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Prof. Gamso: Too Soon to Declare USMCA Winners & Losers

October 11, 2018

After a year of negotiations, the United States, Mexico, and Canada have agreed to a trade deal that will replace NAFTA. President Trump hailed the new agreement, creatively named the U.S.-Mexico-Canada Agreement, or USMCA, as “a great deal for all three countries.” The new deal does include some noteworthy changes. But Thunderbird professor Jonas Gamso says it’s far too soon to say who wins and who loses.

On Sept. 30, 2018, the United States, Mexico and Canada announced the completion of negotiations toward a new United States-Mexico-Canada Agreement (USMCA), a deal designed to replace the North American Free Trade Agreement (NAFTA). The new agreement came after a year of back-and-forth renegotiating the nearly 25-year-old NAFTA. 

It’s not a done deal yet, though. U.S. President Donald Trump, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Peña Nieto have to sign the agreement, which they plan to do before Peña Nieto leaves office at the end of November. And then the deal still needs to be ratified by all three governments. Since the approval process for the $1.2 trillion trade deal will take some time, most of the new USMCA provisions won’t go into effect until 2020. 

Basically, NAFTA 2.0

In many respects the 1,000-page trilateral dealis a conventional modern trade agreement. It creates new rules for trade in digital products and protects the intellectual property of pharmaceuticals, film studios, and others. But in other respects, USMCA is considered a big step backward for free trade. 

“I think most analysts agree that USMCA is basically NAFTA 2.0: not a dramatic revision but an update to reflect the modern world,” says Jonas Gamso, Assistant Professor of International and Global Studies at Thunderbird. “Beyond that, there is a lot of uncertainty about how things will play out and what that means in terms of winners and losers.”  

I think most analysts agree that USMCA is basically NAFTA 2.0.” ~ Prof. Jonas Gamso Click to tweet

The devil’s in the details

The most frequently reported highlights of the new agreement are: 

  • Automobile industry – For an auto to qualify for zero tariffs, 75% of its parts must be made in one of the three countries (that’s up from 62.5% under NAFTA). And 30% of the work done on the car must be done by workers earning at least $16 an hour. (That rises to 40% a few years later.) The deal effectively exempts both Mexico and Canada from future auto tariffs by the U.S. But auto industry experts believe these changes will cause car prices to rise.
  • Dairy farmers – U.S. dairy farmers are gaining a bigger market share in Canada, especially for what is known as “Class 7” milk products such as milk powder and milk proteins. USMCA also restricts how much dairy Canada can export.
  • Intellectual property and digital trade– The deal extends the terms of copyright to 70 years beyond the life of the author (up from 50).
  • Drug companies – Big drug companies in the U.S. can now sell to Canada for 10 years before facing generic competition. That’s up from NAFTA’s 8-year protection.
  • 25% tariff on steel and aluminum – For now, tariffs on steel and aluminum remain in place for material imported into the U.S. from Canada and Mexico.    

Highlights of the USMCA include new rules for the auto industry, dairy farmers, drug companies, copyright protections, and steel & aluminum tariffs.”– Click to tweet

Bringing NAFTA up to date

Knowledge Network: Are there any other highlights worth keeping an eye on?

Prof. Gamso: Digital trade, labor, and environmental provisions help modernize the agreement: 

  • Digital trade– NAFTA was negotiated and went into effect at a time when the internet was in its infancy and, hence, the deal did not attend to most digital technology or commerce. USMCA does have provisions to deal with these matters, including provisions to protect internet companies from being held liable for user content and rules to make electronically purchased products duty free.

  • Labor and environmental standards – NAFTA was the first U.S. trade agreement to feature specific conditions on trading partners’ labor and environmental standards. Such conditions are now even stronger, and a regular feature of U.S. trade agreements – USMCA included. For example, the USMCA stipulates that Mexican trucks crossing into the U.S. must meet higher safety regulations and that Mexican workers must have more ability to organize and form unions. 
  • Intellectual property protections– Again, NAFTA was the first U.S. agreement to attend to intellectual property rights, but much has changed in 25 years. The IP chapter of the USMCA is longer and implements more stringent protections for patents and trademarks related to, among other things, financial services and biotechnology.

New digital trade, labor, and environmental provisions of the USMCA represent modernizations from NAFTA.” Click to tweet

Investors keep an eye on the long term

There are two other important changes that will create uncertainty for foreign investors:  

  • Mechanisms for resolving disputes between investors and states have been eliminated –Investors can no longer sue governments over policy changes that will affect future profits (though there are exemptions for a few sectors in Mexico). This means that if an investor from one USMCA country has a dispute with another USMCA country’s government, they will have to seek resolution using the domestic court system in the country.
  • There is a sunset clause – The terms of the USMCA will automatically be renewed every 6 years, and the deal will expire after 16 years, unless the three countries agree to renew it.  

Winners, losers, and wait-and-see

Knowledge Network: Who are the winners and who are the losers? Or do we know yet?

Prof. Gamso: Two clear winners are U.S. dairy farmers and drug companies. (See above.) It is tempting to say that auto workers will be winners. Higher wages in Mexico should mean less shifting of production to Mexico, thereby protecting workers in the U.S. and Canada. And higher wages for those jobs that remain in Mexico should increase the standard of living among Mexican workers. But auto companies may decide not to comply with new rules for Mexico production and instead pay a relatively small tariff, or they may ultimately seek cheaper options in Asia.

Two clear winners in the USMCA are U.S. dairy farmers and drug companies.” ~ Prof. Jonas Gamso Click to tweet

Two clear losers are steel producers in Canada (Trump’s tariffs are staying for now) and auto consumers in general, since Mexican wages and other costs are going to rise – and those costs will probably be passed on to consumers. 

Beyond that, there is a lot of uncertainty. For example, foreign investors are getting some new protections, in the form of extended copyright protections and more robust IP rules, but they are also losing one of the major avenues that they have to challenge governments, with the disbanding of arbitration panels.  

Two clear losers in the USMCA are steel producers in Canada (Trump’s tariffs are staying for now) and auto consumers in general.” ~ Prof. Jonas Gamso Click to tweet

Talks, trade, and politics

Knowledge Network: Do you anticipate any speed bumps in the process required to implement USMCA?

Prof. Gamso: There is likely to be some push-back in all three countries, and we might even see some tweaks during the ratification process. That said, I think this will pass through the legislatures of all three countries, probably some time next year.

Knowledge Network: President Trump says the USMCA proves tough talk and tariffs work. What do you think the trade deal teaches us about his negotiating tactics?

Prof. Gamso: This tells us that the Trump Administration will negotiate in a very public and dramatic way, taking the negotiation to the edge of collapse in the process, but that in the end his negotiators will take a deal that does not dramatically deviate from the status quo.  

Does that mean that his tactics were effective? I’m not sure. On the one hand, he was able to make a deal (pending ratification) and to get some modest concessions from Mexico and Canada in the process. On the other hand it is not necessarily the case that his approach was helpful for making a deal or that the deal turned out better for any or all parties because of his negotiating approach. 

It also is not clear yet whether Trump’s strategy will work in other settings, particularly now that everyone is wise to his approach. 

It is not clear yet whether this strategy will work in other settings, particularly now that everyone is wise to Trump’s approach.” ~ Prof. Jonas Gamso Click to tweet

Manufacturing in Mexico

Knowledge Network: Reaching a new trade agreement was one of the highest priorities of Peña Nieto’s government before he leaves office in December. How does the deal benefit Mexico? Do you think it will stall Mexico’s recent manufacturing growth?

Prof. Gamso: The stable continuation of more-or-less-status-quo trade and investment relations is a good thing for Mexico and for most Mexicans. It is too early to say with certainty what this will mean for the future of Mexican manufacturing, but my expectation is that this will probably slow the growth of Mexico’s auto sector, as higher costs will likely mean fewer incentives to produce there.  

Provision for challenging each other

Knowledge Network: Canada seems pleased that the USMCA preserves the binational panel dispute settlement mechanism from Chapter 19 of NAFTA. Why is this important?

Prof. Gamso: The countries agreed to leave the third-party arbitration process in place for adjudicating disputes over anti-dumping and countervailing duties. This means that if one government puts these duties into place, then the others can challenge them before a special court. Canada had used this process successfully several times to challenge U.S. tariffs and so the Canadian negotiators wanted to keep this mechanism in place.

A trade agreement by any other name

Knowledge Network: Anything else you’d like to say about the USMCA?

Prof. Gamso: One interesting thing is the name change. Trump had disparaged NAFTA so much that to tweak the agreement modestly was probably not what his supporters (particularly swing voters in the Midwest) had in mind or expected. The name change seems like a transparent way to overstate the extent to which NAFTA was changed.  

The name change seems like a transparent way to overstate the extent to which NAFTA was changed.” ~ Prof. Jonas Gamso Click to tweet

Taking aim at China?

A surprise provision in the USMCA, Article 32.10, requires any USMCA nation to notify the other two members three months before launching free trade talks with a non-market economy. In addition to being able to review any such agreement before it’s signed, the other countries can terminate the trilateral agreement and strike a deal between themselves. In effect, they can kick out any of the other countries wanting to forge trade agreements with non-market countries. 

“This will make it more difficult for Mexico and Canada to do a trade agreement with China,” Gamso says. While Article 32.10 doesn’t specifically name China, analysts believe the Trump administration is targeting China and views trade negotiations with other nations as a way to set the stage. 

Bottom line

Regardless of its shortcomings or ulterior motives, Gamso says USMCA includes changes to NAFTA that were necessary. “All three countries win by maintaining the trade agreement and by updating it,” he says. “The new deal, despite whatever problems it may have, is considerably better than no deal.” 

The new deal, despite whatever problems it may have, is considerably better than no deal.” ~ Prof. Jonas Gamso Click to tweet 

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