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.
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.
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.
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.
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
European Union (28)
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
“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
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:
European Union (28)
Subtotal (Mex.- Taiwan)
From all countries
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
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
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.