Magazine | December 09, 2019, Issue

NAFTA Was Good, and the USMCA Is Okay

President Donald Trump delivers remarks on supporting the passage of the U.S.-Mexico-Canada (USMCA) trade deal in Milwaukee, Wis., July 12, 2019. (Carlos Barria/Reuters)
Assessing the new trade pact with Canada and Mexico

President Trump could be on the verge of his biggest bipartisan accomplishment — right in the middle of an impeachment inquiry and, even more oddly, partly because of it. This triumph would be the passage of a slightly modified version of what he has called “perhaps the worst trade deal ever made.”

The North American Free Trade Agreement (NAFTA) was a populist whipping boy even before its 1993 enactment. Ross Perot, Pat Buchanan, and the labor movement led the charge against it, while the Clinton administration and the leading Republicans in Congress backed it. The debate at the time trafficked in overblown claims about how many jobs the pact would create or destroy, but economists in the years since have generally concluded that it had a mildly positive effect on the economies of the U.S., Canada, and Mexico.

Trump has criticized NAFTA on two main grounds. He says it cost America 4.1 million manufacturing jobs. That number assumes that all of the reduction in manufacturing employment over the last quarter century was caused by the trade agreement, and none of it by automation or trade with other nations. He blames NAFTA as well for turning the small trade surplus that the U.S. used to run with Mexico into a large trade deficit. But even those economists who worry about trade deficits in general don’t think that bilateral trade balances are important. Anyway, the agreement brought down Mexican tariffs on American exports much more than it brought down American tariffs on Mexican ones.

In part by threatening to withdraw from NAFTA altogether if Canada and Mexico did not agree to changes, Trump’s negotiators managed to make a deal among the three countries in September 2018. “We are replacing the job-killing disaster known as NAFTA with the brand-new U.S.–Mexico–Canada trade agreement,” the president said at a rally a few days afterward. He did not mention that most of the provisions in the USMCA are carried over from NAFTA. Trade among the three countries would remain mostly free.

There are a few changes. The most universally lauded are the ones concerning digital trade. It hardly existed when NAFTA was written, so the agreement had to be modernized to cover it. Negotiators had a head start on the issue. Rules for digital trade had already been devised for the Trans-Pacific Partnership (TPP), which would have included the NAFTA countries and eight others. During the 2016 campaign, Trump denounced the TPP as a “rape of our country.” Once elected, he took the U.S. out of the agreement. But the USMCA applies most of the TPP’s rules on digital trade to North America. The effect is generally to codify existing practices and thereby provide greater stability to this commerce.

Americans with varying views on free trade and protectionism have also applauded another provision of the agreement. Canada will allow slightly more dairy imports from the U.S. The issue has long troubled relations between the countries. It will continue to do so, but the USMCA makes some progress.

Trump has sometimes embraced the label of “protectionist” and often adopted its substance. Some of the revisions to NAFTA reflect that disposition, even though Congress had instructed trade negotiators to press for more trade rather than less. The new deal requires higher wages in Mexico’s auto industry: a sector-specific regulation previously foreign to trade agreements and alien to their spirit. It also tightens the rules of origin for cars. Around five-eighths of a car had to be made in North America to qualify for low tariffs under NAFTA; under the USMCA, about three-quarters will. Seven-tenths of the steel and aluminum will have to come from North America, too, in keeping with the administration’s desire to protect these industries. And the entire deal now has a complicated “sunset clause” that can be expected to make long-term business investments more difficult.

The International Trade Commission, part of the U.S. government, has estimated that the agreement would expand our economy by 0.35 percent and increase employment by 0.12 percent. In its analysis, the provisions borrowed from the TPP would have a positive effect. The provisions concerning cars would, on the other hand, raise prices, cut sales, and reduce employment in auto assembly. 

The International Monetary Fund reached a more pessimistic conclusion. Its economists project that the USMCA will cause a decline in the production of cars and car parts for all three countries. The U.S. will see a small hit to the size of its economy and an increase in its trade deficit.

Free-traders have split about whether the USMCA is a net improvement over NAFTA; different opinions have been expressed even within one libertarian think tank, the Cato Institute. The business groups that tend to back trade agreements have been supportive — but much of that support is based on the fear that if the USMCA doesn’t pass, Trump will make good on his occasional threats to withdraw from NAFTA. Whether he has the legal authority to do that is disputed. If he did withdraw, the tariff levels of 1993 would return.

That rationale for agreeing to the USMCA has occasionally been voiced in public. The editors of the Washington Post, free-trading liberals, have urged congressional Democrats to pass the USMCA in order to “put out the NAFTA fire, even if it’s a blaze Mr. Trump fanned.”

Such reasoning, coupled with the normal political calculations of members of the president’s party, has led most Republicans in Congress to favor passage. The only declared Republican opponent of the agreement in the Senate is Pat Toomey of Pennsylvania, a strong free-trader. Referring especially to the auto-industry provisions of the USMCA, he says, “They loaded up what is supposed to be a free-trade agreement . . . with all kinds of restrictions on trade.”

Toomey expects Congress to approve the deal anyway. Some of the protectionist elements of the deal will help Trump win votes from congressional Democrats. They “got things they never dreamed of getting in a free-trade agreement,” he says. The 31 House Democrats in districts that President Trump carried in 2016, meanwhile, want to balance their support for an impeachment inquiry with evidence that they are hard at work on other issues and willing to cooperate with the president on occasion.

Speaker of the House Nancy Pelosi recently said that she expected to reach an agreement on worker protections with the administration “imminently,” in which case “this can be a template for future trade agreements” — which is exactly what worries some free-traders. On a recent edition of the CBS show Face the Nation, she delivered a message that was well tailored for those 31 members of her caucus: “None of us came here to impeach a president. This is very sad. At the same time, as I say, we’re trying to pass a trade bill, pass our appropriations bills, Voting Rights Act.”

Until now, the most notable bipartisan legislation signed by Trump was a reform of federal criminal sentencing and prisons. Passing the USMCA would be bigger, because Trump campaigned on replacing NAFTA. While the new deal does not amount to the radical change he suggested he wanted, he will be able to say that he has delivered on a promise and strengthened the economy. With enough bipartisan support, not many people will look closely at the details. The “worst trade deal ever made” is about to become one of the best, and without having to undergo much alteration.

This article appears as “‘The Worst Trade Deal’ Gets Even Better” in the December 9, 2019, print edition of National Review.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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