Breaking down the new North American trade agreement

What is USMCA? 

The pact is Trump’s replacement for the North American Free Trade Agreement, which took effect in 1994.

NAFTA slashed tariffs and tore down most trade barriers between the United States, Canada and Mexico, unleashing a burst of trade between the three countries. U.S. farmers especially enjoyed increased access to their neighbors’ large markets.

But NAFTA also encouraged U.S. manufacturers to move factories south of the border to take advantage of low-wage Mexican labor. Trump and other critics called NAFTA a job killer, while NAFTA supporters said it created a powerful regional bloc that could stay competitive with manufacturing, labor and trade in Europe and East Asia.

Trump insisted on a revamped deal and threatened to withdraw from NAFTA if he couldn’t get one he liked. Negotiations on a replacement began in August 2017, and the three countries signed USMCA a year ago.

What will change? 

Trump’s version mostly continues to allow the free flow of trade across North American borders of the three countries. But it updates the pact to reflect the rise of e-commerce and other aspects of the digital economy that didn’t exist when NAFTA was negotiated.

For instance, USMCA allows U.S. companies to transfer data across borders without encountering discriminatory barriers. Jason Oxman, president of the tech trade group ITI, said the pact’s digital provisions set “a new and important precedent for modern trade rules.”

Boost for manufacturing 

To qualify for USMCA’s duty-free benefits, carmakers must get 75% of their automotive content from within North America — up from 62.5% under NAFTA. That means more content would have to be homegrown in higher-wage North America, not imported more cheaply from China and elsewhere.

At least 40% of vehicles would also have to originate in places where workers earn at least $16 an hour. That would benefit the United States or Canada — not Mexico, where auto assembly workers are paid a fraction of that amount. The wage requirement is likely to push up the cost of cars built in North America.

Under USMCA, Mexico was required to formally authorize workers to form independent unions. Mexican unions had traditionally been co-opted by employers and the government and done little for workers. Laborers have been fired for trying to bargain on their own for better pay and working conditions. That is one reason Mexican wages remained so low — and attractive to U.S. manufacturers aiming to cut costs.

What’s at stake 

Pelosi has been working to thread a delicate needle, determined to negotiate a deal with the administration that a broad coalition of House Democrats can support.

She seeks to deliver a deal that can win the backing of moderates facing tough reelection races next year. They are eager to vote on a trade bill before year-end to show they accomplished a key legislative priority amid a controversial impeachment inquiry.

Credit: T.J. KIRKPATRICK

Credit: T.J. KIRKPATRICK

But Pelosi has also been actively engaged with unions, especially the AFL-CIO, to shore up key enforcement provisions to protect workers, which she hopes will attract progressive lawmakers who have shied away from backing labor deals in the past.

The sticking points at the final stages of negotiations between the three countries affected by the new trade deal related to provisions involving steel, iron and pharmaceuticals, according to sources close to the discussions.

Pharmaceuticals ‘shut out’ 

The Democrats won a significant concession from the administration on drug prices.

Gone is what Democrats considered a giveaway to the pharmaceutical industry: a provision that offered expensive biologic drugs — which are made from living cells — 10 years of protection from cheaper knockoff competition.

“If you go back and look at trade agreements over the last 20 years, most of the verbiage deals with protection for pharmaceuticals,” said Rep. Earl Blumenauer, the Democratic chairman of the House trade subcommittee. “They have been the big winners, and they got shut out in this agreement.”

Impact on the economy 

The agreement probably will not have much impact on the economy. Trade is a relatively small part of the U.S. economy, and trade with Mexico and Canada is smaller still. In an April analysis, the independent International Trade Commission calculated that USMCA would add 0.35% or $68 billion, to economic growth and generate 176,000 jobs over six years — blips in a $22 trillion economy with 152 million nonfarm jobs.

Gregory Daco, chief U.S. economist at Oxford Economics, dismissed USMCA’s economic benefits as “negligible.”

“The intrinsic importance of the deal is not what it does to modernize NAFTA but rather what it prevents: a potentially disastrous breakdown of trade between the U.S. and its most important trading partners,’’ Daco wrote in a research note Tuesday.

Behind the scenes 

Jared Kushner, son-in-law and senior adviser to Trump, traveled to Mexico on Tuesday to finalize talks over the revised trade deal, two administration officials told Tribune News Service. One source said Kushner was “optimistic” about House support for the agreement.

Support in Congress 

Republicans have spent the last several months using floor speeches, tweet storms and home state engagements to blast Democrats for not bringing up Trump’s trade deal for a vote in the House.

Because it is a revenue measure, the law states that legislative action on the trade deal must first take place in the House before it can go to the Senate.

The GOP’s pressure campaign on Pelosi in particular has intensified in recent weeks, with Senate Majority Leader Mitch McConnell of Kentucky making floor remarks to accuse the California Democrat of “slow-walking” the agreement and caving to the demands of “big labor” while nursing an “impeachment obsession.”

Not everyone is happy with the deal, but USMCA still probably has enough support to clear Congress. In an unusual move, the top U.S. labor group — the AFL-CIO, which routinely opposes trade pacts — came out in favor of the worked-over USMCA.

But business groups want to take a closer look at the text. And some Republicans may balk at the concessions the administration made to win Democratic support.

“There are serious problems with this agreement,” Pennsylvania Republican Sen. Pat Toomey told reporters Tuesday.

Among other things, he objects to a so-called sunset provision that would end USMCA after 16 years unless the three countries agree to continue it and to the removal of the protection for biologic drugs.

Daniel Ujczo, a trade attorney with Dickinson Wright PLLC in Columbus, Ohio, said the concessions made to Democrats are likely to dampen the enthusiasm that businesses expressed while lobbying for the pact. “The business ‘wins’ that have been championed for the last year are now just a ‘whew’ we have relative certainty in North America,” Ujczo said.

What’s next 

Congress must ratify the deal. A House vote is expected next week on the USMCA deal — just about the same time that lawmakers also will vote on a pair of historic impeachment charges against Trump.

— Compiled by ArLuther Lee, The Atlanta Journal-Constitution. Information provided by Tribune News Service was also used to supplement this report.