What’s going on with USMCA?

USMCA deal

It’s been several months since the US, Canada, and Mexico signed the new trade deal that will replace NAFTA.

But ratifying the deal, which was signed by leaders on the sidelines of the November 2018 G20 summit in Argentina, is proving more difficult than many expected. In fact, all of the three countries have yet to pass the agreement.

During his 2019 State of the Union address, President Donald Trump encouraged Congress to approve the United States-Mexico-Canada Agreement (USMCA) and replace “the catastrophe known as NAFTA.”

However, with no indication as to when Congress will vote on the deal, future trade relations between the three countries remain a bit uncertain.

Here’s a look at what’s going on with USMCA.

How does USMCA differ from NAFTA?

Considering it’s been a while since the deal was signed, it’s understandable if you’ve forgotten how USMCA differs from NAFTA.

One of the big changes is greater access to the Canadian dairy market to help ease problems with overproduction of milk in the US. American dairy producers will get access to 3.59% of Canada’s dairy market, slightly above the access granted under the Trans-Pacific Partnership.

USMCA also kills Canada’s Class 7 pricing strategy. The pricing system made it cheaper for Canadian dairy processors to buy domestic ultra-filtered milk, a concentrated ingredient used in cheese and yogurt. US farmers said the Canadian pricing system blocked their imports and damaged world prices. A briefing note from the US Trade Representative (USTR) office outlined the elimination of Class 7 within six months of USMCA coming into force.

Regarding rules of origin, with the new agreement, 75% of auto content must be manufactured in North America, a considerable increase from 62.5% under NAFTA. And by 2023, 40-45% of auto content must be made by workers who earn at least $16 per hour.

What’s more, unlike NAFTA, the deal allows each country to sanction the others for labor violations that affect trade.

USMCA also comes with a shelf life. The new deal runs out after 16 years under a provision known as the “sunset clause.” Plus, every six years the three countries will review USMCA, at which point they can decide whether to extend it. Meaning, once the deal comes into force, we’ll get to go through a fresh wave of trade uncertainty in six years’ time.

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How will the deal benefit the US?

The US International Trade Commission (ITC), an independent federal agency, recently released its highly-anticipated analysis on how USMCA would benefit the American economy. Many lawmakers were waiting on the report, delayed because of the partial government shutdown, before making a decision on the deal.

According to the report, the trilateral agreement would have a positive but modest impact on the US economy. The report estimated the deal would raise the country’s gross domestic product (GDP) by 0.35% and create 176,000 jobs (a 0.12% increase) after six years.

“In light of the US economy relative to the size of the Mexican and Canadian economies, as well as the reduction in tariff and nontariff barriers that has already taken place among the three countries under NAFTA, the impact of the agreement on the US economy is likely to be moderate,” reads the report.

Shortly before the ITC analysis came out, the USTR office released its own report on the deal’s potential impact on the US auto sector. The USTR report estimated the creation of roughly 76,000 American auto jobs over five years – nearly three times the ITC’s projection of 28,000 new jobs in the US auto sector.

While USMCA would “likely have a positive impact on all broad industry sectors” within the US economy,” according to the ITC analysis, the manufacturing sector would be the biggest beneficiary.

Overall exports to Canada and Mexico would increase by 5.9% and 6.7% ($19.1 billion and $14.2 billion) respectively. Meanwhile, imports from Canada would rise by 4.8% ($19.1 billion) and products from Mexico would go up by 3.8% ($12.4 billion).

“[The USMCA] will allow us to sell more Made in America products to our two best customers – Mexico and Canada. So, it’s crucial,” said Rep. Kevin Brady, a Texas Republican and ranking member of the House Ways and Means Committee, in an interview with Bloomberg.

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When will it pass?

That’s the million-dollar question.

It’s not clear what will happen next and when for USMCA.

Democrats wanted Mexico to pass labor reforms before scheduling a vote on the deal in the House of Representatives. Though Mexico approved the labor changes at the end of April, which includes having secret ballots in union elections, a vote hasn’t been scheduled. And at the moment it doesn’t appear as though one will happen anytime soon.

One reason is that some Democrats and labor groups have expressed concern that USMCA doesn’t do enough to ensure Mexico enforces its new labor reforms.

“You can have all of the good language in the world that you want, but if you don’t have enforcement, you’re just having a conversation,” said House Speaker Nancy Pelosi.

According to the Wall Street Journal, the new deal “faces mounting resistance in the Democratic House” and the chances of it passing before the 2020 presidential election are “dimming.”

Rep. Earl Blumenauer (D-Ore.), chairman of the Ways and Means subcommittee on trade, told CNN the deal is a “work in progress” and that Democrats are “not going to be held to an artificial timetable.”

The US presidential election isn’t the only time-sensitive pressure for ratifying the deal. Canada also has a federal election quickly approaching in October 2019. Both elections could jeopardize the chances of getting the agreement passed.

Among US lawmakers, Democrats aren’t the only ones with concerns. Several Republican senators have urged Trump to drop tariffs on steel and aluminum imports from Canada and Mexico in order to protect the deal.

“If these tariffs aren’t lifted, USMCA is dead,” wrote Senate Finance Chairman Chuck Grassley (R-Iowa) in a Wall Street Journal op-ed.

Earlier this spring, Chrystia Freeland, Canada’s foreign affairs minister, told reporters that the steel and aluminum tariffs “raises some serious questions about NAFTA ratification.”

Whether or not USMCA is voted on this year, it’s clear the deal still faces some significant hurdles.

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