USMCA Is a Net Move AWAY From Free Trade
By David Henderson
The reduction of trade barriers among the USMCA’s parties will strengthen U.S., Mexican and Canadian supply chains, returning manufacturing jobs to North America from China. Even before the Covid-19 pandemic exposed how North America had become too dependent on China for medical equipment and drugs, Beijing’s campaign of intimidation and censorship was already hurting international companies.
The above paragraph suggests that the new United States Mexico Canada Agreement (USMCA) is a move to freer trade. Otherwise how could the authors claim that there’s a reduction of trade barriers.
I wrote about the USMCA at length in a Hoover publication, Defining Ideas, on December 20. My article is titled “NAFTA 0.0.” Here’s how I explained the title:
Some people are referring to the USMCA as NAFTA 2.0. When we use such a numbering system for software, the higher the number the better the product. So software 2.0 is presumably better than software 1.0. In this case, though, USMCA is likely inferior to NAFTA. So USMCA could reasonably be labeled NAFTA 0.0.
In other words, in most important respects, USMCA is a move away from the free trade aspects of NAFTA.
I elaborated in the piece:
There are some improvements. One is in agriculture. Governments in Canada have been notorious for restricting agriculture imports from the United States. Those include dairy products, eggs, wheat, poultry, and wine. The USMCA would lighten these restrictions. That’s particularly important for the U.S. dairy industry right now because of the decades-long decline in the amount of milk that the average American consumes. To put this in perspective, though, this is nothing like free trade; it simply increases, in small steps, the amount of various agricultural products that can be imported into Canada from the United States. Take a look at the U.S. Trade Representative’s bragging Fact Sheet on agriculture under the USMCA and see if it doesn’t make you think about a central planner grudgingly allowing slightly more freedom. Robert Lighthizer, the U.S. Trade Presentative and a vocal advocate of managed trade, might be proud. Neither Canadians nor Americans should be.
Another improvement is in the area of digital trade. The U.S. government’s International Trade Commission (ITC), in its April 2019 analysis, claimed that the USMCA would, after six years, actually increase U.S. real GDP, relative to the NAFTA baseline, by $68.2 billion, or 0.35 percent. That’s a substantial number, amounting to about $200 annually per American. But, the ITC admits, that estimate leans heavily on the assumption that the digital trade rules would be clear enough that digital trade would expand substantially. Simon Lester, associate director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, expresses a well-founded skepticism. He grants that this part of the wording is good: “No Party shall prohibit or restrict the cross-border transfer of information, including personal information, by electronic means if this activity is for the conduct of the business of a covered person.” But Lester notes lots of exceptions, such as for government measures that are “necessary to achieve a legitimate public policy objective.” Legitimate in whose eyes?
But here is where USMCA is a strong move away from free trade:
Unfortunately, the USMCA has two big negatives. The first is the rollback of free trade in the auto industry. Under NAFTA, the way to avoid the 2.5 percent tariff that the U.S. government imposes on cars from other countries is to make sure that at least 62.5 percent of the value of a car is produced in North America. The USMCA raises that to 66 percent and then, over a period of three years, to 75 percent. In short, that’s a 20 percent increase in the amount of value that must be produced in North America. Another restriction on trade is that 70 percent of the aluminum and steel used in North American auto production must originate in North America. Both provisions will raise the prices of cars, as even the ITC admits.
The other big USMCA rollback of free trade in the auto industry is the imposition of a minimum wage in the Mexican auto industry. You read that right. The Trump administration, which to its credit, has refused to support a bill to raise the U.S. minimum wage from its July 2009 level of $7.25 an hour, wants a minimum wage of $16 an hour in its neighbor’s auto industry. Trump’s economic advisers understand that one of the effects of a big increase in the U.S. minimum wage would be to hurt the employment prospects of unskilled workers. Remember that a minimum wage law doesn’t guarantee a job at the minimum wage. All it guarantees is that someone who gets a job will be paid the minimum wage. But as left-of-center Nobel economist Paul Samuelson pointed out years ago, it is the requirement that a young unskilled worker be paid the minimum wage that makes him less likely to get a job.
The $16 minimum wage will have little effect in the U.S. and Canadian auto industries because the vast majority of auto workers in those industries already are paid at least $16 an hour. But the effect in the Mexican auto industry, absent other adjustments, would be devastating. According to a 2018 study by the Center for Automotive Research, based in Ann Arbor, Michigan, in 2017 the Mexican wage for auto assembly averaged $7.34 an hour. The auto producers in Mexico aren’t about to more than double the wage.
Disclosure: H.R. McMaster is a Hoover colleague.
HT2 Don Boudreaux and Dan Griswold.