schott’s advice? So far, the indications are that they will not. U.S. Trade Representative Robert Lighthizer has earned praise from Democrats and Republicans for his outreach to Congress and for listening to their concerns. A working group of House Democrats has focused on four topics of concern in the USMCA: environmental standards, labor standards, enforcement of USMCA commitments, and the generous treatment of pharmaceutical companies’ intellectual property.

Lighthizer is working to satisfy congressional concerns as he prepares the final elements of the administration’s USMCA submission to Congress. Still pending are draft implementing legislation, labor and environmental impact assessments, and an enforcement plan as required by the terms of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the legislative grant of trade negotiating authority that governs the U.S. process. When the complete submission is in, it will be up to Speaker of the House Nancy Pelosi (D-CA) to decide when she will introduce the implementing legislation, the next step in the approval process. In her previous term as speaker, Pelosi amended House rules to revoke any deadline on Congress to act on the U.S.-Colombia Free Trade Agreement, blocking legislative approval until Republicans regained a majority in the House. She could do so again to delay implementation, but so far, all she has said is that she wants to have at least 100 House Democrats supporting the bill before she introduces it.

As CSIS’s trade guys, Scott Miller and Bill Reinsch, have argued, the prospects for the USMCA approval by Congress have been improving all summer. The business community has not expressed the ambivalence of some in the scholarly community about the agreement. Two broad business coalitions,USMCA Now and Pass USMCA, have been established to promote congressional approval, and agricultural and farm interests have endorsed approval as well. Notwithstanding the imperfections in the agreement, such as greater complexity and higher compliance costs associated with new rules of origin for example, business community support reflects a desire to end a period of uncertainty that has cast a shadow over vulnerable North American supply chains. As prospects for a resolution of U.S.-China trade disagreements have diminished, support for the USMCA has grown.

Members of Congress have their own pragmatic reasons to put the USMCA debate behind them. While business and farm sector support for the USMCA has been vocal, opposition from labor unions and environmental groups has been muted. The self-described “squad” of progressive House members led by Representative Alexandria Ocasio-Cortez (D-NY) has been vocal on many issues but has not made opposition to trade agreements a priority. Democratic presidential candidates did not address the USMCA at all in their first round of debates in Miami. By approving the trade deal this fall, it could become old news by the 2020 election and less likely to sway voters.

The news that White House and congressional leaders have reached a compromise on the federal budget and debt ceiling is a further encouraging sign that could give momentum for USMCA approval.

Still, USMCA approval by Congress is not a sure thing. Reinsch identified four potential “land mines” that could blow up a deal between Trump and congressional leaders on the USMCA, and they all continue to have explosive potential. Democrats could overreach on their demands for changes to the USMCA, leading Canada, Mexico, or the White House to walk away from the deal. Lighthizer could find he is unable to deliver the "fixes" from Mexico and (maybe) Canada that Democrats demand. President Trump, through a maladroit tweet or flash of temper makes the USMCA all about himself, prompting the "resistance" to gain the upper hand within the House Democratic caucus. And finally, a process foul by Lighthizer or Pelosi that violates the requirements of the trade negotiating authority legislation or rewrites House rules to change the framework for approval could damage chances that the USMCA will replace NAFTA before the 2020 election. None of these risks can be ignored particularly in the volatile and partisan atmosphere prevailing in Washington.

Yet if one of these land mines explodes, leaving NAFTA in place carries risks too. Trump’s threat to withdraw from NAFTA requires six months’ notice to Canada and Mexico and would be challenged in court. What the Wilson Center’s Laura Dawson calls “Zombie NAFTA” would provide short-term stability for business. But over the next 14 months in the run-up to the 2020 election, any evidence of an economic slowdown would give Trump a reason to blame Democrats for bad economic news because they failed to pass the USMCA.

Taken together, political momentum, support from the business community, and recent evidence of bipartisan compromise suggest that fall 2019 will be the USMCA endgame. Despite being panned by the critics, if the USMCA does not win congressional approval in the next few months, expect a sequel to debut in political theaters across North America in 2021.

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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Christopher Sands

Christopher Sands

Senior Associate (Non-resident), Americas Program