USMCA, The New NAFTA Deal That Is Slightly Worse Than the Old NAFTA

While the American press obsessed so much time last week over the nomination and confirmation of Brett Kavanaugh as the newest Supreme Court Justice, a major piece of news was overshadowed. On October 1, the renegotiation of the North American Free Trade Agreement (NAFTA), which has been titled the United States-Mexico-Canada Agreement (USMCA), was released. Renegotiating NAFTA was one of President Trump's major campaign promises back in 2016. If ratified, Trump could claim it as another campaign promise fulfilled. What about USMCA makes it different from NAFTA?

The Good

• Increased Liberalization of the Canadian agriculture market. This is the most rewarding part of USMCA. For a while, U.S. access to the Canadian dairy market has been an issue due to strict supply management. U.S. producers have greater access to the Canadian agriculture market, which will also be good for Canadian consumers because they will have more options readily available. 
• Tariff rates remain low. Trump has been using tariffs as a blunt weapon to coerce trading partners into submission (see here, here, here, and here), which does not help with long-term trade relations. Given how ineffective tariffs are as economic tools, it's nice to see an agreement where Trump lets up on the tariffs. 
• No Section 232 tariffs for Canada and Mexico. Section 232 is a trade loophole that the U.S. executive branch is allowed to impose when it wants to enact tariffs in the name of national security. While USMCA itself does not protect Canada and Mexico, side deals were made to de facto exempt them from this faulty policy. On the other hand, the fact that Trump could not have provided Canada and Mexico with blanket exemptions only acts to sour relations with the U.S.
• Trade dispute mechanism. Canada was adamant on preserving the trade dispute mechanism in Chapter 19 of NAFTA in order to defend itself from protectionist trade policies. Fortunately, it succeeded in this endeavor. 
• Improved shipping conditions (de minimis). For those of you who are unfamiliar, de minimis refers to a threshold below which no tax or duty is collected. Fortunately, the threshold has been raised under USMCA. The United States allows its consumers to purchase up to $800USD without tariffs and duties, which is great because the decision helps consumers and business owners alike. The Peterson Institute made the case for such an increase back in July (also see  McDaniel et al., 2016). 

The Bad

• Effects on Automobile Manufacturers. Under NAFTA, an automobile with less than two-thirds of North American parts was considered duty-free. With USMCA, the automobile needs three-fourths North American parts to move freely between the three countries. This will make automobile manufacturers more reliant on North American automobile parts. This is great for North American automobile parts manufacturers, but bad for automobiles and those who are looking to buy North American automobiles. As the Peterson Institute points out in its latest report on USMCA, it is poised to lead to a less competitive automobile market with less investment and fewer jobs.
• Automobile Manufacturer Wages. The deal also states that 40-45 percent of the value of automobiles be produced in plants where the minimum wage is $16. This will not have a major impact for U.S. workers since most of them make over $16. This will have a bigger impact on the Mexican auto manufacturing market because the minimum wage down there is $4.15/hour. While this might sound like a win for Mexican auto manufacturers, it probably will not be since a major increase in minimum wage leads to a major decrease in labor market employment. 
• Longer copyright terms. USMCA extends the copyright term from 50 years beyond the author's life to 70 years. As I pointed out over three years ago, longer copyright terms do not do anyone favors.
• Greater protection of pharmaceutical industry. USMCA also extends the intellectual protection of biologics and certain drugs from eight years to ten years. We will have to wait an extra two years before a drug can be open to generic competition, which means that more medical prescriptions will be expensive for longer.
• Discouraging other free trade agreements. Article 32.10 of USMCA details the rules that ultimately deter USMCA members from negotiating free trade agreements with non-market members (e.g., China). Limiting negotiations on free trade agreements is a bad idea since freer trade is all-around better.
• Continued limiting of government procurement markets. A good free trade agreement would allow access of FTA partners to compete in bidding processes. USMCA provides no new access. As we saw with Trump's "Buy American" idiocy, limiting procurement options lengthens project times, reduces quality, and costs the taxpayer more. 

Conclusion: The truth is that the changes made to NAFTA are largely cosmetic because the overall structure of NAFTA by and large remains intact. This could lead us to complain that USMCA is really not going to increase employment or create a major boost to the trade bloc's economy. However, USMCA is good in the sense that we avoided withdrawing from NAFTA without a replacement bill. It removes some trade uncertainty, although let's remember that Trump is the one who created this trade uncertainty in the first place.

This bill has more protectionist elements than it does elements of trade liberalization, surely more than the Trans-Pacific Partnership (TPP) had. Given that Trump is at the helm, this is probably the best-case scenario. Now that we have the NAFTA issue out of the way, Trump could focus on other trade issues, which might not be good. I would like to think that Trump could do something productive, such as work on trade liberalization with the United Kingdom, or even better, China. The sad truth is that we have already started a trade war with China. Instead of seeing the error of his ways on protectionism, the success with USMCA will likely embolden Trump to play hardball with China, which is the last thing we need.