5 small wins in the USMCA
House Democrats announced Tuesday they struck a deal with President Trump to revise the North American Free Trade Agreement. The new pact, with the somewhat unwieldy title of the United States-Mexico-Canada Agreement (or USMCA), would update a host of laws and regulations governing trade relations between the three countries. The deal also received the blessing of the AFL-CIO, America's biggest union organization, which clears the way politically for skeptical Democrats to get on board.
In truth, exactly what's in the USMCA is still in flux. Final legislation has yet to reach Congress, though lawmakers are eager to pass a finalized agreement this month. But we do have some idea what it contains. And despite President Trump's frequent denunciations of the original NAFTA as "the worst trade deal ever made," most of the changes in the UMCSA appear modest and highly contingent — albeit mostly in pro-worker direction.
Here's a rundown of those teeny, tiny improvements in this draft of the USMCA.
1. New rules to help American automakers
A big complaint with the original NAFTA was that it led to a lot of automanufacturing jobs fleeing from the U.S. to Mexico, where labor costs (i.e. worker pay) are lower, and labor standards and work conditions are more lax. Basically, Mexico's workers are worse off, so it’s cheaper to build cars there. The new USMCA tries to rebalance those forces by laying down rules of origin requiring a certain portion of car parts be built in America, lest extra tariffs get slapped on the final vehicle when it's sold in the United States. In particular, the USMCA requires that 40 to 45 percent of cars and trucks produced in Mexico be made by workers earning the equivalent of $16 an hour in U.S. dollars — which would bring labor costs more into balance on both sides of the border.
The U.S. International Trade Commission (ITC) projected in April that these provision would increase employment in American auto parts manufacturing by 28,000. That's positive movement, but it's worth keeping in mind it would amount to a 3 percent increase in jobs on offer in the entire American auto sector.
2. A few more jobs overall (maybe)
The point about automobile employment leads to the larger question of what impact the USMCA would have on the U.S. economy overall. The ITC's work projects the deal would add $21 trillion in GDP to the American economy over its first six years, leading to 176,000 additional American jobs. Once again, those are positive numbers. But you also have to consider them in context: Another $21 trillion over six years is a mere 0.35 percent increase for U.S. GDP, while the job increase is a 0.12 percent increase over current employment — about what the country adds in a single month of normal economic growth. Wages would increase by 0.27 percent.
The other thing to keep in mind is that the ITC's track record for these sorts of projections is not stellar. It wildly underestimated the harm that would come from liberalized trade relations between the U.S. and Korea, as well as the U.S. and China. Bizarrely, the ITC's own model assumes that improving labor standards in Mexico would contribute much less to the U.S. economic improvements that more "investor certainty." And other projections dispute even the very modest positive gains the ITC projected.
3. Improved labor standards (maybe)
Overall, Mexico's labor movement is in even worse shape than America's. Its union membership rate is 14.5 percent, and many of the workers who are organized are in particularly weak unions. Labor activists in Mexico also have a habit of disappearing or being killed. All of this leaves Mexican workers extremely vulnerable to exploitation, and thus cheaper than their U.S. counterparts. Which means improving labor standards and union rights in Mexico is a big part of the USMCA.
The trouble has always been enforcement. Making sure Mexican authorities respect labor rights requires some sort of mechanism, such as inspections from the U.S. or Canada, but Mexico doesn't like surrendering its sovereignty in that respect. Lawmakers have been trying to hammer out a compromise for months, and it's not yet clear what they settled on. But obviously, this is something the AFL-CIO cares about a lot, and their endorsement of the USMCA yesterday specifically noted the elimination of "loopholes designed to make it harder to prosecute labor violations."
4. Tamer investor settlement rules
One of the particularly odious aspects of old trade deals, including NAFTA, was the investor-state dispute settlement mechanism. Basically, if a member country to the deal decided they needed some new regulation to improve worker safety or environmental cleanliness or what not, private businesses could sue the government in a special court system for harming their bottom line.
Happily, it at least looks like the system has been scaled back in the USMCA's case: Investor-state dispute cases can go on for another three years in Canada, but then companies will have to go back to the regular Canadian court system. There are larger carve outs protecting the system in Mexico — particularly for fossil fuel industries — but even here new limitations have been added.
5. Tamer drug patents
One last ugly business from old trade deals is the extension of extremely long America-style patent laws, particularly for life-saving drugs. These laws can allow one company to corner the market for a pharmaceutical for years, jacking up the price as it goes. Not only does that enact a heavy cost on poor people in other countries, it makes it harder for Americans to reform their own laws, since now their patent rules have to be coordinated with everyone else’s.
Once again, the USMCA appears to have stepped back a bit here: For biologics, expensive pharmaceuticals that represent over a third of consumer spending on drugs, U.S. patents give companies 12 years before cheap generic versions of the drug can be made. But the patents only last five years in Mexico and eight years in Canada. The deal's original compromise was 10 years — an increase for two of the three signatories.
But political pressure appears to have forced lawmakers to back off, and the new USMCA reportedly allows each country to keep its own patent design. Which arguably makes this the teeniest improvement of the lot.