Regardless of whether President Donald’s Trump’s recent tariff threat on goods from Mexico materializes in an attempt to curb illegal immigration, Congress will soon contemplate passing an update to the North America Free Trade Agreement (NAFTA). The trade agreement was crafted in the mid-1990s and is due for a modernization.
Trump has threatened that if Congress does not pass his new deal, the United States-Mexico-Canada Agreement (or USMCA), he will pull us out of NAFTA. If those are truly the only two options, then USMCA is better than nothing.
Mexico and Canada each have a web of trade agreements granting valuable market access to several European Union, Asian, Pacific, and South America countries.
If U.S. exporters lose their own preferential access to Mexico and Canada, two of our largest markets, the rest of the world will quickly step in. Our farmers and businesses would be at a severe disadvantage.
Comb through each country’s tariff schedules, product-by-product, line-by-line, trade agreement-by-trade agreement, and you can find dozens — if not hundreds — of examples of how the United States would lose out in the absence of a North American trade agreement.
Here are three:
• U.S. beef producers would lose preferential market access in Mexico and instead face tariffs of up to 20%. Meanwhile, key competitors from Australia, Canada and New Zealand would receive duty-free access or a reduced rate.
• U.S. beer producers, already suffering from higher aluminum can prices thanks to section 232 tariffs, would lose their preferential access to Canada and Mexico, and instead face the same 20% tariff that German, Belgian, and Dutch beer makers from the EU face.
• U.S. dairy producers would not get to take advantage of long-awaited and hard-fought-for USMCA market openings in Canada. Instead of duty-free access, U.S. dairy exporters would face an 11% tariff and additional fees up to $2.07 per kilogram while European dairy sellers get better access.
Half of U.S. imports from Mexico and Canada are intermediate inputs — things that American businesses buy to keep their production and operations functioning. Without a North American trade agreement, those purchases would face an import tax, and costs for U.S. businesses would rise. In terms of both market access and the ability to obtain globally competitive inputs, it is clear that many U.S. farmers and large businesses suffer without a North American trade agreement.
Small and medium-sized U.S. businesses would also lose out, not only due to the higher import taxes, but also because Mexico and Canada would not need to raise their thresholds for duty-free imports and minimal clearance procedures. At issue is the so-called de minimis threshold, which is a valuation ceiling for imports, below which no duty or tax is charged and the clearance procedures are minimal.
Fewer U.S. goods could be sold to Mexican and Canadian customers without costly taxes and import delays. Higher thresholds tend to facilitate trade for small and medium-sized firms, particularly those that sell online and through e-commerce.
Without USMCA, the United States would lose a unique opportunity to establish a strong template on digital trade for the future.
This is important because digital content (while not always visible) is used for nearly every good and service we buy: a pair of shoes may now use 3D-scanning technology; purchasing lip gloss can involve a virtual assistant; pet supplies, kids’ sporting goods and countless other retail products use digitized supply chains; and what seems like a routine doctor visit can involve digital back-and-forth between multiple parties.
The digital intensity of goods and services varies across sectors. Transparent, fair, and trade-facilitating rules on how to treat cross-border digital flows are long overdue.
The USMCA includes a well-crafted chapter on digital trade rules, and includes some of the best practices in international trade: preventing favorable treatment to domestic firms at the expense of foreign firms; barring trade-restricting measures; protecting trade secrets; and a commitment to unfettered trade flows.
The chapter also leaves room for countries to tackle hard-but-legitimate questions of data and personal privacy, as long they do so in the least trade-restricting way and treat domestic and foreign firms consistently.
In a few areas, the absence of a North American trade deal may not be so bad.
On intellectual property, Canada and Mexico’s Trans-Pacific Partnership (TPP) commitments would remain in place, and for the most part, those provisions are relatively strong. Once changes to intellectual property rights are made, those new practices generally apply across the board. So the TPP-related changes that Canada and Mexico make would generally apply to U.S. trade as well.
The areas in which USMCA differs from TPP include patent period extensions for regulatory delays, plant patentability, stronger protections for trade secrets, longer copyright periods, and longer data exclusivity periods for biologic drugs.
The economic benefits of many of these patent- and copyright-related provisions are questionable at best.
On autos, USMCA includes an entire side agreement which is morphing into a textbook case on micro-managed trade. It includes government mandates on what auto makers must use to make vehicles, where they must purchase the inputs, and how much they must pay their workers.
USMCA increases the total required North American content of a vehicle to 75% (up from 62.5%); steel, aluminum, and glass content required to come from North America increased to 70%; and 40% of an automobile and 45% of a light truck must be produced using an average labor wage of $16 per hour.
History suggests that strict production and labor mandates rarely lead to a robust industry for workers and consumers. The USMCA does not bode well for the competitive outlook for the North American auto industry.
In terms of the economics, the bright spots of the USMCA probably outshine the dull spots.
The administration agreeing to finally exclude Canada and Mexico from its steel and aluminum tariffs certainly helps. And the U.S. Chamber of Commerce has been more vocal in its support of new trade agreement, though that may be more out of fear of no North American trade agreement than pure enthusiasm about this particular one.
Indeed, if the alternative to no USMCA is no North American trade agreement at all, then USMCA appears to be the better outcome for the U.S. economy.
Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University. She is the author of the new policy brief “Economic implications for the United States of a North America without NAFTA or USMCA: A brief summary of key areas.”
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