USMCA

U.S. trade policy under a Biden Administration and a Democratically-controlled Congress — how will a search for social justice and more equitable distribution of benefits affect trade laws and negotiations?

President-elect Biden’s pick for U.S. Trade Representative, Katherine Tai, spoke at a National Foreign Trade Council virtual conference yesterday and various press reports indicate that she identified two primary areas of focus of the incoming Administration in trade as being China and the USMCA. Ms. Tai is quoted as stating that the Biden Administration “will pursue trade policies that place the humanity and dignity of every American and all people at the heart of our approach” and will use trade policy “to create a more inclusive prosperity for Americans”. Inside U.S. Trade’s World Trade Online, Tai calls for more trade collaboration ‘across the entire spectrum,’ January 12, 2021,https://insidetrade.com/daily-news/tai-calls-more-trade-collaboration-%E2%80%98across-entire-spectrum%E2%80%99. See also Financial Times, What maiden speech of USTR-elect says about Biden’s trade policy, January 13, 2021, https://www.ft.com/content/f57fc73f-276f-470f-bffe-ab348fb13f16; Washington Trade Daily, January 13, 2021, Biden’s Worker-Centered Trade Policy, https://files.constantcontact.com/ef5f8ffe501/cfb23ebb-cdc6-4b55-adb5-3a5cbd7cfce6.pdf, (“’The President-Elect’s vision is to implement a worker-centered trade policy,’ Ms. Tai continued. ‘What this means in practice is that US trade policy must benefit regular Americans, communities, and workers. And that starts with recognizing that people are not just consumers – they are also workers, and wage earners.’”).

In an earlier post, I had reviewed the range of issues that an incoming U.S. Trade Representative will be facing. See December 12, 2020, The Incoming Biden Administration and International Trade – Katherine Tai, nominee for U.S. Trade Representative, https://currentthoughtsontrade.com/2020/12/12/the-incoming-biden-administration-and-international-trade-katherine-tai-nominee-for-u-s-trade-representative/.

In the area of trade negotiations, the USMCA reflects a greater focus on workers and has been cited by Democrats as having moved in the right direction to address the needs of working families. Enforcement is a major element of the new agreement on labor rights and how well the new agreement works in the labor enforcement area will be tested shortly after President-elect Biden is sworn is as the AFL-CIO will be filing a complaint on Mexico’s implementation then. Inside U.S. Trade’s World Trade Online, Trumka: AFL-CIO to launch labor case against Mexico soon after Biden takes office, January 12, 2021, https://insidetrade.com/daily-news/trumka-afl-cio-launch-labor-case-against-mexico-soon-after-biden-takes-office.

But there are many areas of trade law where a more worker-inclusive approach to trade policy could lead to significant changes in the approach pursued. For example, on the pending issue of renewal of the Generalized system of preferences (GSP expired on Dec. 31, 2020), Democrats in 2020 were looking for modifications to eligibility criteria to address issues like human rights, anti-corruption and the environment. See Inside U.S. Trade’s World Trade Online, Wyden: GSP changes needed to ‘raise the bar’ for U.S. trading partners, December 2, 2020, https://insidetrade.com/daily-news/wyden-gsp-changes-needed-%E2%80%98raise-bar%E2%80%99-us-trading-partners. These types of changes are likely to be pursued in 2021. But there are others that may be equally important to working men and women in the manufacturing sector. For many products produced in various GSP countries, the primary beneficiary is a local subsidiary of a major multinational company — companies that very likely don’t need the tariff advantage to be competitive against imports from other countries. Congress and a Biden Administration could examine whether eligibility within an eligible country would not apply to goods from subsidiaries of multinational companies. Such an approach would reduce the likely loss of jobs in the United States or encourage reshoring where the advantage is a tariff-based incentive.

Similarly, Congress has often considered miscellaneous tariff bills (MTBs) to provide waiver of duties on imports reportedly not produced in the United States. Many businesses are pushing for adoption of MTBs early in the Biden Administration. There can be literally thousands of such requests received and handled. There is no present process to review which products are simply inputs being shipped between subsidiaries of the same company, for which products maintaining the duty could lead to production starting in the United States, etc. A Biden Administration, if interested in ensuring that trade policy works for all Americans might view changes to the MTB process to be relevant.

In trade remedies, while U.S. law has permitted workers to bring petitions, the Biden Administration and Congress could look at self-initiation of cases of interest to workers where major producers in the U.S. are conflicted because of foreign operations and could seek funding (based on use of a small portion of trade remedy duties collected from other cases) for workers to be able to hire private counsel to pursue cases.

While the Trump Administration has bolstered action on imports made from forced labor, the Biden Administration has the ability to significantly increase the use of existing U.S. law against such imports and should explore additional documentation required for any goods from an area where forced labor is suspected to be used.

While one is not expecting significant new FTA negotiations by the Biden team in 2021, there are negotiations underway where labor, environment and other priorities for the Biden team could be addressed. The U.S.-U.K. negotiations would be one obvious one. If there is to be a comprehensive U.S.-Japan agreement, that would be a second one where achieving meaningful results on labor and environment should be doable. U.S.-Kenya would be more challenging but would be important. While a significant part of the business community is hopeful that the U.S. will reengage with the now CPTPP countries, it is unlikely that such an undertaking will be pushed in 2021.

While the U.S. will be reengaging with the EU and while the U.S. and EU should have broad areas of common interest on labor and environment in a Biden Administration, the immediate issues before both the U.S. and EU are resolution of the Airbus/Boeing disputes and retaliations, what path forward there is on global excess capacity in various sectors (including steel and aluminum where the U.S. has 232 tariffs in place and the EU has retaliated and also has safeguard duties in place on steel), the 301 investigations into the EU and various EU Members on digital service taxes and the ongoing OECD/G20 efforts to adopt broadbased agreed rules for taxation of the digital economy, and collaboration on efforts to deal with distortions caused by China’s policies.

On the important U.S.-China relationship, the U.S. should start a phase 2 negotiations with China. In addition to the remaining issues from the U.S. 301 investigation of China that remain unresolved, successes in the EU-China Comprehensive Agreement on Investments on services and selected goods areas where various issues were addressed on sustainability, transparency, subsidies, etc. could be useful as precedents for any phase 2 talks on similar issues.

On the WTO, reform is a key priority for the Members and may provide the U.S. with an opportunity to make trade rules work better for working men and women. There is considerable interest among many WTO Members on the effects of climate change and what role the WTO can play to address. Indeed, there is generally reasonable interest in a range of the UN Sustainable Development Goals, a number of which should be of interest to the Biden team and the Democratically led Congress. Historically, labor issues have been unwelcome by many developing and least developed countries at the WTo, and it is unclear that there has been any significant change, meaning such issues will likely be more fruitfully addressed in FTAs or in other venues (e.g., GSP legislation).

House Ways and Means Committee Democratic Policy Pillars and Priorities on Health and Economic Equity while generally not trade focused are consistent with likely direction of the Biden Administration

A recent document released by the House Ways and Means Committee Chairman Richard Neal entitled Policy Pillars and Priorities: A Bold Vision for a Legislative Pathway Toward Health and Economic Equity deals with the broad issue of changes needed to laws that are within the Ways and Means jurisdiction to address the challenges of unequal access to health care and economic opportunities experienced by many members of minority groups in the United States. The document is embedded below. Generally trade is not the primary focus of the different topics although there is reference to trade in a number of the sections.

HWMC-Pillars-and-Priorities-Pathway-toward-Health-and-Economic-Equity

Specifically, the paper identifies nine policy pillars, four that are part of the section on health equity pillars and five that are part of the economic equity pillars. Trade is not addressed in any of the health pillars as policy approaches but is included as one of the policy approaches for each of the economic equity pillars. Below is the pillar and the listed trade policy approach cited for each.

“ECONOMIC EQUITY POLICY PRIORITIES

“Economic Justice for Workers

“Ensure trade policies support and do not undermine economic justice for workers in the
United States and in trading partner countries

“Economic Justice for Children and Families

“Assess the impacts that trade policies have on the ability of families from marginalized
communities and children of color to access needed resources

“Retirement Security

“Assess the impacts that trade policies have on the ability of American families to plan for and
enjoy a secure and dignified retirement

“Investment in Communities from the Ground Up

“Assess the impacts trade policies have on communities and their access to economic
opportunity and justice

“Environmental Justice

“Promote environmental justice through U.S. trade policies, including trade agreements and
programs”.

The paper from Chairman Neal was accompanied by a majority staff report which is embedded below and from which the section on trade (pages 20-24) is copied after. What is clear from the report and the economic equity pillars is that Democrats will be looking for trade policies to support efforts to make global trade more beneficial to working people and less discriminatory in effect on minorities. While the bulk of the tools to achieve greater equity will be domestic laws and policies (e.g., substantial infrastructure projects could be of significant help both short-term and longer-term), trade policy that includes the concerns of labor and the environment will likely differ significantly from policy that is simply business-owner focused.

HWMC-Majority-Staff-Report

“Access to the Benefits of Trade for Individuals and Communities

“Commonplace discussions about the objectives of international trade policy generally identify and promote the interests of economic sectors – industrial, agricultural, and services, for example. Seldom have trade’s effects on individuals or communities been considered, much less prioritized as such, beyond in any but the most abstract terms. When trade policymakers have taken the time to make the interests of individuals and communities a priority, however, their efforts have generated substantial political support for those policies. 106 Consequential developments in recent years – and in 2020 in particular – are challenging policymakers to
investigate further the role that trade policy has played in either perpetuating or exacerbating unequal access to the benefits of trade for certain individuals and communities – both in the U.S. and worldwide. In 2020, the COVID-19 pandemic has highlighted the fact that these disparities in outcomes among different communities result from structural and systemic inequities U.S. laws and policies create – inequities that emerged as far back as some of the first U.S. international economic policies involving the exchange of goods and people.107

“Globally, the pandemic has also revealed the fragility of our international supply chains and the inequity in the treatment of workers in low-cost labor countries where manufacturing has become concentrated. Predominantly non-White workers from developing countries and former colonies across the world suffer compromised labor conditions while producing goods for U.S. and global consumers. Unequal contracting and employer relationships that have developed from the arbitrage that conventional trade policies enable have encouraged a spectrum of exploitative practices, including the prevalence of forced labor in certain regions.108 In their attempts to minimize financial losses related to COVID-19, U.S.- and European-based multinational companies have left already low-wage workers in developing countries – also struggling to survive the pandemic – without pay.109 In this way, COVID-19 revealed how globalization has incentivized supply chain models that depend on finding the lowest cost workforce for production, regardless of living or working conditions, with dire consequences for public health, supply chain resilience, and a disparate impact on those already bearing the heaviest burdens in the existing global economic order.110 Indeed, some have called on brands and global retailers to remedy inequitable purchasing practices and commit to support millions of garment workers of color around the world who have enabled substantial industry profits, particularly in light of recent corporate public actions to promote racial justice.111

“For the last 50 years, the U.S. has pursued a policy of aggressive trade liberalization and experienced
a painful decline in manufacturing and redistribution of jobs to the services sector. The loss of manufacturing jobs and the increase in service sector work has exacerbated income inequality more broadly because those manufacturing jobs often had union benefits and wages that supported middle- and working-class families, whereas service sector jobs generally did not.112 In recent years, U.S. service sector jobs have also faced the
pressures of globalization and losses to lower-labor-cost countries.113 Trade policies favoring financial and corporate interests over those of individuals and their communities have yielded lowered labor conditions and standards for American workers in the form of decades-long wage stagnation, weaker labor protections, limited options for quality jobs, and increased unemployment.114

“Black workers have faced even harsher obstacles to recover from globalization-related job losses due to systemic and pervasive racial disparities across the labor market and in accessing public services.115 The loss in manufacturing jobs disproportionately impacted Black workers in a multitude of ways, including negatively affecting their wages, employment, marriage rates, house values, poverty rates, death rates, single parenthood, teen motherhood, child poverty, and child mortality.116 In addition to increases in precarious work, the decline in union jobs has also been cited as a contributing factor to growing inequality. In fact, union jobs help reduce disparities Black workers suffer by enabling more equitable labor conditions that
help protect them from discriminatory practices.117 At the same time, trade liberalization has impacted immigrant and Latino workers in the U.S. who have also suffered job losses and wage stagnation.118, 119

“An examination of U.S. policies affecting agricultural production and trade, as well as the historical realities that helped shape them, reveals racial inequities in both their development and impacts. The production of
certain commodities in the U.S. can be traced back to the founding of the original colonies as part of trans-Atlantic trade when forced labor powered production and comprised a key element of the triangular trade flow. Those commodities continue to enjoy robust support through U.S. government policies – support that is often strategically sheltered from strict multilateral trade disciplines. U.S. policies and systemic inequities have over time restricted the rights and ability of Black Americans to acquire or retain land for farming; Black farmers currently make up less than two percent of all U.S. farmers.120 Furthermore, policies and practices have been documented that further restricted the ability of Black farmers to access the government support that other farmers receive.121 Taken together, it appears that benefits and prosperity that U.S. farmers and agricultural producers enjoy from trade and attendant policies lack inclusivity and reflect significant disparities between communities. Thus, such factors must be revisited to promote economic equity.

“Some have criticized the globalization resulting in large part from U.S. trade policies of the past decades for a redistribution of wealth that places costs disproportionately on those that are socially and economically disadvantaged in other countries as well.122 The current application of U.S. trade policies has contributed to imbalanced economic benefits in developing countries and broader unrealized development goals. The disproportionate benefits for corporate entities over individuals and local communities have dramatically impacted the economies and demographics of some developing countries. The resulting job losses in those foreign nations have in many cases spurred mass forced migration.123 Similarly, U.S. preference programs have historically benefitted a small set of developing countries and have largely left the least developed countries behind.124 A thoughtful, probing re-examination of the modes and objectives of U.S. trade policy in light of their domestic and international effects is necessary now more than ever before. Only then can reforms and new approaches be adopted to produce a sustainable and inclusive prosperity that prioritizes meaningful economic benefits for individuals and communities, and others who have been left out, overlooked, and exploited. also

“106 Guided by a focus on the effect of the trade agreement on individuals, in 2019, House Democrats engaged in a direct negotiation with the Trump Administration to correct serious deficiencies in the Administration’s attempted renegotiation of the North American Free Trade Agreement (NAFTA). House Democrats required significant changes to strengthen the standards and enforceability of worker rights and environmental protections, and to ensure people’s timely access to affordable medicines. The changes secured a level of bipartisan, bicameral support that U.S. trade policy had not seen in nearly 40 years.

“107 Danyelle Solomon et al., Systematic Inequality and Economic Opportunity, CTR. FOR AM. PROGRESS (Aug. 7, 2019), https://www.americanprogress.org/issues/race/reports/2019/08/07/472910/systematic-inequality-economicopportunity/.

“108 Elizabeth Paton and Austin Ramzy, Coalition Brings Pressure to End Forced Uighur Labor, N.Y TIMES (July 23, 2020), https://www.nytimes.com/2020/07/23/fashion/uighur-forced-labor-cotton-fashion.html; see also Vicky Xiuzhong Xu et al, Uyghurs for Sale, AUSTRALIAN STRATEGIC POLICY INST. (Mar. 1, 2020),
https://www.aspi.org.au/report/uyghurs-sale.

“109 Mark Anner, Abandoned? The Impact of Covid-19 on Workers and Businesses at the Bottom of Global Garment Supply Chains, PENNSTATE CENTER FOR GLOBAL WORKERS’ RIGHTS (Mar. 27, 2020),
https://www.workersrights.org/wp-content/uploads/2020/03/Abandoned-Penn-State-WRC-Report-March-27-
2020.pdf; see also Who Will Bail Out the Workers That Make Our Clothes?, WORKER RIGHTS CONSORTIUM (Mar. 2020), https://www.workersrights.org/wp-content/uploads/2020/03/Who-Will-Bail-Out-the-Workers-March-2020.pdf.

“110 Traditional payment structures for apparel orders heavily favor global brands and retailers over suppliers and workers in developing countries. See, Garment Workers on Poverty Pay are left without Billions of Their Wages During Pandemic, CLEAN CLOTHES CAMPAIGN (Aug. 8, 2020), https://cleanclothes.org/news/2020/garmentworkers-on-poverty-pay-are-left-without-billions-of-their-wages-during-pandemic; My Children Don’t Have Food: What the Crisis Means for the People Who Make Collegiate Apparel , WORKER RIGHTS CONSORTIUM (June, 2020), https://www.workersrights.org/wp-content/uploads/2020/06/My-children-dont-have-food_June-2020.pdf.

“111 Kalkidan Legesse, Racism is at the Heart of Fast Fashion—It’s Time for Change, THE GUARDIAN (June 11,
2020), https://www.theguardian.com/global-development/2020/jun/11/racism-is-at-the-heart-of-fast-fashion-itstime-for-change.

“112 Robert E. Scott, Trading Away the Manufacturing Advantage, ECONOMIC POLICY INST. (Sep. 30, 2013),
https://files.epi.org/2013/trading-manufacturing-advantage-china-trade.pdf; Daniella Zessoules, Trade and Race: Effects of NAFTA 2.0 and Other Low-Road Approaches to Trade on Black Communities, CTR. FOR AM. PROGRESS (June 18, 2019), https://www.americanprogress.org/issues/economy/reports/2019/07/18/471198/trade-and-race/;
Gerald D. Taylor, Unmade In America: Industrial Flight and the Decline of Black Communities, ALLIANCE FOR AM. MANUFACTURING (October 2016), https://s3-us-west-2.amazonaws.com/aamweb/uploads/researchpdf/
UnmadeInAmerica.pdf.

“113 Offshoring Security: How Overseas Call Centers Threaten U.S. Jobs, Consumer Privacy, and Data Security,
COMMUNICATIONS WORKERS OF AM. (Oct. 2013), https://files.cwa-union.org/national/offshoring-security.pdf.

“114 Sandra Polaski et al., How Trade Policy Failed U.S. Workers—and How to Fix It, BOSTON UNIV. GLOBAL
DEVELOPMENT POLICY CTR. (Sep. 14, 2020), http://www.bu.edu/gdp/files/2020/09/How-Trade-Policy-Failed-USWorkers-and-How-to-Fix-it-FIN.pdf; David H. Autor, The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade, NAT’L BUREAU OF ECONOMIC RESEARCH (2016), https://www.nber.org/papers/w21906.pdf.

“115 Robert E. Scott, Trading Away the Manufacturing Advantage, ECONOMIC POLICY INST. (Sep. 30, 2013),
https://files.epi.org/2013/trading-manufacturing-advantage-china-trade.pdf; Daniella Zessoules, Trade and Race: Effects of NAFTA 2.0 and Other Low-Road Approaches to Trade on Black Communities, CTR. FOR AM. PROGRESS (June 18, 2019), https://www.americanprogress.org/issues/economy/reports/2019/07/18/471198/trade-and-race/.

“116 Eric D. Gould, Torn Apart? The Impact of Manufacturing Employment Decline on Black and White Americans, THE MIT PRESS J. (Mar. 6, 2020), https://www.mitpressjournals.org/doi/pdf/10.1162/rest_a_00918. See also Sandra Polaski et al., How Trade Policy Failed U.S. Workers—and How to Fix It, BOSTON UNIV. GLOBAL DEVELOPMENT POLICY CTR. (Sep. 14, 2020), http://www.bu.edu/gdp/files/2020/09/How-Trade-Policy-Failed-US-Workers-and-How-to-Fix-it-FIN.pdf.

“117 Id.; see also Andrea Flynn et al, Rewrite the Racial Rules: Building an Inclusive American Economy, ROOSEVELT INST. (June 2016), https://rooseveltinstitute.org/wp-content/uploads/2016/06/RI-RRT-Race-201606.pdf; Natalie Spievack, Can labor unions help close the black-white wage gap?, URBAN INST. (Feb. 1, 2019), https://www.urban.org/urban-wire/can-labor-unions-help-close-black-white-wage-gap.

“118 Fracaso: NAFTA’s Disproportionate Damage to U.S. Latino and Mexican Working People , PUBLIC CITIZEN
(Dec. 3, 2018), https://www.citizen.org/article/fracaso-naftas-disproportionate-damage-to-u-s-latino-and-mexicanworking-people/.

“119 Trade Discrimination: The Disproportionate, Underreported Damage to U.S. Black and Latino Workers from U.S. Trade Policies, PUBLIC CITIZEN (Jan. 7, 2021), https://www.citizen.org/wp-content/uploads/PC_Trade-
Discrimination-Report_1124.pdf.

“120 Khalil G. Muhammad, The Sugar that Saturates the American Diet has a barbaric history and as the White Gold that Fueled Slavery, NY. TIMES (Aug. 14, 2019), https://www.nytimes.com/interactive/2019/08/14/magazine/sugarslave-trade-slavery.html.

“121 Nathan Rosenberg, USDA Gave Almost 100 Perfect of Trump’s Trade War Bailout to White Farmers, THE
COUNTER (July 29, 2019), https://thecounter.org/usda-trump-trade-war-bailout-white-farmers-race/ ; Paola Rosa-Aquino, Nearly 100 Percent of Trump Funds Designed to Help Farmers Went to White Farmers, GRIST (Aug. 1, 2019), https://grist.org/article/trump-trade-war-usda-farmer-subsidy-race-disparity/; and Chantal Thomas, Income Inequality and International Economic Law: From Flint, Michigan to the Doha Round, and Back, CORNELL LEGAL STUDIES RESEARCH (2019).

“122 Chantal Thomas, Income Inequality and International Economic Law: From Flint, Michigan to the Doha Round, and Back, CORNELL LEGAL STUDIES RESEARCH (2019).

“123 Both NAFTA and the U.S. Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) have
been criticized for contributing to increased migration of Mexican and Central American workers, respectively, into the U.S. See Andrew Chatzky, et. al., NAFTA and the USCMA: Weighing the Impact of North American Trade, COUNCIL ON FOREIGN RELATIONS (July 1, 2020), https://www.cfr.org/backgrounder/naftas-economic-impact; see also Mark Weisbrot et. al., Did NAFTA Help Mexico? An Assessment After 20 Years, CTR. FOR ECONOMIC & POLICY RESEARCH (Feb. 2014), https://cepr.net/report/nafta-20-years/; NAFTA at 20, AFL-CIO (Mar. 27, 2014), https://aflcio.org/reports/nafta-20.

“124 Generalized System of Preferences (GSP): Overview and Issues for Congress RL33663, CONG. RESEARCH SERV. (2019).”

Inserted material in boxes in report:

“We should be asking: why are Black and Latino people less likely to be working from home; less likely to be insured; less likely to live in unpolluted neighborhoods? The answer is racist policy… Will policymakers turn away as people of color suffer in their bedrooms, suffer on their hospital beds, suffer watching their loved ones lowered into their graves –all the while blaming them for their own suffering –all the while adding to the racist history of their suffering? Or will policymakers be antiracist? Meaning no longer blaming people of color for disparities. And focused on pushing policy that leads to equity and justice for all. Testimony of Dr. Ibram X Kendi, Hearing on The Disproportionate Impact of COVID-19 on Communities of Color, May 2020.”

“So climate change will lead to increased droughts, more frequent droughts. But, at the same time, it will also change precipitation patterns and lead to heavier downpours. The Great Plains, which are the breadbasket of America, are projected to experience drought conditions unprecedented in the last millennium. We expect to see the ranges of certain pests expanding, and changes in the growing seasons. And all of these things could have implications for agriculture and our food security. Testimony of Dr. Katherine Marvel, Hearing on The Economic and Health Consequences of Climate Change, May 2019.”

Conclusion

The United States is eight days from a new Administration. While trade is not the topic of first importance to the incoming Biden team, the desire to build back better and more equitably will have effects on Executive actions in all areas, including trade, and will over the next two years at least with the Democrats in charge of both the House and the Senate include legislative discussions of issues of health and economic equity that may have important trade policy implications as well.


Revisions to the US-Mexico-Canada Agreement Gains Support of Labor and House Democrats

The Trump Administration has sought to replace/update NAFTA as a priority since taking office. The Obama Administration also wanted to update NAFTA but viewed that as doable within the context of the Trans Pacific Partnership agreement talks. When the Trump Administration withdrew from the TPP in 2017, updating/revising NAFTA became the preferred approach.

In a post from November 16, 2019, I reviewed the possibility that USMCA, if revisions were made to address Democratic concerns, could be an example of bipartisan trade legislation. See https://currentthoughtsontrade.com/2019/11/16/usmca-a-return-to-bipartisan-trade-legislation/.

For roughly a year, the Trump Administration through USTR Lighthizer and the House Democrats have been pursuing negotiations on changes deemed necessary by the Democrats for the USMCA to be acceptable to them. Enforcement of labor and environment provisions and issues surrounding biologics have been at the core of the concerns being explored. Labor and environmental groups have pressed hard for changes that would address their concerns, and the problems they have experienced under other agreements.

In recent weeks, lead negotiators from Mexico and Canada were in Washington to review changes the Administration was seeking and providing further feedback/reactions to whether such changes were acceptable. A meeting in Mexico City today between the main negotiators is intended to permit agreement on revisions acceptable to the three countries.

Earlier today, the President of the AFL-CIO, Richard Trumka, expressed support for the modifications to the USMCA that had been negotiated by the Democratic team with the Trump Administration. Speaker of the House Nancy Pelosi and House Ways and Means Chairman Richard Neal indicated that the House Democrats believed the revised agreement (as reflected in the modifications negotiated with the Trump Administration) was far superior to both NAFTA and the USMCA that had previously been signed by the governments. Indeed, assuming agreement by the three countries to the revisions this afternoon, USMCA as revised, will be ready for Congressional consideration as early as next week.

While the text of the modifications is not yet public, the House Ways and Means Committee Chairman has released a fact sheet which reviews issues pursued by the Democrats that they perceive have been successfully resolved. The text of the fact sheet is included as a PDF below.

USMCA-win-factsheet-

If the USMCA is revised as expected, the timetable in the Congress will likely be expedited and will be supported by large parts of the business community whether agriculture, manufacturing, services and will include support from labor and other groups.

When the text of the agreed modifications is available, the revisions will be added to the comparison documents provided in the prior post that compare USMCA to NAFTA and the TPP agreement that the U.S. had signed (before withdrawing).

To the extent that the USMCA becomes a model for other agreements going forward, there should be greater likelihood of bipartisan support for future agreements just as has developed for USMCA.

USMCA – A Return to Bipartisan Trade Legislation?

Trade legislation historically was an area of bipartisan agreement. For the last twenty years or so, it has been increasingly difficult to find bipartisan support for trade agreements and implementing legislation. If the consultation process between the Trump Administration and House Democrats results in a set of modifications to the USMCA that garner larger Democratic support, we may be seeing a roadmap for greater bipartisan efforts in the trade arena going forward.

The Democrats have highlighted concerns in four areas – enforcement, labor, environment and pharmaceuticals. Labor (as reflected in the position of the AFL-CIO and its member unions) has felt that prior trade agreements, including NAFTA, resulted in situations where workers have not benefited and have in fact seen economic opportunities shrink. The shrinkage was a result of jobs moving off-shore, with imports into the U.S. from such off-shored facilities ramping up and reducing U.S. employment. Indeed, the possibility of moving to Mexico has been viewed by labor as a constant threat applied by management in many companies to reduce income expectations of workers. NAFTA has not been viewed by labor as helping improve significantly working conditions in Mexico nor the problems of labor rights in Mexico. How to achieve meaningful improvements has been a major concern of labor and many Democrats. For labor, the result of past trade agreements has been a documented stagnation of wages and reduced employment in manufacturing. The concern with North American neighbors has been reinforced by the large and growing trade deficit with Mexico in particular. For labor, agreements that don’t result in actual improvements in the opportunities for workers as well as the companies are simply unacceptable. A race to the bottom on worker rights and environmental protections is not acceptable to labor or to environmental groups.

The Trump Administration introduced certain provisions into the USMCA that were intended to address certain Administration concerns over the trade deficit with our neighbors. The Administration also elevated labor and environment from side letters to integral chapters of the Agreement, an important improvement over NAFTA. While recognizing improvements over prior agreements, Democrats have signaled that some modifications are critical for their support.

USTR Lighthizer and his team have been involved in negotiations with Democratic House members over a number of months. While the specifics of the proposals and counter-proposals are not public, press accounts indicate that resolution of Democratic concerns/demands could be close. Moreover, the Mexican government has been visited by Congressional Democrats, and the President of Mexico has forwarded communications on his commitment to fulfilling Mexico’s obligations under the USMCA labor chapter.

Speaker Pelosi stated at her weekly press conference this past week that “I do believe that if we can get this to the place it needs to be which is imminent, that this can be a template for future trade agreements, a good template.” House members involved in the negotiations agree negotiations are progressing, but have indicated a deal is not yet imminent. https://thehill.com/policy/finance/trade/470580-usmca-deal-close-but-not-imminent-democrats-say. The next few weeks will likely indicate whether agreement can be reached on the four topics being negotiated.

Obviously, the vast majority of the USMCA will not be disturbed by any agreement between the Trump Administration and House Democrats. And any modifications to the agreement or acceptance of additional side agreements, etc., obviously need to be agreed to by Mexico and Canada and result in implementing legislation that is approved by Congress. But without agreement between the Administration and the House Democrats, USMCA implementing legislation will not be taken up by Congress. Thus, agreement between the Administration and House Democrats in the next few weeks is priority number one for the USMCA moving forward.

For those with an active interest in the USMCA and how the agreement, before modifications, compares to the NAFTA or to the Trans Pacific Partnership (as signed by the U.S., but before the U.S. withdrew), I include below side-by-side documents of several chapters (14 on investment, 20 on intellectual property, 23 on labor, 24 on environment, 31 on dispute settlement) and one side letter (on biologics). The side-by-side documents were generated by my firm prior to my retirement. Presumably modifications to the agreements or additional side letters, etc. that are agreed to by the Administration with the House Democrats will key off of the enclosed chapters and side letter.

USMCA-Side-by-Side-Chapter-14-Investment

USMCA-Side-by-Side-Chapter-20-Intellectual-Property-Rights

USMCA-Side-by-Side-Chapter-23-Labor-1

USMCA-Side-by-Side-Chapter-24-Environment

USMCA-Side-by-Side-Chapter-31-Dispute-Settlement

MX-US_Side_Letter_on_Biologics

The U.S. Trade Deficit – Data for First Thirty-Three Months of the Trump Administration (2017-Sept. 2019)

The U.S. trade deficit has been at extraordinarily high levels for many years, having ranged from $766.6 to 818.0.billion/year during 2005-2008 (2nd term of President George W. Bush).  After a sharp contraction in trade during the 2009-2010 period as the country dealt with the great recession flowing from the financial crisis that started in 2008 (with resulting significantly lower trade deficits), trade deficits ran from $689.5 to $745.5 billion/year during the 2011-2016 years of President Obama’s tenure (2016 trade deficit was $735.3 billion).

President Trump has had a significant focus on trade issues during his presidency.  His Administration has attempted to address the chronic trade deficit the country has developed over the last fifty years through improved trade deals, aggressive enforcement of various trade laws and some domestic actions (regulations and taxation).  Despite these actions, the first two years and nine months of the Trump Administration saw a significant expansion of the trade deficit in 2017 ($793.4 billion) and 2018 ($874.8 billion) – an increase by 2018 of 18.97% over 2016 levels) – with a stabilization in the first nine months of 2019 (up 1.43% from the first nine months of 2018 at $647.6 billion).

A growth in the trade deficit during 2017-2019 reflects various causes including:  (1) continued economic growth in the U.S. and slower growth rates in much of the rest of the world; (2) a delay in the trade balance effects flowing from the Administration’s trade actions against China under Section 301 of the Trade Act of 1974 and against many countries on steel and aluminum under Section 232 of the Trade Expansion Act of 1962; (3) retaliation by various trading partners for actions taken by the U.S.; and (4) shifts in currency values.

The huge trade deficit with China declined by $38.5 billion or by 12.77% in the first nine months of 2019 reflecting the large tariffs applied by the U.S. on huge parts of Chinese exports to the U.S. which exceeded the contraction in U.S. exports to China flowing from retaliation by the Chinese.  However, there was more than a $47.7 billion increase in the deficit from trade flows with other countries during the first nine months of 2019.  Below are some of the countries with whom the U.S. trade deficit has increased in the first three quarters of 2019 by more than $5.0 billion.  Data reflect the size of the increase in the U.S. trade deficit with the particular country: :

Country or Group of Countries Increase in U.S. Trade Deficit
9 months 2019
Mexico $17.0 billion
European Union (28) $12.0 billion
Vietnam $11.7 billion
Switzerland   $7.3 billion
Taiwan   $6.5 billion
Subtotal $54.5 billion

Vietnam and Taiwan could be in some significant part the result of shifting shipments from China to neighboring countries where Chinese or other producers have investments, where producers have found alternative sourcing or where there has been shipment of products from China which have been mislabeled as to origin.

Similarly, the large increase from Mexico may reflect in part a move back to Mexico or increased sourcing from Mexico for companies previously sourcing from China.    An UNCTAD Research Paper (No. 37) entitled “Trade and trade diversion effects of United States tariffs on China” released recently made similar findings for imports in the first half of 2019.  https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2569.  As noted in the Abstract to the paper (page 1):

“This paper finds that United States tariffs against China have resulted in a reduction in imports of the tariffed products by more than 25 percent. The analysis finds that China’s export losses in the United States have resulted in trade diversion effects to the advantage of Taiwan Province of China, Mexico, the European Union and Viet Nam among others. The analysis also finds that those effects have increased over time. The analysis finds some preliminary evidence that Chinese exporters may have started to bear part of the costs of the tariffs in the form of lower export prices. Overall, the results indicate that the United States tariffs on China are economically hurting both countries. United States losses are largely related to the higher prices for consumers, while China’s losses are related to significant export losses.”

The shift in trade balance for the mentioned countries and for the U.S. as a whole is explained in the following table which shows the change in U.S. total exports and in U.S. general imports during the first nine months of 2019 vs. the same period of 2018:

Country US Exports US Imports US Trade Balanace
China  -$15.2 BN  -$53.0 BN  +$47.7 BN
Mexico    -$4.3 BN +$12.8 BN   -$17.0 BN
European Union (28) +$14.0 BN +$26.0 BN   -$12.0 BN
Vietnam   +$1.0 BN +$12.7 BN   -$11.7 BN
Switzerland    -$4.5 BN   +$2.8 BN     -$7.3 BN
Taiwan   +$0.5 BN   +$7.0 BN     -$6.5 BN
Subtotal (Mex.-
Taiwan)
  +$6.7 BN +$61.3 BN   -$43.5 BN
From all countries =$15.2 BN    -$6.0 BN     -$9.2 BN

Thus, in the first nine months of 2019, US trade with China fell in both directions, with imports from China declining by $53.0 billion and U.S. total exports to China declining $15.2 billion.  Trade with Mexico and Switzerland saw declines in U.S. total exports to each country (-$4.3 billion and -$4.5 billion respectively) while imports from those countries into the U.S. increased (+$12.8 billion and +$2.8 billion).  For the European Union, Vietnam and Taiwan, the U.S. saw total exports increase, but at much slower amounts than the increase in U.S. imports from those countries.  

When looking at the 2-digit HS categories that saw the largest changes in the U.S. trade balance with China in 2019, the three largest improvements in the U.S. trade balance with China were in HS chapters 84, 85 and 94 dealing with nonelectrical equipment, electrical equipment and furniture respectively. The U.S. trade balance with China improved by $17.0 billion, $18.8 billion and $4.0 billion for these three chapters respectively, largely due to contractions in imports from China on those items.  In a prior post (October 13) on the announced likelihood of a first phase U.S.-China agreement, I reviewed the contraction in U.S. exports of agricultural products, particularly soybeans, that happened in 2018 (down $10.2 billion from 2017).  There has been some limited improvement in U.S. exports of soybeans in the first nine months of 2019 and so no agriculture products saw huge declines in exports in 2019 or large reductions in the US trade surplus with China this year.

 Some of the U.S. trade balance improvement vis-à-vis China on these specific manufactured  goods was offset by increased deficits with Mexico ($1.7 billion for Chapter 84, $1.3 billion for Chapter 85), the EU ($6.9 billion for Chapter 84), Taiwan ($4.3 billion for Chapter 84, $1.7 billion for Chapter 85) and Vietnam ($0.5 billion for Chapter 84, $7.6 billion for Chapter 85, $1.3 billion for Chapter 94).

The challenge for any administration attempting to change trade flows is the time it takes to achieve new agreements, to implement specific actions, and to design and obtain approval for new legislation.  Such challenges reflect the state of play for many of the Trump Administration’s trade efforts to date.  Benefits from the initial agreements with Japan signed on October 7 will likely be seen in 2020 if Japan is able to implement the agreements through legislation this month as is reported as possible in the media.  Changes from the USMCA will depend on whether and when Congress takes up implementing legislation.  The Administration is hoping to conclude and sign a first phase trade agreement with China yet this year.  Such an agreement with China will likely result in at least a standstill on tariffs against China and likely some reductions in tariff levels phased in over time based on results of implementation efforts by both sides.  An agreement with China would also improve market conditions for some U.S. products shipped to China, with reported commitments for increased purchases of various U.S. agricultural products as but one example.  Discussions are ongoing with other countries on specific trade concerns, and so additional improvements in market access may yet occur during the current term of President Trump’s Administration. 

Businesses understandably look for predictability in both the trade environment and the rules of engagement with trading partners.  With the heavy focus on revising domestic trade policy and the aggressive use of legislative tools on the books, the Trump Administration’s efforts to date have created a great deal of uncertainty for businesses.  Some businesses have been harmed at least short term, others have benefited from the actions taken by the Administration.  Whether the changes being pursued by the Administration will achieve the objectives sought is an open question.  A review of the changes in trade flows (U.S. imports and U.S. exports) from the Trump Administration’s first thirty-three months in office show that changes towards greater trade balance will not occur quickly nor without a fair amount of disruption to supply chains, business models and companies and many workers.  A more sustainable trade environment is an important objective.  Not since the early 1970s has an Administration been concerned about large and increasing trade deficits.  The Trump Administration has been concerned and has been attempting to change domestic and international trade policy to restore greater balance.  Whether meaningful change will occur is almost certainly a multiple Administration project.  Whether the project will be pursued will depend in part on what is achieved under the current Administration.

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