USMCA: Obstacles to Ratification

President Donald Trump of the United States, former President Enrique Peña Nieto of Mexico, and Prime Minister Justin Trudeau of Canada signed the United-States-Mexico-Canada Agreement (USMCA) in November of 2018 to replace NAFTA. The new deal proposes a number of updates to the old agreement which has governed North American trade since 1994.

USMCA includes a number of new provisions intended to benefit North American firms while liberalizing trade between the three partner states. For instance, the USMCA raises wage floors for automotive workers and tightens country-of-origin requirements. The deal addresses restrictions on dairy trade between the United States and Canada, and contains a pledge to refrain from currency manipulation, which were issues unresolved by NAFTA.

The USMCA also includes a sunset clause scheduling legislative reviews and possible modifications for every six years. This stipulation allows for periodic adjustments in the event that portions of the deal are less efficient than projected.

Although the three executives support the agreement, the deal still needs to be ratified by the legislatures of the partner states in order to be enacted. In Washington, D.C., it is unclear about the future of the agreement. Members of Congress have indicated that there are components of the USMCA that should be improved. Like all trade agreements, there is gain for every signatory. Agreements are not designed to prioritize the interests of one country over those of its partners.

It is worth noting the magnitude and importance of trade between the United States and Canada. The U.S.-Canada trade partnership is one of the largest in the world. The total value of trade between the two countries reached $673 billion in 2017 -- Canada’s largest partner is the United States, and is the United States' second largest trading partner. Canada is the largest goods export market for the United States at $282.3 billion in 2017, and 76% of all Canadian exports are to the United States. The U.S. Trade Representative estimates that 1.2 million U.S jobs are supported through this export market alone. Canadian foreign direct investment (FDI) in the United States has also increased substantially in recent years, led by manufacturing, wholesale trade, and finance.

Uncertainty over North American trade against a backdrop of tariffs and tariff retaliations jeopardizes the stability of the U.S.-Canada trading partnership. If action is not taken soon and barriers to trade persist, exports and FDI will suffer. Decreasing international competitiveness among firms means that those exporters will lose their hold on foreign markets as more competitive foreign producers gain access. This was the case of U.S. soybean exports when protectionist policies escalated between the Trump and Xi Jinping administrations. There is a chance that those soybean exporters might never regain the market access they held in China.

The likelihood of the USMCA’s ratification has dominated debates and commentary over the future of the deal. The agreement still faces a series of hurdles in Congress on its path to ratification. U.S. Trade Representative Robert Lighthizer is currently meeting with lawmakers to brief them on the USMCA’s provisions. Members of Congress have expressed concerns with a few components of the agreement. Some are worried about deal’s implications for labor standards. They point to the fact that the Mexican government may not update its organized labor laws according to the deal’s stipulations. In this case, they argue, there is no adequate means of enforcing the agreement and protecting Mexican workers. Speaker of the House Representative Nancy Pelosi (D) has gone as far as to say that there will be no vote on the agreement until Mexico reforms its labor laws. The Mexican government claims that it is in reach of passing these reforms before a congressional recess in late April.

Other dissenting legislators criticize the deal for its intellectual property rights concessions to large pharmaceutical companies. On the other side, pro-business interests attack measures which weigh on free trade, like country-of-origin requirements for automobile parts.

Legislators on both sides of the aisle have called for the removal of steel and aluminum tariffs as a requisite for the deal’s ratification. Recently, Finance Committee Chairman Senator Chuck Grassley (R) echoed this demand. Canadian officials have indicated that the passage of the agreement in Parliament is contingent upon the removal of Section 232 tariffs on steel and aluminum. Critics argue that these tariffs, which the Trump administration implemented on grounds of national security, constrict free trade and cause political friction at odds with the spirit of an international trade agreement. Business leaders across the United States, as well as non-profits like PNWER, have advocated for the removal of the Section 232 tariffs, which hurt firms across borders.

The USMCA enjoys its most robust support from private sector actors. In February, a coalition of firms and organizations including the U.S. Chamber of Commerce, the National Association of Manufacturers, Fiat Chrysler Automobiles, and the American Farm Bureau Federation pledged their support for the deal. A number of other American manufacturing and agriculture-related organizations have also come out in support of the agreement.

The future of the USMCA is uncertain, as the vote which Trump and many Republicans hope to reach this summer is not yet guaranteed. The U.S. International Trade Commission will publish economic projections of the USMCA by April 19, an evaluation which may sway legislators in favor of or against the agreement. However, the political trappings of ratifying the agreement may weigh just as heavy as any economic analysis. Democrats are aware that approving the deal would mean a major policy victory for Trump, prefacing his run for re-election. Partisan calculations will certainly present another obstacle for Trump and Lighthizer as they push the agreement toward Congress this summer.

Speaking pragmatically, if the USCMA is not ratified, trade will most likely continue according to NAFTA’s provisions, but it is unlikely that the 232 tariffs will be lifted. Some firms can request waivers for those tariffs, but this complicates business operations and not all companies are even aware of this option. Ideally, legislators and the U.S. Trade Representative will resolve disputes over labor and environmental standards and freedom of trade in a timely manner. However, these demands are, to an extent, antithetical, and a compromise deal which satisfies all parties is unlikely to emerge in the near future. In light of persisting tariffs, it is worth asking ourselves: if the USMCA is not ratified, where do we go from here?
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By Daniel Green, PNWER Policy Intern. Daniel is a senior undergraduate student at the Jackson School of International Studies at the University of Washington.

Resources:
Pelosi Says the House Won’t Hold USMCA Vote until Mexico Changes Labor Laws 
Market Watch- April 2, 2019  

Trump Trade Deal with Canada, Mexico Still Faces Hurdles 
​Boston 25 News- April 1, 2019

Guest Opinion: Congress Must Approve Canada/Mexico Trade Agreement
Idaho Politics Weekly- March 31, 2019

Mnuchin: Lifting Tariffs Part of Plan for USMCA Passage
Politico- March 15, 2019

Democrats Cool Toward NAFTA Replacement, Question Labor Standards
Reuters- March 13, 2019

Liberal Wing of Democrats Wants Changes to NAFTA Replacement
Politico- March 12, 2019

US Working on Plan to Lift Tariffs from Canadian Steel and Aluminum: Trade Chief
Global News- March 12, 2019

Mexico’s Government Says Ratification of USMCA Contingent upon End to Section 232 Aluminum and Steel Tariffs
Aluminum Insider- March 6, 2019
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USMCA Faces an Uncertain Path through Congress
Marketplace- March 5, 2019

US Auto Chief Courts Auto Union to Support North American Trade Pact
Reuters-March 1, 2019

China Trade War Update: A Trickle of Soybean, Oil Exports
Forbes- February 19, 2019

Senate Finance Chair Says Tariffs on Steel, Aluminum Should Go
​Reuters- January 30, 2019

U.S.-Canada Trade Facts 
​Office of the Unites States Trade Representative