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On November 30, 2018, the leaders of the three North American countries signed the U.S.-Mexico-Canada Agreement (USMCA). So far, only Mexico has ratified the trade deal. To mark the upcoming one-year anniversary of the signing, we prepared this report, Making it Together: USMCA and U.S. Trade. It provides an update on deal-related developments and discusses the importance of trade with Canada for the U.S. economy.
Since last autumn, escalating U.S./China trade tensions, increasing risk surrounding U.S. and foreign trade policies, along with the consequences of these tensions and uncertainties for the U.S. and global economies, have pushed the USMCA to the backburner. But it’s against these developments that unencumbered access to North American markets becomes even more attractive for U.S. businesses. Total U.S. trade with Canada and Mexico, i.e., combined U.S. exports and U.S. imports of goods and services, was $1.4 trillion in the year ending June, with Canada alone at more than $720 billion, the most for any single country. This means about $2 billion of goods and services crosses the U.S.-Canada border every day. The USMCA should allow this to continue, and increase further.
Upon ratification in all three jurisdictions, the USMCA will replace the North American Free Trade Agreement (NAFTA) that has governed continental trade since 1994. NAFTA was due for modernizing, given how new goods and services have emerged in the past 25 years and the way digitalization has revolutionized commerce. Under the Obama Administration, the Trans-Pacific Partnership (TPP) was designed to update NAFTA and also expand it to other Pacific Rim countries.1 The TPP was signed in February 2016, but Congress failed to ratify it by November. The subsequent election of Donald Trump marked a seismic shift in U.S. trade policy, with the new Administration interpreting the increasing U.S. trade deficit as the negative economic consequence of unfair practices by America’s trading partners, failure to enforce U.S. trade laws, and bad trade deals.
At the time of the election, the annual U.S. goods and services trade deficit totaled just above $500 billion or about 2.7% of nominal GDP. It has since widened to $656 billion (12 months ended July 2019) or around 3.1% of GDP (Chart 1). Interestingly, the trade shortfall has remained at a relatively stable share of GDP since early 2013, in a narrow 2.7%-to-3.1% range, after widening meaningfully in two waves. The first was after NAFTA came into force in January 1994 and the second was after China entered the World Trade Organization (WTO) in December 2001. Before the Great Recession (2006 Q3), the four-quarter deficit hit a record of $778 billion or 5.7% of GDP, before shrinking massively. The latter emphasizes that, because of America’s propensity to import, the trade deficit tends to improve when domestic demand is weakening and deteriorate when demand is strengthening.
Although the total trade deficit has been relatively stable for six years, this masks extreme moves among the components. The U.S. ran a very large $244 billion surplus in services trade in the latest year (1.2% of GDP), with a record $900 billion deficit in goods trade (Chart 2). The latter, as a share of GDP (4.3%), was still not as bad as 2006’s nadir (6.2% in Q3). However, accounting for the steady improvement in the petroleum goods trade shortfall, the balance of trade in non-petroleum goods is currently at a record deficit both in dollar terms and relative to GDP ($858 billion, 4.1%).
A record non-petroleum goods trade deficit is not necessarily a bad thing because there are net economic gains from trade. However, the benefits are often diffused through the economy while the costs tend to be concentrated. Unfortunately, given America’s woefully inadequate trade-adjustment programs and alleged unfair trade practices by some partners (which the Trump Administration argues is particularly the case for China), the mounting goods trade deficit corresponded with a lengthening list of trade casualties that increasingly became a social and political problem. The response was President Trump’s “America First” trade-policy agenda, with its two key priorities of strictly enforcing U.S. trade laws (hence the proliferation of U.S. tariffs) along with negotiating new and better trade deals.
The first week in office, President Trump pulled the U.S. out of the TPP.2 And having referred to NAFTA as the “worst trade deal ever,” the Administration informed Congress in May 2017 that it intended to renegotiate the North American deal. The first set of talks between the U.S., Canada and Mexico took place in August 2017. An agreement in principle was reached in the late hours of September 30, 2018, in time for the October 1 deadline.3
The USMCA achieves the goal of modernizing NAFTA, mirroring much of what the U.S., Canada and Mexico had already agreed to in the TPP.4 Through its 34 chapters (NAFTA had only 22) and various annexes and side letters, the USMCA should facilitate even more trade in goods and services among the partners.
According to the International Trade Commission’s (ITC) required assessment published in April 2019, the USMCA should boost U.S. GDP by 0.35% and add more than 175,000 jobs.5 This is arguably a modest gain from such a comprehensive trade deal. The ITC concluded that the various provisions that reduce policy uncertainty about international data flows, cross-border services and investment would have the most significant impact, along with the new rules of origin in the automotive sector. However, modeling how businesses would react to reduced uncertainty is fraught with uncertainty. The ITC employed a conservative assumption so there’s likely more upside here. Meanwhile, raising the North American and higher-wage vehicle content for tariff-free trade is estimated to boost U.S. automotive production and jobs. But, this would likely be offset by projected increases in vehicle prices that would hurt the broader economy via pared purchasing power.6
Part of the appearance of a modest net economic gain from the USMCA reflects the fact that the three economies have already reaped much of the benefits of lowering tariff and non-tariff barriers to goods trade under NAFTA, and two-way services trade is still only around 11% of total trade. The ITC’s analysis was also done with U.S. Section 232 tariffs on steel and aluminum in place, along with Canada’s and Mexico’s retaliatory tariffs. However, these have since been removed. The ITC’s analysis also did not account for the added attraction for U.S. businesses to “re-shore” global supply chains in North America amid a flare-up of global trade tensions, not to mention the potential boost to business confidence after ratification of the USMCA.
The Mexican Senate ratified the USMCA on June 19, 2019.
In Canada, the Trudeau government introduced USMCA-implementing legislation on May 29, but it wants to move “in tandem” with the U.S. (unlike Mexico). The legislation made its way to the final stages of the approval process, awaiting the U.S., but the October 21 election call will require it to be reintroduced in the next session. By the time the next session begins, and given the usual year-end parliamentary break, it’s likely that Canada will only be in a position to ratify the USMCA by early next year.
U.S. Trade Representative Lighthizer sent a draft Statement of Administrative Action to Congress on May 30, which gave the Administration the option to submit to Congress (after 30 days) implementing legislation and the final USMCA text to be considered by Congress. This has yet to take place. Under the Trade Promotion Authority (TPA), once these documents are submitted—and there are no modifications permitted in this “fast track” process—the House has 45 session days to consider it, then another 15 session days to vote on it. The Senate then has 15 session days to consider it and another 15 session days to vote on it. The whole process could take 90 session days to complete. Congress doesn’t meet every calendar day, so 2019 passage is looking iffy. Given that the trade deal cannot be modified, the Senate could consider it concurrently with the House to expedite the process.
If the House is not pleased with the timing of the Administration’s submission, say, because it wants some changes made to the trade deal beforehand, the House can still circumvent TPA procedures. This was done with President Bush’s Colombia Free Trade Agreement, which, after being submitted in April 2007, failed to be ratified by the time he left office in January 2009 (the House had Colombian labor issues). It was eventually ratified in October 2011 after renegotiation with Colombia under the Obama Administration. “Fast track” is sometimes not so fast.
You can read the full report here.
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Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the team responsible for forecasting and analyzing the No...(..)View Full Profile >
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