It is easy to think that U.S. trade policy is completely doomed. Just this week, ahead of his planned meeting with Chinese President Xi Jinping at the G-20 summit, President Trump announced that it is “highly unlikely” that he will step back from his planned tariff increase from 10% to 25% on $200 billion in Chinese goods.
Not all hope is lost though.
Good news came Friday morning as the U.S., Mexico, and Canada officially signed a new economic pact dubbed the U.S.-Mexico-Canada-Agreement, or the USMCA.
This is essentially a re-write of the already existing NAFTA, with a few modifications that aims to address parts of NAFTA that have been on the hot seat since its 1994 ratification.
Let’s take a look at these negatives and how the USMCA aims to address them.
U.S. Manufacturing Jobs
One of the most publicized issues with NAFTA has been its adverse effect on American manufacturing. A Peterson Institute for International Economic’s study found that the U.S. loses a net 15,000 jobs per year due to the agreement. These jobs have primarily gone to Mexico, where wages are considerably lower than in the U.S. for lower skilled jobs.
To address these job losses, the USMCA has added a clause that 40% to 45% of automotive content should be made by workers earning at least $16 per hour. Since the average manufacturing worker in Mexico earns $2.30 per hour, this aims to keep more automotive factories open in the U.S.
Unfortunately, this may only have a slight impact on the decline of manufacturing jobs here. Other factors play into these employment declines, including technological advances. Factories are becoming more productive, and using less labor to produce more goods than in the past. Even if factories are drawn to stay here, these trends are not going to change.
The original NAFTA gurus promised back in the 1990’s that the agreement would help accelerate Mexican wages closer to that of the U.S. and Canada. This unfortunately never came to fruition, as Mexican wages have only grown at a 1.2% pace on average between 1993 and 2013 and have grown unevenly between the northern and southern regions.
The USMCA includes language that boosts Mexican labor unions, in hopes of giving their laborers more negotiating power. This may prove to be beneficial, especially with incoming President López Obrador’s pro-labor stances. With a national government and regional agreement committed to stronger labor rights, Mexico may finally see a turn around in these paltry wage trends.
NAFTA Benefits That USMCA Boosts
As one may expect, a free trade agreement helps facilitate, well, trade. This is one area where NAFTA has done well. Numerous industries in the U.S. have become heavily integrated into commerce with Mexico. For example, our energy industry can thank them for being quite loyal buyers, with 425,000 barrels of gasoline going there per day in 2017 (more than the next five highest buyers combined) and 250,000 barrels of diesel per day (second only to Brazil).
The USMCA may further help the U.S. on this front. One of its clauses aims to limit auto exports from Mexico and Canada to the U.S. by imposing car quotas. Seeing how our trade deficit with Mexico is at about $60 billion even with these trade boosts from NAFTA, the new accord can be beneficial for slowing our overall current account deficit by holding back imports while maintaining exports.
Time Will Tell
Overall, the USMCA is basically NAFTA 2.0 with some provisions aimed at fixing NAFTA’s major issues. The new agreement still has a long way to go before being ratified, with the new Democrat House being heavily against open trade. If it can get through these political hurdles, the USMCA could turn out to be a mixed bag that helps areas like Mexican labor and wages, but at the same time does not address prevalent complaints like the decline of American manufacturing employment.
With a sunset clause that requires review after six years, this negotiation process may be alive again in the near future.