New Deal with USMCA: Good For North American Trade?

USMCA deal

Trump got his trade deal, with his strong-arm tactics forcing Canada and Mexico to the table. So, was it worth it? Many are quick to compare it to its predecessor, and others to the language it borrows from the TPP. The administration, and its allies, predictably are pretending the agreement is groundbreaking or historic. What is it really? Let’s break it down.
The United States-Mexico-Canada Agreement is the trade successor to NAFTA, the free trade deal that Trump has famously called “the worst deal, maybe ever” and that blue-collar unions have largely blamed for the decline in American manufacturing. It comes after nearly two years of the president threatening to leave or dismantle NAFTA. That said, much of the deal remained in place in the simply-named USMCA, though with slight improvements. The deal will have to be passed by Congress, on an up-or-down vote without amendments, in 2019.

What Problems Did Trump Have With NAFTA Deal?

Trump’s biggest qualms with trade (and his biggest folly in economics generally) are trade deficits. Just after taking office, Trump tweeted that the US had a $60 billion dollar deficit with Mexico. While his concerns over manufacturing jobs leaving the States are understandable (and his emphasis on this point won him the election), none of the new deal really addresses that.
Mexico will be allowed to export $108 billion worth of auto parts to the United States without tariffs, and Canada will also be allowed $32.4 billion. Canada will be able to export 2.6 million passenger vehicles, which is significantly more than the 1.8 million they currently export. There was no progress on steel tariffs, or the retaliatory agricultural tariffs Canada and Mexico instituted in response. While the administration says those talks are not over, it’s disheartening, to say the least, that this issue lives on.

So What Changed?

The biggest win for the US came to dairy producers. US dairy has been fairly restricted in Canada, thanks to two provisions. One is a rise in the market cap, up 3.59% from NAFTA. American dairy producers regularly hit the trade cap, so this is an immediate win. Additionally, Canada has agreed to remove some protectionist policies regarding “ultrafiltered” milk, which will boost American exports.
Another large win for the Trump administration is the sunset clause. The deal will expire after 10 years, if not renewed. The lack of a sunset clause was a common (and fair) criticism of the TPP. The upside is there is room for a new and/or improved deal after the less-than-trade-friendly Trump presidency, but the downside is the uncertainty. Still, ten years is enough for businesses now, and the buck is largely passed to the next president.

At What Cost?

Obviously, not all is well with the deal. The Trump administration forced in language restricting Canadian trade with China. This is a big win for the administration, but a loss for Canadian consumers. Chinese trade isn’t particularly popular in Canada, so any impact of this clause would have to be down the line.
The biggest loss comes on the intellectual property front. General patents saw a 20-year post-mortem extension, and pharmaceutical patents saw a 2-year extension, which will hurt generic drug prices in Canada and could come into play in the US if any progress is made on generic drug manufacturing legislatively.
Whether the deal passes or not will likely depend on the results of the midterms election. Remember, Trump won blue-collar and union votes because of his distaste for NAFTA. This deal is no better from a union perspective, so a Democratic takeover of the House (or Senate) could significantly slow down this deal, especially if the gains come from Pennsylvania and Ohio.

You can read more from Ian Scar on Think Liberty here.


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