Donald Trump

Is the USMCA, the Trade Deal that Will Replace NAFTA, a 'Historic Transaction'? No.

Donald Trump is calling it a big win. That's overselling it.



Give President Donald Trump credit. He said he was going to renegotiate the North American Free Trade Agreement (NAFTA), the trade deal among the United States, Canada, and Mexico. And as Reason's Eric Boehm noted here earlier today, he's just done that, concluding a new three-way agreement called the USMCA (for United States–Mexico–Canada Agreement). It's nice to have a president follow through on campaign promises, especially when they don't involve shutting down the country to immigrants and refugees or spending billions of new dollars on the military.

But this new arrangement, like the one it replaces, just isn't as big a game changer as its critics or champions think. There's slightly over $1 trillion in trade among the United States, Mexico, and Canada. (The U.S. economy alone generates about $20 trillion in goods and services.) The best thing about the USMCA is that it ends the drama created by Trump in the first place. The agreement must be approved by each country's legislature, which is expected to happen, and it will go into force in 2020. At year six the signatories will review it, but its terms are expected to last for 16 years.

The agreement opens up part of Canada's dairy market to American milk producers, and it forces Mexico to pay higher wages to people in automobile factories. (It also makes it easier for them to unionize, at least theoretically.) The biggest effects will probably be felt in the auto industry, where the USMCA has a strong potential to, as Boehm writes, "warp automakers' supply chains [and] increase prices." But the deal also gives U.S. drug companies two extra years in Canada before generics can compete against name brands. There are 60-plus pages of new intellectual property rules, including an agreement to extend Canada's copyright terms from 50 years after the death of an author to 70 years, the current length in the United States.

Canada, which resisted coming to the table until the last moment, received some key concessions, especially regarding Chapter 19, a dispute-resolution system. The Washington Post reports:

Chapter 19 allows Canada, Mexico and the United States to challenge one another's anti-dumping and countervailing duties in front of a panel of representatives from each country. This is generally a much easier process than trying to challenge a trade practice in a U.S. court. Over the years, Canada has successfully used Chapter 19 to challenge the United States on its softwood lumber restrictions.

In the final analysis, there aren't that many more gains from trade to be had among the United States, Mexico, and Canada, especially if the movement of labor isn't part of the deal (which it's not). As Mercatus Center economist and Reason columnist Veronique de Rugy wrote earlier this year, trade was already pretty damn free among the three signatories:

The WTO [World Trade Organization] reports that all non-agricultural U.S. exports to Canada also enter that country duty-free. And for all the talk about that pesky 270 percent Canadian tariff on U.S. dairy, 97 percent of U.S. agricultural exports to Canada are duty-free.

Other countries aren't as lucky when exporting to Canada and Mexico. The weighted tariff that non-U.S. foreign exporters face on their agricultural products sold to Canada is 12.4 percent, and on their non-agricultural products it's 2.3 percent. When non-Americans export to Mexico, agricultural tariffs average 20.1 percent, and non-agricultural ones average 3.5 percent. Other countries would love to get some of the NAFTA treatment.

NAFTA had a positive impact on the U.S. economy. Writing about the risk of withdrawing from the 1994 agreement in The Wall Street Journal a few months ago, Matthew Slaughter, dean of the Tuck School of Business at Dartmouth College, wrote, "In a new report canvassing dozens of academic and policy studies, I find that the U.S. gross domestic product is now 0.2 percent to 0.3 percent larger than it would be without Nafta, a yearly boost of about $50 billion."

Trump's understanding of trade is notably screwy, a fact he makes clear every time he insists that trade deficits are a bad thing. As a candidate in 2016, he excoriated NAFTA, which he said "destroyed this country economically." That is simply false on every meaningful level. What NAFTA did was effectively lower the cost of American goods and services being sold in Canada and Mexico. (Tariffs were already on the low side.) In the United States, unemployment fell and factory wages increased after the passage of NAFTA; the country had been shedding manufacturing jobs as a percent of the workforce since 1943 and, contrary to the prophesy of 1992 presidential candidate Ross Perot, NAFTA generated no additional "giant sucking sound" on that score.

NAFTA is best understood as part of a post-war global movement toward freer trade which made everyone involved wealthier. As Reason's Ronald Bailey has noted,

in 1960, just 22 percent of countries representing 21 percent of the global population had open trade policies. This rose to 73 percent of countries representing 46 percent of world population by the year 2000. [A 2008 World Bank] study compared growth rates of countries before and after trade liberalization, finding that "over the 1950–98 period, countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization" and that "investment rates by rose 1.5–2.0 percentage points."

The USMCA is, in its way, classic Trump. The new deal isn't particularly different than the old one, but it gives the president a chance to talk up his policies:

Late last night, our deadline, we reached a wonderful new Trade Deal with Canada, to be added into the deal already reached with Mexico. The new name will be The United States Mexico Canada Agreement, or USMCA. It is a great deal for all three countries, solves the many…deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world. The USMCA is a historic transaction!