Just Say No to the New Nafta

(Bloomberg Opinion) -- President Donald Trump claims he has “tremendous Democrat support” in the House for the accord he signed last year with Mexico and Canada to replace the North American Free Trade Agreement. He threatens to withdraw from Nafta if Congress doesn’t quickly pass his new trade deal.

House Speaker Nancy Pelosi wants the deal, now called the United States-Mexico-Canada agreement, improved before Congress votes on it, with stronger labor and environmental protections, among other changes, even though some Democrats are willing to support the deal as is.

Pelosi’s instinct is right: Congress should call the president’s bluff and just say no to the USMCA. Compared with current policies, the new accord would restrict trade and investment, impose costs on consumers, and undercut U.S. economic growth. Rejecting it now can lead to a better deal with Mexico and Canada.

The main flaw is that the USMCA imposes costly regulatory mandates that would disrupt North American trade and investment, particularly in the auto sector. It also restricts bidding on government contracts and includes a “sunset” clause that requires review of the agreement every six years and provides for its possible termination in 16 years. These conditions will constrain investment and growth.

Some supporters of the deal say it provides new rules that will benefit the U.S. But those “new” rules aren’t new. Rather they mirror provisions affecting labor, the environment and e-commerce from the revised Trans-Pacific Partnership that have been carried out by Mexico and Canada since that accord went into effect on Dec. 30, 2018. Trump withdrew from the TPP, but Canada and Mexico remained in it, and already apply these provisions in trade relations with the U.S.

The administration’s claim that the USMCA will boost economic activity is based on a study by the United States International Trade Commission, which estimated the pact would increase U.S. growth by 0.3 percent of GDP per year. But in fact the study says that on balance the market access provisions of the accord would restrict trade and cause U.S. growth to decline by 0.12 percent.

The positive overall result touted by American officials is based on a separate estimation that USMCA rules in areas like intellectual property and digital trade will reduce uncertainty and encourage investment and growth. But those gains result from Mexico and Canada’s participation in the revised TPP; US firms already get those benefits without the USMCA.

Moreover, the commission’s study failed to account for the greater uncertainty caused by the sunset clause, not to mention the cost of Trump’s threats to raise tariffs on Mexico unilaterally over immigration issues. Overall, the USMCA would increase uncertainty for traders and investors alike and have a negative impact on growth.

The costly regulatory mandates imposed by the USMCA are in the form of requirements that high percentages of goods must be made in North America in order to get U.S. trade preferences. The administration claims these “rules of origin” would yield new investment in U.S. production and increase the nation’s auto sector jobs by 7.6 percent.

But the trade commission study refutes that claim. It estimates that these very rules would increase U.S. and Mexican production costs. In the U.S., the rules would reduce output and increase imports from outside North America, while raising the average price of vehicles, factors that would cut auto sales. Simply put, USMCA auto rules would hurt auto firms and workers.

Automakers in the U.S. opposed these rules during the trade negotiations but they are now going along with them out of fear that Trump will make things even worse by pulling out of Nafta. It is debatable if the president has the legal authority to do that. In any case, abrogating Nafta without a replacement would devastate the auto industry in states Trump needs to win in 2020, including Texas.

House Democrats can easily afford to call his bluff.

A better approach for Congress would be to defer consideration of legislation until U.S. trade officials fix what’s wrong with the pact, starting with consumer protections in pharmaceuticals and stronger enforcement of labor and environmental provisions. Importantly, revisions should also scale back the damaging auto provisions exposed by the U.S. International Trade Commission study. And the Democrats should insist that the pact cover climate change issues, a glaring omission in the version Trump signed.

Trump may not go along with this path. But there’s little economic cost in deferring action and planning how the USMCA can be properly fixed in the post-Trump era. The USMCA requires more than cosmetic changes. It’s time for Congress to set that process in motion.

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jeffrey J. Schott is a senior fellow at the Peterson Institute for International Economics.

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