New NAFTA brings high risks and few rewards

It is no surprise that calls to renegotiate the North American Free Trade Agreement (NAFTA) have resonated with many Americans over the years. Numerous studies have documented the negative effects of NAFTA on certain groups, regions and the environment in the United States, Mexico and Canada.

President Trump can be credited with renegotiating NAFTA and is now pressing Congress to ratify it. Yet according to the evidence we reviewed with our colleague Kevin Gallagher in a recent policy brief, the revised NAFTA, now called the United Stated Mexico Canada Agreement (USMCA), will not restore industrial jobs, worker rights and living wages; nor will it provide the needed protections for affordable health care and the environment, which the original NAFTA has eroded.

It also introduces serious new restrictions on the right of the three governments to regulate privacy and harmful content on the Internet. Based on our review of the terms of the agreement and projections of its impact, we argue that the USMCA will shift the balance further against working households and local communities. If our interest is sustainable, shared prosperity, the USMCA is a step in the wrong direction.

Recent research and data indicate that trade agreements have adversely affected jobs and wages. For example, a 2016 study that looks at the effects of NAFTA by measuring each industry’s vulnerability to Mexican imports and each locality’s dependence on vulnerable industries finds that wage growth was dramatically lower for blue-collar workers in the most affected industries and localities, with negative effects on service-sector workers in those localities as well.

Will the USMCA remedy the adverse distributional effects of NAFTA and avoid new distortions? Based on the official US government study, the answer is no. The U.S. International Trade Commission (USITC) projects that the USMCA will bring small and skewed economic gains in the U.S., including: a one-time increase in GDP of only 0.35 percent; a one-time increase in total employment of a small fraction of one percent, mainly in low-paid service sector jobs; and a one-time wage increase of about a quarter of 1 percent on average.

It is important to note that the USITC study finds any positive effects at all only because it attributes economic value to the reduction of “policy uncertainty” for investors as a result of increased protections for firms in a few sectors, including pharmaceuticals and information technology. Without this imputation of value for the private sector, the study finds that the impact of USMCA on economic growth, employment and wages will be negative. Furthermore, the idea of policy certainty arising from the USMCA sits uncomfortably with the recent threats to impose high tariffs on all imports from Mexico.

Turning to the specific provisions of most concern to the public and many legislators, on labor the USMCA expands the scope of commitments to protect labor rights but does nothing to strengthen their enforcement, meaning that even seeming improvements will have little impact in practice. The experience with NAFTA and subsequent U.S. free trade agreements demonstrates that replicating the weak enforcement provisions will mean that there is no leverage to achieve progress on rights and wages in trading partner countries.

On environment, the USMCA fails to even mention climate change, despite that the World Trade Organization and the United Nations have shown that trade expansion increases carbon dioxide emissions and that North American fossil fuel emissions are the second largest of any region in the world. The chapter on environment eliminates NAFTA provisions that parties should heed commitments under Multilateral Environmental Agreements even if they conflict with NAFTA rules. And there is a loophole (in Annex 14E of the text) whereby U.S. oil and gas companies with Mexican government contracts can still sue the Mexican government if it adopts higher environmental and public health standards.

The USMCA introduces new restrictions on the right of the parties – including the US government – to adopt new regulations that would protect the public interest. For example, the chapter on “digital trade” would prevent the U.S. from instituting new requirements that US individuals’ personal and financial data must be kept in the U.S. to protect it from malign or less secure handling abroad. USMCA intellectual property protections would constrain the U.S. (as well as Canada and Mexico) from future efforts to reduce prescription drug prices by locking in the number of years biotechnology companies can avoid competition based on their test data. This will allow firms to keep high drug prices for longer periods also reducing incentives for new research.

The 2020 presidential election season is the perfect opportunity to have a national debate about a new, more equitable trade strategy for the country. A trade regime suitable for 21^st century challenges will need to support, not undermine a more equitable and inclusive economy where costs and gains are distributed more fairly to working households and corporations. It will need to support low-carbon growth paths and address pollution and environmental degradation. It will also have to devise a new generation of intellectual property rules that ensure affordable access to medicine. A sustainable and politically acceptable trade regime must recognize that investors’ interests often run counter to the public good and must be kept in check.

Instead of seizing the opportunity to devise a new trade model, the USMCA locks in and even adds to policies that have contributed to rising inequality, stagnant wages, rising health care costs, environmental degradation and political disaffection. To protect working households and their communities, Congress should either take the time to fix the USMCA or reject it.

Sandra Polaski is a senior research fellow at the Global Development Policy Center, Boston University and former deputy director-general for policy of the International Labour Organization.

Jeronim Capaldo is a research fellow at Tufts University’s Global Development and Environment Institute.