Bill Owens: USMCA Analysis

Oct 23, 2018

The focus of President Trump in announcing the signing of the United States Mexico Canada Agreement (USMCA) was the positive impact it would have on US agriculture, the auto industry and labor.

Given Canada’s strong reaction one would have thought that the impact on US dairy farmers would be significant. Analysis done by Bank of America Merrill Lynch Global Research indicates that the new diary quotas will give American dairy farmers access to up to 3.6% of Canada’s market which will increase exports to Canada by $70 million, or approximately .0003% of US GDP and represents approximately .00028% of our trade with Canada. These are clearly diminimus numbers, and as Cornell’s main dairy economist, Andrew Novakovic stated he “does not believe it is going to have a terribly noticeable impact on US Dairy Farmers. Of course there are always regional differences that have a larger impact on the local economy, let us hope given the North Country’s proximity to Canada will get some perceptible economic advantage to our region’s dairy farmers.

The Indiana State Department of Agriculture Director praised the agreement indicating it is “a major windfall for farmers and AG businesses in the state (Indiana)”, however, he does not specify how the agreement will impact Indiana farmers relative to Canada. I would note that AG trade with Mexico is very significant, as Mexico imports a substantial amount of grains and wheats, so in that sense, simply providing market certainty and removing the threat of tariffs imposed by Mexico could very well be beneficial to Indiana farmers.

Craine’s Detroit Business indicates that President Trump has also touted the auto industry provisions as a huge win, as well. The agreement does require increased automotive content along with a quota on imports to the US from Mexico and Canada, as well as minimum wage requirements designed to make manufacturing more attractive in the US by making Mexico less attractive (meaning more expensive). Experts are indicating that the changes in USMCA will simply increase costs for automakers and suppliers with those costs being passed down to consumers which likely results in a decrease in car sales, and therefore, a decrease in jobs. It will take substantial and costly changes in the supply chain in order to reach the 75% country origin requirements in USMCA. Thus, the industry will look at alternatives available to it, including simply paying WTO tariffs because that will likely be less expensive and simpler than expanding production in the US. In addition, even if the later were to occur, the likelihood that there are substantial increases in employees is virtually nil due to the fact that if to the auto industry builds new plants or expands existing plants, it is more likely to increase the utilization of robots, not people. Even the requirement that vehicles have to have at least 30% of the production done by workers making $16 or more per hour (that rises to 40% in 2023) again, leaving the auto maker with the option of paying the WTO tariff which may well be less expensive than raising wages, and although the 2% tariff is paid on the entire vehicle, it is simply a mathematical computation to determine what direction an automaker may take. Canada and Mexico will be exempt under the agreement, from the 25% global tariffs on cars, trucks and parts pursuant to a side letter agreement between the nations.

A fascinating provision in the USMCA (Section 32.10) requires all three countries to give a three month notice before commencing free trade agreement negotiations with a nonmember of the USMCA. This clearly points to China.

The removal of Chapter 11 from NAFTA which is the dispute resolution mechanism for investor- state disputes is likely beneficial to Canada. Canada has had more claims filed against it than the US or Mexico under this provision and has suffered numerous losses costing hundreds of millions. So a loss may be a win, particularly since NAFTA Chapter 19 was kept which addresses disputes involving anti-dumping and countervailing duties a far more practical and repetitive concern. Mr. Trudeau won that part of the deal.

As we continue to study and analyze, I’m sure we will have some further surprises and nuances to share.

Mr. Owens is a former member of Congress representing the New York 21st, a partner in Stafford Owens in Plattsburgh, NY and a Senior Advisor to Dentons to Washington, DC.

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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