U.S. Trade Representative (USTR) Robert Lighthizer and certain officials in the administration have expressed optimism about the future of the U.S.-Mexico-Canada Agreement (USMCA). Concerns are growing, however, about whether the intended overhaul of NAFTA will be ratified by the United States Congress.
On October 23, 2019, Senator Grassley, chairman of the Senate Finance Committee, stated that he had a “growing worry” about the current progress of USMCA and claimed that the Democrats are stalling in the hopes of stopping the deal. House Speaker Nancy Pelosi has repeatedly expressed that negotiations between Democrats and the administration on USMCA have been genuine and with the intention of moving the legislation forward. Ratifying the USMCA is contingent on support from Democrats, who possess a majority in the House of Representatives.
The Democrats are ostensibly concerned about the labor enforcement provision, specifically focusing on Mexico’s recent labor reforms that were passed in May. Enforcement of the new labor laws as well as the labor provisions in USMCA requires the renegotiation of countless employment contracts across Mexico. Additionally, Mexico’s labor unions must properly organize themselves to abide by the new labor provisions.
Democrats are also concerned about the deal’s environmental provisions. Republicans have repeatedly stated that the trade agreement should be an easy bipartisan win, as Senate Majority Leader Mitch McConnell and Rep. Kevin McCarthy argue in their Wall Street Journal opinion article, citing job creation and wage growth estimates.
The alleged benefits of USMCA are not quite as simple as they appear. While a report from the U.S. International Trade Commission (USITC) concluded that USMCA would increase U.S. gross domestic product (GDP) by 0.35% and employment by 0.12%, the report also predicted that the tariffs, due to changes to the rules of origin, would detrimentally affect American consumers for each job created. The USITC also predicted that automobiles would become more expensive under USMCA and that variety would decrease, causing Americans to purchase fewer of them.
The USITC’s report suggests that the agreement essentially props up manufacturing and mining at the expense of other sectors of the economy. According to The Economist, this should have ordinarily led the USITC to conclude that USMCA would have a net negative impact, however, the USITC factored in business confidence in a stable trade policy that was significant enough to swing the overall conclusion as positive. As the USITC explains within the report, “of the eight USMCA components included in the economy-wide model, provisions that reduce policy uncertainty…have the most significant impact on the estimated results.”
However, the outcome of ratification will likely be decided by political factors, not economic ones. Passing the USMCA is of importance to the administration since its China and E.U. trade policy has yet to yield any concessions amidst an ever escalating trade war with both sets of trading partners.
Supporters of the trade agreement want to see a vote on USMCA before the end of 2019, as the chances of ratification are likely to dwindle as the election gets closer. There is a limited amount of time left in the current legislative session, however, and the agenda is currently preoccupied with sanctions on Turkey and the recently initiated impeachment inquiry. Republican opposition to the impeachment inquiry is likely to further reduce the chances of progress being made on the ratification of the USMCA.
Speaker Pelosi could request for lawmakers in the House to vote on USMCA during an off-week, but there is a strong possibility for the USMCA ratification process to get pushed to the 2020 session. If that happens, there is a decent chance that legislators could continue to stall the trade agreement.
To date, Mexico is the only nation of the three signatories to have ratified the USMCA. Though the bill was introduced in Canada’s parliament last May, Canada had opted to move its ratification process in tandem with the U.S. Despite the recent elections in Canada, ratification of USMCA should still be on track. Justin Trudeau remains Prime Minister and the Liberal Party has retained enough seats to maintain a minority government.
We will continue to monitor this situation and will provide future updates as developments occur. Please contact Husch Blackwell’s International Trade and Supply Chain team for more information.