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The USMCA Should Be the First Step to Broader Trade Liberalization

U.S. trade representative Robert Lighthizer speaks at the Presidential Palace in Mexico City, Mexico, December 10, 2019. (Henry Romero/Reuters)
The renegotiated NAFTA includes a couple of key improvements, but there’s still much work to be done.

After another tumultuous negotiation, House Democrats and the Trump administration have announced an agreement to move forward with the USMCA, the flawed but salvageable product of lengthy and contentious efforts undertaken by the United States, Mexico, and Canada to renegotiate the North American Free Trade Agreement.

The Trump administration and House Democrats have been hammering out changes to the deal since Democrats took control of the chamber following last year’s midterm elections. Some of the changes have been positive, but serious flaws in the USMCA remain.

On the positive side of the ledger, Democrats were able to bolster the USMCA’s enforcement mechanism. NAFTA includes a provision allowing countries to block the formation of neutral panels that hear disputes and issue binding decisions regarding alleged violations of its terms. As a result, enforcement under NAFTA ground to a halt in 2001 and has been dormant ever since. At the urging of House Democrats, a similar provision has now been removed from the USMCA.

Democrats were also able to remove a disputed pharmaceutical provision that was included in the original USMCA. Under the deal’s initial terms, name-brand biologics — innovative but expensive prescription drugs made from living organisms — were afforded “at least” ten years of market exclusivity without generic competition. Meanwhile, U.S. law provides twelve years of protection, the longest such period in the world.

Because they export lengthy monopoly periods, biologics-market exclusivity provisions are deeply controversial. During the negotiations over the Trans-Pacific Partnership, the U.S. trade representative pushed for a twelve-year exclusivity period, largely at the behest of the then-chairman of the Senate Finance Committee, Orrin Hatch (R., Utah). The U.S. spent a lot of valuable time and political capital lobbying for this provision, even though it was a non-starter for several other TPP countries, and some Democrats in Congress. Eventually, the TPP parties agreed on five to eight years of exclusivity. But the watered-down provision was jettisoned entirely by the remaining parties once the Trump administration withdrew from the agreement. Instead of attempting to secure lengthy monopoly protection for a tiny segment of the U.S. economy, the USTR should have been pushing for more liberalization in other sectors.

Though Mexico and Canada agreed to the overly generous ten-year exclusivity provision now stripped from the USMCA at House Democrats’ behest, the TPP debate suggests that other potential trading partners will likely oppose such demands with vigor. If, as Speaker Nancy Pelosi has indicated, the newly finalized USMCA is to become a template for trade agreements going forward, the removal of this provision will send a signal to such potential partners that they can work with policymakers in the United States.

Despite these positive changes, the negotiations between the Trump administration and House Democrats failed in one particularly glaring respect. Under the terms of the USMCA, the United States, Mexico, and Canada are required to engage in new negotiations every six years, and the agreement could ultimately end after 16 years unless all three parties agree to continue it. Yet trade and investment thrive in predictable climates. Trade agreements are beneficial in that they provide the certainty necessary to facilitate the type of investment that yields economic growth. While periodic reviews are a good idea, the deal’s sunset provision will undermine the certainty usually provided by trade agreements, and set a dangerous precedent for future trade-deal negotiations.

Improving enforcement and removing the biologics-exclusivity provision are shrewd moves that can help pave the way for future trade-liberalization efforts, both domestically and abroad. And those efforts can’t come soon enough. While the United States is treading water, the rest of the world is acting quickly to liberalize trade. In addition to the TPP, which is now moving forward without the United States, the European Union and MERCOSUR — a Latin American trading bloc comprising Argentina, Brazil, Paraguay, and Uruguay — recently completed trade negotiations. Likewise, in September, 54 of 55 African countries launched the first phase of what will ultimately become the African Continental Free Trade Agreement.

Despite President Trump’s promises to quickly negotiate a number of bilateral trade agreements, progress on such deals has been slow. Instead, Trump has tinkered with the U.S.–South Korea Free Trade Agreement, announced a “mini deal” with Japan covering agriculture and digital trade, and secured a renegotiated NAFTA that looks a lot like the original. In the long term, a stalled trade-policy agenda would be a significant blow to U.S. competitiveness and geopolitical interests in an increasingly globalized world. The USMCA should be the first step in an aggressive push for expanded liberalization.

Clark Packard is a resident fellow and trade-policy counsel at the R Street Institute.

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