USMCA Deal Looks to be in Trouble

usmcaMore than six months after the United States, Mexico and Canada agreed a new deal to govern more than US$1 trillion in regional trade, the chances of the countries ratifying the pact this year are receding.

The three countries struck the United States-Mexico-Canada agreement (USMCA) on Sept. 30, ending a year of difficult negotiations after U.S. President Donald Trump demanded the preceding trade pact be renegotiated or scrapped.

Although, the agreement was signed by all three countries, it does not take effect until it is ratified, which none has done, and the deal has not ended trade tensions in North America. If ratification is delayed much longer, it could become hostage to electoral politics.

The United States has its next presidential contest in 2020, and Canada holds a federal election in October.

The delay means businesses are still uncertain about the framework that will govern future investments in the region.

“The USMCA is in trouble,” said Andres Rozental, a former Mexican deputy foreign minister for North America.

Though he believed the deal would ultimately be approved, Rozental said opposition from U.S. Democrats and unions to labour provisions in the deal, as well as bickering over tariffs, made its passage in the next few months highly unlikely.

Canada’s Parliament must also ratify the treaty and officials say the timetable is very tight. Current legislators only have a few weeks work left before the start of the summer recess in June, and members of the new Parliament would have little chance to address ratification until 2020.

Trump has shown frustration with the Democratic-led U.S. House of Representatives for failing to sign off on the USMCA. He has threatened to pull out of the old pact, the North American Free Trade Agreement (NAFTA), if Congress does not hurry up.

If Trump did dump NAFTA, the three nations would revert to trade rules in place before it came into effect in 1994.

The biggest impediment is the continuation of tariffs imposed by U.S. President Donald Trump on steel and aluminum imports to the United States.

The President used a controversial clause dealing with national security, commonly called Section 232, to slap tariffs of 25% on steel and 10% on aluminum from Canada and Mexico. Canada and Mexico say these tariffs are illegal and are seeking exemption from them.

The metals tariffs were not included in the USMCA and Mexico and Canada are impatient to resolve the issue. Mexico has repeatedly threatened to target new U.S. products by the end of April in retribution if tariffs are imposed.

Meanwhile, Trump has threatened to slap tariffs on Mexican auto exports unless Mexico does more to stop drug traffickers and illegal immigration.

Mexico’s government is in the final stages of completing a new list of potential U.S. imports to be targeted, said Luz Maria de la Mora, a Mexican deputy economy minister.

“There’s going to be a bit of everything,” she told Reuters, declining to give details of how the list — originally encompassing products such as bourbon, cheese, motor boats, pork legs, steel and apples — could be modified.

De la Mora would not be drawn on whether Mexico could refuse to ratify USMCA if steel tariffs are not withdrawn, saying only: “All options are on the table.”

Tariffs are a drag on the Canadian economy because the United States is Canada’s largest export market for steel, and steel represents nearly 17% of U.S. steel imports. Canada also provides the United States with about half of its annual aluminum needs.

The U.S. economy is roaring, so Canadian exports there continue to be strong. A stumbling block is that the United States has proposed to end tariffs by replacing them with quotas limiting the amount of steel and aluminum Canada can export there.

Prime Minister Justin Trudeau, who faces a tough re-election battle, rejected last week accepting quotas on Canadian steel and aluminum in exchange for U.S. tariffs being dropped.

Meanwhile, Canadian Foreign Minister Chrystia Freeland has said that her government was “constantly” looking at its own retaliation list, noting that Trump’s tariffs left the country over $16 billion worth of space to strike back.

Freeland did not say when that list could change, and a government source, speaking on condition of anonymity, said it might not be necessary. Still, Freeland said Canada was coordinating with Mexico about its options.

U.S. Democrats in the new Democratic-majority House of Representatives have threatened to block the USMCA unless Mexico passes legislation to improve workers’ rights, a demand shared by the Canadian government.

A bill already in Mexico’s Congress to strengthen trade unions should be approved this month, the government says.

Trump blamed NAFTA for millions of job losses in the United States as companies moved south to employ cheaper Mexican labour. Trump is running for re-election in 2020, and his ‘America First’ policy will likely feature prominently in the campaign.

Democrats also want more enforceability on the environmental commitments [in the agreement] and have concerns with biologics.

USMCA shields new biologic drugs from competing cheaper generic drugs for at least 10 years, up from the current protection of eight years in Canada and five in Mexico. But some Democrats in Congress want to lower the threshold to seven years, so cheaper generics can get to market faster.

There is also the general idea in Congress that there’s no need to rush. “I think the Democrats don’t want to just hand Trump a victory,” says Matthew Stewart, director of economics for the Conference Board of Canada.

Forcing Mexico and Canada to rework NAFTA was one of Trump’s signature pledges during his shock win in 2016, and Democrats are pulling out the stops to avoid losing again.

“The closer the election gets, the harder it will be for Democrats to grant Trump a victory” by ratifying the USMCA, said Sergio Alcocer, a former deputy Mexican foreign minister.

This go-slow approach might be exacerbated now that the report by special counsel Robert Mueller has been tabled and appears to remove the allegation that Mr. Trump colluded with the Russians before his 2016 presidential election. The Mueller report’s conclusions and the President’s statement that he has been “completely exonerated” puts the Democrats in a position where it might be even more difficult to hand the Trump administration a win.

“People need to be very careful around opening up what could really be a Pandora’s box,” Freeland said last Thursday.

Canadian officials say they fear that if one part of the treaty were reopened, it could spark clamour for other sections to be renegotiated as well.

  • Source: Reuters, The Globe and Mail