After months of Democrat obstruction, which has kept $1 trillion in North American trade in a state of suspended animation, House Speaker Nancy Pelosi finally agreed to pass the US-Mexico-Canada Agreement (USMCA) last week. With House passage likely this week and Senate passage in early January, we are on the precipice of bringing North American trade into the 21st century with a new deal that greatly improves upon NAFTA.
The USMCA has garnered support from a wide array of interest groups, from the Chamber of Commerce to the AFL-CIO because this deal will protect American workers while enhancing market access for US companies. Amazingly, some Republicans, like Senator Pat Toomey opposeUSMCA, but their criticisms are belied by the facts. Indeed, the key principles of this agreement should serve as the bedrock of all future trade agreements.
First, NAFTA helped to decimate the US auto industry. Since implementation 25 years ago, imports of Mexican cars quintupled while we lost 10%of our auto manufacturing jobs. Under new “rules of origin,” 75% of every car must be made in North America, up from 62.5% while also eliminating loopholes and workarounds. Further, essentially 40% of each car must be made in Canada or the US due to higher-wage requirements. The result should be $34 billion in new automotive investment and 76,000 new jobs.
The United States has the largest, most diverse consumer market in the world, one every nation on earth needs to access. Under the Trump Administration, we are finally leveraging access to our market to help US workers. The principle is simple: if you want to sell the product to the US, you also have to build some products here. By applying this principle to the USMCA, we will help revitalize our auto industry. By continuing to apply it to future trade deals, we can be sure that American workers aren’t left behind ever again.
Second, USMCA protects America’s sovereignty and enhances our comparative advantages. This agreement largely eliminates a NAFTA provision known as Investor-State Dispute Settlement (ISDS). Under ISDS, foreign companies could take the US, Mexican, or Canadian governments to international arbitration rather than go through the local court system. Subjecting US laws to an international arbiter, rather than our court system, was a clear violation of our sovereignty and constitutional structure that will no longer occur.
Moreover, free trade is rooted in the concept of “comparative advantage.” If Country A makes product X better than Country B, which makes product Y better, A should sell X to B in exchange for Y, which leaves all parties better off. Typically, we think of comparative advantage in terms of production cost, but that is not the only type of advantage. A company that is contemplating a $1 billion investment will want to be sure that its investment is protected. Thanks to America’s robust rule of law, there is never the worry the government could one day nationalize the facility without compensation. This is one reason to operate in the USA rather than a developing nation, even if labor costs are higher.
With ISDS mechanisms, companies could invest in foreign nations without worrying about legal risk as they sought recourse via international arbitration rather than the local courts. In a sense, America had ceded one of its greatest comparative advantages (legal stability) for nothing in return. While this policy was great for companies seeking to cheaply outsource, it was a disaster for our workers. Hopefully, the USMCA will be the first of many deals to eliminate this practice that ignores US sovereignty and gave away a key advantage.
Finally and perhaps most importantly, the USMCA positions America well against our burgeoning struggle against China. If Mexico or Canada sign a free trade deal with a nonmarket economy (namely, China), the US can exit USMCA. In essence, nations have to choose whether to have free access to our market or China’s. This provision will help insulate the North American marketplace from undue Chinese influence or aggression. With its oppressive nature, the goal of global supremacy, and flouting of international law in the South China Sea and elsewhere, China poses the gravest existential threat to our way of life in the world today, akin to the Soviet Union in the Cold War. Nations have to choose a side in this century-defining conflict, and we are wise to make clear that no one should expect to have unfettered access to our market while working against us geopolitically. All future trade agreements should include this China poison pill to contain their rise and maintain Western solidarity.
Moreover, the USMCA expands agriculture access, modernizes trade laws for the digital economy, and has powerful enforcement mechanisms to ensure Mexico implements its labor laws. Ensuring American workers don’t have to compete against foreign laborers working in subhuman conditions is in no way anti-free trade, and I would hope these provisions are not a reason why Toomey or other Republicans oppose USMCA.
Now, negotiations with Pelosi led to the removal of a provision that extended patent protection for biologics to ten years in Mexico and Canada. While this no doubt disappointed the pharmaceutical industry, there are more pressing issues facing the US than foreign drug prices, like rebuilding our manufacturing base and building a united front against China. Putting the needs of American workers before those of Big Pharma should be an easy call for Republicans and Democrats alike.
President Trump took office promising to remake our international trade arrangements. On USMCA, he unambiguously succeeded, and the result will be tens of billions in new investments and over 75,000 new jobs. Equally important, the principles that make this deal a success, incentivizing domestic production, protecting our sovereignty, and protecting against China, can be features of future trade deals to ensure our trade agreements put America and our workers first.
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