Latin America Advisor

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What Are the Most Important Changes to the USMCA?

Canadian, Mexican and U.S. officials signed amendments to the USMCA trade accord last week in Mexico City. // Photo: Mexican Government. Canadian, Mexican and U.S. officials signed amendments to the USMCA trade accord last week in Mexico City. // Photo: Mexican Government.

The United States, Mexico and Canada on Dec. 10 signed amendments to the trilateral deal reached last year to replace the North American Free Trade Agreement. The U.S.-Mexico-Canada, or USMCA, pact now includes mechanisms to settle labor and environmental disputes and ensure compliance with labor standards, issues over which U.S. Democratic lawmakers had concerns. The latest changes also shorten intellectual property protections for biologic drugs, but legal protections for technology companies, which Democrats had tried to remove, remain in the deal. What are the most important amendments made to the USMCA? How will the changes affect the three North American countries, and which sectors are set to gain or lose the most from them? Is ratification in the U.S. Congress now guaranteed, and how soon can the USMCA’s approval be expected?

Andrés Rozental, member of the Advisor board and president of Rozental & Asociados in Mexico City: “It is still somewhat early to digest and explain all the changes made to the original USMCA text that was signed in Buenos Aires late last year. However, there appear to be some differences of interpretation between the Mexican chief negotiator and the U.S. trade representative’s 27-page document, which purports to list all the changes that were incorporated into the addendum signed early last week. The USMCA, even as originally drafted and agreed, represents a less advantageous deal for Mexico than the NAFTA still in force, especially as related to rules of origin, labor content and specific measures designed to put Mexico at a disadvantage vis-à-vis the United States and Canada. The additional changes negotiated under pressure to complete a package before the end of 2019 are even more onerous for Mexico, and in the case of the ‘supervisory’ functions given to the United States—and to a lesser degree to Canada—on compliance with Mexican labor and environmental laws represent a frankly interventionist agreement by Mexico to have foreign ‘attachés’ keep Mexican companies under surveillance for possible violations of our own laws. This should be a responsibility for Mexican authorities, not foreign ones. President López Obrador and the Mexican private sector have been under tremendous stress to agree on any text as quickly as possible under the dubious argument that the absence of agreement in the United States was impeding domestic and foreign investment in Mexico. Succumbing to this pressure, Mexico accepted changes that are clearly not in our interest. Notwithstanding the above, the Mexican Senate has already overwhelmingly approved the addendum. I foresee that the U.S. House of Representatives will act in the coming couple of weeks, while the Senate majority leader has said that no action on USMCA would come before the end of the impeachment process against President Trump. Canada’s approval will also be in the early months of 2020.”

Miyako Yerick, senior associate, and Michelle DiGruttolo, senior managing director, both at Ankura Consulting: “The USMCA will only add 0.35 percent GDP growth in the United States over the next six years, so the agreement’s biggest tangible benefit is the certainty it delivers to the North American trade stakeholders. Its passage eliminates the possibility of an abrupt NAFTA abrogation, boosts business confidence and allows for the resumption of needed large-scale capital expenditures. The USMCA brings innovations in the IP and environmental chapters we expect to see replicated in future agreements. Internet companies and U.S. dairy are winners, U.S. drug makers and Canadian dairy will lose, and it will be a mixed bag for autos and steel. Consumers will also see mixed results as increases in vehicle manufacturing, auto parts production and factory wages will raise buyer costs, while expanded internet commerce will lower them. Canada lost some ground in dairy concessions, while Mexico’s government welcomed the new labor enforcement measure, and Washington Democrats won some decisive concessions on labor and biologics. Recent Mexican grumbles notwithstanding, we expect the U.S. House to pass the USMCA before Christmas. We anticipate a slight delay in the Senate in January 2020 as the impeachment trial will take precedence, and no other legislation can be brought up until the completion of the vote. Canada will time its ratification around the U.S. Senate, and Mexico’s Senate already approved the updates. While the trade war will likely become global in 2020, the passage of this agreement will deliver at least a modicum of certainty and security to North American trade.”

Nicolás Mariscal, member of the Advisor board and chairman of Grupo Marhnos: “A year after reaching a trilateral deal to replace the North American Free Trade Agreement, representatives of the United States, Canada, and Mexico have made amendments that respond to American concerns on labor, health and environmental regulations. The three main changes include: 1.) mechanisms to settle labor disputes and clauses indicating that all countries must comply with the same labor standards; 2.) eliminating the 10-year requisite of property protections for biologic drugs; and 3.) stricter and higher environmental regulations, including environmental appointees in Mexico City. Current projections indicate that trade among the three countries will increase with the new agreement. The International Trade Commission of the United State predicted a 0.35 percent GDP growth and 176,000 new jobs in the next six years derived from this deal, particularly in the manufacturing sector. The dispute-settling mechanisms definitely present a more attractive alternative instead of particular arbitrations. Climate change and environmental regulations had not been a priority in the past, and now they have become a key aspect of the final deal. Given that Canada and Mexico have both agreed to most American requests and addressed together the main concerns, U.S. Congress approval seems more likely than before. The Mexican Senate has already ratified the agreement; in the United States, it will probably happen before the end of the year, whereas Canada will ratify it before February according to recent announcements.”

Carlo Dade, director of the Trade and Investment Centre at the Canada West Foundation: “Ratification of the new North American trade agreement (referred to as such or ‘the new NAFTA’ in Canada) will not be an issue north of the border, even with a minority government. In Canada, trade agreements are approved not by Parliament, but rather by a vote of the cabinet. Parliament is not required to vote on the treaty, and any vote it may take is advisory and nonbinding. With the U.S. AFL-CIO backing the agreement, and agricultural interests other than the protected dairy lobby on side, it is hard to find opposition in Canada except for academic critics of some of the intellectual property measures. Canada largely won in this agreement by not losing. Parts of the cattle industry, which is as cross-border as the auto sector, faced a potential 10-percent U.S. tariff if NAFTA tariff cuts were eliminated. The auto sector gained protections from U.S. section 232 national security tariffs on autos, and even the dairy and other supply managed sectors gained by giving access to only a measly 3.5 percent of their protected market, or about twice Prince Edward Island (PEI)’s share of the national dairy market. (PEI is about the size of two good-sized counties in Wisconsin). One big loser, though, were firms that depend on movement of people to support trade in services. The new agreement failed to update the more than 20-year-old provisions in NAFTA, leaving North America and especially U.S.-based companies less competitive than those with access to new trade blocs such as Canada-E.U. and Canada/Mexico-CPTPP. But the biggest loss was in Canada and Mexico failing to gain greater protection from idiosyncratic unilateral tariff threats from the U.S. president. Without that protection, the agreement only offers certainty until the president’s next tweet. Issues over labor enforcement are seen as U.S.-Mexico issues, and Canadians largely just want this whole episode/nightmare to end.”

Tamara Kay, associate professor at the University of Notre Dame’s Keough School of Global Affairs, and Kimberly A. Nolan García, assistant professor at FLACSO México: “The USMCA, President Trump’s much touted replacement of NAFTA, appeared dead in the water until early last week when new labor rights amendments were announced at a trinational ceremony in Mexico City. It seemed progressive activists had won their year-long battle to improve the agreement, with Speaker Pelosi reportedly proclaiming of the GOP, ‘We ate their lunch.’ But the tide may have turned over the weekend when Mexican lead negotiator Jesús Seade claimed the deal Mexico signed on Dec. 10 included key labor provisions that Mexico had not actually agreed to in negotiations, specifically a new procedure that allows U.S. labor diplomats to monitor Mexico’s progress upholding labor standards. Although it is unclear how this will play out, it is important to highlight how lopsided the amendments appear to be. Only Mexico is required to have stringent monitoring and be subject to possible trade sanctions for labor rights violations, and especially those related to freedom of association and collective bargaining. And labor rights protections for workers in the public sector—where unions in the United States have fought hard to remove barriers to union affiliation, collective bargaining and right-to-work laws—are excluded from protection under the amendments. The amendments’ focus on Mexico is quite ironic given the greatest threat to U.S. jobs and workers does not come from Mexico, but from corporations and government efforts to undermine labor rights and unionization. Mexican workers will therefore gain the most from USMCA labor provisions—and decades-long pressure from the Mexican left—forcing the government to restructure its labor regime and enforce its laws that, on the books at least, are vastly superior to U.S. labor laws.”

Andrew Rudman, managing director at Monarch Global Strategies: “Beginning with President Trump’s inauguration in January 2017, the threat of a NAFTA withdrawal weighed heavily on firms operating in North America. With the completion of the Protocol of Amendments to the USMCA, and the expected ratification in early 2020 by the U.S. Congress and Canada, this uncertainty should be removed. Firms will again be able to base their North American investment and production decisions on a clear set of rules (albeit with some important changes). Of greatest import is surely the support from much of organized labor for the revised USMCA. Not only should this ensure passage within the U.S. Congress, but it also marks an important shift toward a more protectionist and interventionist U.S. trade policy. The strengthened labor enforcement mechanism is consistent with the objectives of the López Obrador administration in Mexico. How Mexico implements its new labor commitments and how alleged violations are addressed through the new labor panel system remain to be seen. The commitment from all parties to improve labor conditions in Mexico is a promising start. From a political perspective, the innovative pharmaceutical industry is probably the biggest loser in the negotiations between USTR and House Democrats. The Dec. 10 protocol stripped out virtually all of the gains achieved in the original negotiation; some of which, such as the length of regulatory data protection for innovative biologic drugs, exceeded the terms of the TPP. In practical terms for innovative pharma, USMCA provides no significant improvement over NAFTA. Indeed, the Dec. 10 agreement recalls the May 10, 2007 deal when agreed-upon provisions to enhance intellectual property rights protections were removed from the Colombia and Peru free trade agreements in return for strengthened labor and environmental provisions to gain the support of House Democrats.”

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