USMCA is a needed reprieve from Trump-induced uncertainty

A just-released analysis of the proposed United States-Mexico-Canada Agreement (USMCA) by the U.S. International Trade Commission (ITC) probably won’t change votes on Capitol Hill, but it does clarify the positive and the negative impact the deal will likely have on the $20 trillion U.S. economy.

The ITC’s nearly 400-page study concluded that the biggest net boost from the USMCA would come from its reduction in “economic uncertainty.” Further gains would flow from lower barriers to agricultural trade and the liberalization of such cross-border service sectors as broadcasting, telecommunications, courier services and banking.

{mosads}The bottom line, according to the ITC: After being fully phased in over six years, the USMCA would boost the U.S. economy by $68 billion, or 0.35 percent of GDP, and it would add a net 176,000 jobs.

But a deeper dive into the study reveals that the “uncertainty” assumption accounts for virtually all of the gains, and that other aspects of the agreement — especially the tighter rules for vehicle and parts trade — will impose a net drag on economic activity. 

In an effort to benefit the domestic auto industry, President Trump’s chief trade negotiator, U.S. Trade Representative (USTR) Robert Lighthizer, convinced Canada and Mexico to accept new rules that require a higher share of the content of cars and light trucks must originate within North America to be eligible for duty-free treatment.

In a novel twist, the agreement also requires that 40 to 45 percent of the content must be produced by workers earning at least $16 per hour (i.e., no Mexicans need apply). 

According to the ITC study, the new auto rules of origin “represent greater restrictions on trade,” with predictable results. The rules will boost employment modestly in the auto-parts sector, but higher prices for auto parts will mean higher production costs for the industry, especially for smaller, more fuel-efficient models.

That will mean fewer U.S. auto exports; higher prices and less choice for consumers; 140,000 fewer vehicles sold each year in the United States; and reduced wages and employment in the overall U.S. economy. An International Monetary Fund working paper released in March came to the same conclusion. 

The Office of USTR released its own white paper just before the ITC report claiming that the auto provisions would spur a large increase in domestic investment and employment in the sector.

But the USTR document relied on statements from auto executives, who may have been understandably wary of telling this administration that they may in fact be planning to import and outsource more auto production to escape the more onerous rules in the USMCA. 

The ITC’s positive assessment of the USMCA depends almost entirely on assuming that it will reduce “policy uncertainty,” particularly in digital trade. Policy uncertainty does impose a drag on investment and growth, as a 2018 Mercatus Center paper by Robert Krol documented.

Yet, it is telling that the ITC found that, without the added boost of reducing uncertainty, the USMCA would actually lead to a 0.12-percent reduction in real U.S. GDP.

Unmentioned is the fact that much of the current policy uncertainty has been created by this administration itself, through its rejection of the Trans-Pacific Partnership (TPP) and its threats to withdraw from the North American Free Trade Agreement (NAFTA). 

In touting the ITC report, USTR Lighthizer said in a statement, “These findings validate President Trump’s action to withdraw from TPP and renegotiate the disastrous NAFTA.” But the findings do nothing of the sort.

A 2016 ITC analysis on the TPP estimated that if it were fully implemented, it would boost U.S. GDP by 0.15 percent. The gain is modest, but it did not include any added growth from less policy uncertainty.

As a modern agreement — including chapters on intellectual property and digital trade and including such major trading partners as Japan, Canada and Mexico— the TPP would have reduced policy uncertainty to a degree comparable with USMCA. 

As for NAFTA, the ITC estimated that its impact has also been positive, if modest. In a retrospective study in 2016, the commission concluded that NAFTA added as much as 0.5 percent to U.S. GDP, even though it did not account for a reduction in policy uncertainty.

In other words, both the TPP and NAFTA produced a positive impact on the U.S. economy according to ITC modeling, even without factoring in the reduction on policy uncertainty, yet the impact of the USMCA under the same assumptions would actually be negative. 

There are good reasons for Congress to look favorably on the USMCA, among them is the policy certainty it would bring. But the ITC report confirms that the benefits would be modest and that any gains from the USMCA will come despite, not because of, the more restrictive rules of origin for motor vehicles and parts.

Daniel Griswold is a senior research fellow and co-director of the Trade & Immigration Project with the Mercatus Center at George Mason University. Follow him on Twitter: @DanielGriswold.