November 28, 2019

Why Nafta Isn’t Dead (Yet) and What Might Replace It

 |  By: Bloomberg News

As a candidate in 2016, President Donald Trump pledged to renegotiate the North American Free Trade Agreement and to terminate it “if we don’t get the deal we want.” Nafta is the accord between the U.S., Canada and Mexico that, starting in 1994, phased out tariffs on most goods among the three countries, creating what was then the world’s largest free-trade zone and over time tripling trade among the signatories. Over 13 months of negotiations beginning in 2017, the three countries agreed to modest changes to Nafta and a new name, the U.S.-Mexico-Canada Agreement, or USMCA. But its long road to implementation isn’t yet over.

1. What happened to Nafta?

It’s still in effect, covering most of the $1.25 trillion in annual trade among the three North American countries while leaders work on the proposed USMCA. Trump never pulled the U.S. out of Nafta, something he claims he has the right to do with six months’ notice to Mexico and Canada. Experts disagree on whether Trump could do that unilaterally or would need the consent of the U.S. Congress.

2. How close is the USMCA to being ratified?

Leaders of the three countries signed the pact a year ago, and Mexico’s Senate ratified it in June. Trump has been pressing the U.S. Congress to approve it, but the opposition Democrats who control the House of Representatives are seeking changes, including stronger enforcement of the USMCA’s stepped-up labor and environmental provisions. House Speaker Nancy Pelosi said in November that a deal was “imminent” but later cast doubt on a vote happening in 2019. Canada’s Parliament, which reconvenes in December after a fall election, may postpone a vote until U.S. lawmakers agree on potential changes. Support for the agreement is broad in Canada.

3. Why was Nafta renegotiated?

Calling it the “worst deal in U.S. history,” Trump blamed Nafta -- which integrated North American supply chains in auto manufacturing and other industries and removed barriers to foreign investment and cross-border trade in services -- for increasing the U.S. trade deficit and sending manufacturing jobs to Mexico. Though economists argue over Nafta’s impact on the U.S., most objective analyses have found it didn’t cause major aggregate job losses in the U.S. but also didn’t significantly boost U.S. gross domestic product. Trump wasn’t alone in calling Nafta inadequate. The deal, signed in 1991 and implemented the first day of 1994, couldn’t have anticipated e-commerce and digital trade, for instance.

4. How would the USMCA change things?

Though Trump has depicted it as altogether different -- “The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!” -- even a fellow Republican, Senate Finance Chairman Chuck Grassley, said 95% of the new deal “is the same as Nafta.” Some industries would notice changes. For automakers, new rules would require more vehicle components to be made in North America, with a portion made by workers earning an average of at least $16 per hour. Canada agreed to allow more imports of U.S. dairy products. Both Canada and Mexico would increase the value of goods that can be imported duty-free. Internet platforms couldn’t be held liable for third-party content, and companies couldn’t be required to store their data locally. Biologic drugs -- unless Democrats succeed in removing the provision -- would have an exclusivity period of at least 10 years, requiring Canada and Mexico to increase their terms. Canada would also increase its copyright protection term.

5. How much better would the USMCA be for the U.S. economy?

The U.S. International Trade Commission found it would boost U.S. trade with Mexico and Canada by about 5% overall, resulting in a 0.35% GDP increase in its sixth year. It would also boost U.S. workers’ annual incomes by an average of $150 and increase employment by 0.12%, or roughly 176,000 jobs. (Trump has said the pact could bring more than 1 million jobs to the U.S., far beyond other estimates.) An International Monetary Fund assessment was less rosy for the U.S. It said the agreement would reduce the country’s “welfare” (a measurement of consumption) by $794 million, while boosting Canada’s by $734 million and Mexico’s by $597 million -- “relatively small” effects at the aggregate level. Just implementing the deal would benefit businesses by providing increased certainty about the future, especially because it would largely exempt Canada and Mexico from future auto tariffs.

6. Where do things stand?

U.S. Democrats have been negotiating with Trump administration officials to try to reach a deal on the implementing language that will be sent to Congress. The Democrats say they want to change provisions on pharmaceuticals, environmental protections, labor and enforcement of the accord. They’re especially focused on Mexico, where the U.S. wants the new agreement to eventually boost wages -- they are on average one-fifth of those in the U.S. -- so fewer American companies move across the border for cost savings. But there’s concern that Mexico is coming up short on the reforms expected of it, which include independent labor courts and the right to elect union representatives. It’s crucial that lawmakers work out their concerns before the implementing bill is sent to Congress because both chambers will consider it under an expedited procedure that bars amendments and requires an up-or-down vote within 90 legislative days.

The Reference Shelf

  • • The Congressional Research Service summarizes key provisions in the USMCA.
  • • A side-by-side comparison of Nafta and USMCA.
  • • These were five sticking points that leaders of the three countries had to work out.
  • • The African continent is seizing the title of world’s largest free-trade zone.
  • • A Council on Foreign Relations review of Nafta’s economic impact
  • • From Bloomberg Government, everything you need to know about the USMCA.

— With assistance by Erik Wasson