The White House is praising the new U.S.-Mexico-Canada Agreement, or USMCA, as a major upgrade over NAFTA, the North American Free Trade Agreement. In truth, it does offer some notable differences that mirror the president’s agenda, but it does little for free trade in the most literal meaning of that term.
Its greatest accomplishment may be that it has eased tensions between the United States and Canada. In truth, however, the agreement faces an uphill climb in Congress, especially considering it likely won’t come up for a vote until after new members are sworn in next year.
NAFTA, ratified in 1994, probably was due for an upgrade. The new accord considers online businesses and other concerns that didn’t dominate markets 24 years ago as they do now.
But this rewrite does the job in ways that may lead to unintended consequences. It certainly could alter the balance of trade.
For instance, it includes a requirement that cars manufactured in the three nations contain 40 percent parts produced in those nations at wages of at least $16 per hour.
That is believed to be a disincentive for U.S. carmakers to move production to Mexico. But it might lead to some unintended consequences. Markets in Mexico, where wages tend to be low, may become distorted. A high skilled worker in Mexico may expect to make $891.91 per month, according to the website tradingeconomics.com. At $16 per hour, autoworkers would earn approximately $2,773 per month.
If autoworkers begin earning more than people in some high-skilled jobs, it could create disincentives that work against the type of education and training Mexico needs to grow its economy.
If U.S. manufacturers who have moved south of the border come back, that also might harm the Mexican economy, possibly exacerbating immigration problems on this side of the border.
The USMCA also does nothing to alleviate the tariffs Trump recently applied to steel and aluminum imports. Officials say those would have to be negotiated separately.
Perhaps the best part of the deal is that it would reduce Canadian tariffs on dairy products — long a source of frustration to U.S. dairy farmers. This would allow greater U.S. access to Canadian markets.
Also, it’s worth noting that not all the concessions that went into forging the new deal come from Canada and Mexico. The United States agreed to back off its demands to do away with the special NAFTA courts that allow the nations to challenge trade restrictions imposed by one another. The Trump administration had argued these courts were an infringement on U.S. sovereignty, making this a prominent compromise.
Underlying many of the deal’s provisions are misguided notions about trade. The administration continues to view trade deficits as bad for the U.S. economy, an idea not supported by research.
In a piece for investopedia.com, economic analyst Michael Schmidt argued that trade deficits mean different things for different types of economies. In the United States, where demand drives growth, trade deficits tend to grow as the economy grows.
Nations, of course, do not trade with one another. Private businesses conduct trade, and only in ways that are mutually beneficial. Governments help trade best when they get out of the way.
Should Congress approve this new agreement, it may take years to learn of its consequences, and perhaps even longer to fix them.