The USMCA is not a free trade deal. That’s because there are no free trade deals.

October 1st, 2018 at 5:43 pm

I’m doing my best to work through the text of the new NAFTA, now called YMCA, I mean CAMUS, no…wait…USMCA!

Trade agreements make for a dense read…here’s a snippet from the Ag chapter, one of the 34 chapters, followed by “annexes” and “side letters”:

“Parties recognize that under Article XI:2(a) of the GATT 1994, a Party may temporarily apply an export prohibition or restriction that is otherwise prohibited under Article XI:1 of the GATT 1994 on foodstuffs to prevent or relieve a critical shortage of foodstuffs, subject to meeting the conditions set out…”

It’s just saying that in a food emergency, a party to the agreement can restrict food exports and remain in compliance, but I print that little example to make a larger point: There is no such thing as “free trade” and there are no “free trade agreements.” FTAs are mythical creatures.

In the real world, agreements exist between trading partners that comprise hundreds of pages of rules by which they will engage in trade. These rules can be straightforward, like the one above, or seemingly obscure (have a look at the side letter on cheese names; as far as I know, I’ve never had Emmentaler cheese, but if this deal becomes law, I can enjoy it free of tariffs!).

Trade rules can favor workers, like the new language in support of independent Mexican unions, or investors, like the dispute settlement procedures that are somewhat weakened in the new agreement. It’s all about who got a seat at the table when the deal was drawn up.

Before getting into some weeds on the new deal, I underscore this point so you don’t confuse trade deals with trade, and especially with the trade balance (I’m talking to you, Trump). The CBO, which certainly doesn’t have a protectionist thumb on the scale, recently pointed out that estimates of the impact of “trade agreements on the U.S. trade balance are very small and highly uncertain.” The flows of goods, services, money, and financial assets will continue apace whether or not this deal is approved.

That doesn’t mean trade deals don’t matter. Instead, it means they have a lot more to do with who wins and loses from trade than whether cargo ships continue to sail the seas and trucks go back and forth across the borders of North America.

Many journalists have done nice work unpacking what’s in the deal, so I’ll just highlight some parts of interest.

Is this really that different a deal than the NAFTA? There are, as noted, differences, but they are not big enough for Trump to credibly claim that NAFTA was a horrible disaster while the USMCA is incredible. As noted, I don’t see the deal, should it become law, changing the flows of goods, services, money, or people in ways that would change economic outcomes. New rules for Mexican auto production, including requirements for a) more production in the trade zone and b) a subset of Mexican auto workers to get paid $16 per hour (2-3 times their current wage), have led some to predict higher car prices.

It’s possible, but nothing is that simple in international trade. Auto exporters trying to sell cars here in the US can forgo the duty-free benefits of the trade deal and pay the existing (WTO) auto tariff amounting to a mere 2.5 percent. And exchange rate movements can eventually swamp such price differences, especially as the $16 is not indexed to inflation.

It also must be underscored that Mexico has a lousy record of implementing and enforcing labor rights, so these changes—ones I view as clear improvements in the deal—will require close monitoring. I don’t trust this administration to follow through on that.

What’s good, what’s bad in the deal? Some of the auto requirements just noted are intended to reduce the trade-induced wage arbitrage opportunities that have long hurt production workers exposed to export competition.

The new rules on Mexican unions are also a positive change. It’s not just that these rules potentially make it easier for Mexican workers to form unions. It’s that the unions could finally gain some true independence, as too often, Mexican unions have been Potemkin unions, fronts for management to impose harsh labor conditions with impunity. Again, this is where enforcement is especially crucial.

Though Canada got to keep one part of the dispute system they wanted—the one they use to fight over dumping and countervailing fees—the ISDS process (investor state dispute settlements) will be phased out for Canada and limited in Mexico. Trade expert Lori Wallach and I have discussed the serious problems with ISDS, as it provides a mechanism by which corporate rights could preempt sovereign rights at the expense of taxpayers. But before we get too excited about this change, we need to learn more about the carve-outs from the new rules. If it’s too easy for favored industries to prosecute investment cases using the old NAFTA and TPP tribunals, then this change won’t be meaningful.

What’s bad in the new deal is the same stuff that was bad in the old one (same with TPP): protectionist measures that further belie the idea of “free trade.” I’m talking here about patent and IP extensions that American lobbies like Big Pharma insist on as the price of their support (Dean Baker has some details here). Surely those complaining about higher car prices based on labor protections should be lodging the same complaints here.

Will Congress Approve the Deal?

Which Congress are you referring to? If the D’s take the majority in the House, look for a whole lot of activism around improving enforcement and blocking ways for countries to get around any labor-friendly rules in the proposed deal. For one concrete example, they’re want to raise that 2.5 percent tariff on auto imports to block companies from skirting the new, higher origin requirements in the USMCA.

But aside from those details—and who knows, I could see Trump and his trade rep, Bob Lighthizer, getting behind the House D’s on preserving those protections—and based on what we know now, I suspect a majority in both chambers will want this deal to go through.

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5 comments in reply to "The USMCA is not a free trade deal. That’s because there are no free trade deals."

  1. David Cantor says:

    If you’ve ever eaten Swiss Cheese, from Wisconsin or Vermont, then you have had a North American knockoff of Emmentaler cheese. The Emmental (literally: Valley of the Emmen River) is in central Switzerland, and is famous for making light cheeses with holes. In Europe there are regulations that require food products labeled with a region to actually come from that region. Sadly, the US mostly ignores such niceties.

  2. Dr. Robert Goldschmidt says:

    All the public cares about is working class purchasing power as measured by wages/GDP. The President would lead us to believe that the exporting countries will pay the tariff, but as usual nothing could be further from the truth. Working families will pay the tariff either directly or indirectly. This means that the tariff will cut directly into working family purchasing power.

    Yes, theoretically this will be compensated for by more US jobs, but this realignment will take years, and we may find ourselves mere importing from a more expensive foreign source with no jobs created here.

  3. Occupier says:

    You have no reason to believe this, but I thought of the occupy movement.

    Now is the time when this sleeper movement moves forward!

    Occupy was an idea we planted to make sure that citizens protect this nation from disastrous governmental mistakes.

    We must wake up and reinvigorate this movement now! We must stop the confirmation of Kavanaugh as a SCOTUS judge. The sexual assault which we believe occurred by this monster must be respected!

    This is about women’s rights in a small sense, but in a larger sense it is about human rights. This monster, Kavanaugh, has no right to rule over our population.

  4. Dave says:

    I really can create a model and a new way of dealing with the inequities of resource distribution.

    In our previous mode of operation as humans, occupation of territory determined the rights over the resources on that territory. It just won’t work anymore. Occupiers occupy the ideas, the human creations, the laws, the government, but we don’t occupy the land. The land was created and is of God and is not ours to own.

    We like legal immigration. We want others to to come and share the bounty. But we want them ALL to be full citizens. No guest workers! If you bring in someone to work, you have to bring them in as a FULL CITIZEN with full rights.