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.
So write
andThe 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.
It’s not.
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.
READER COMMENTS
James
Jul 8 2020 at 9:12pm
It looks all fair to me. Canada should protect their agricultural sector as it is essential to be able to feed your country during special times like a pandemic or war. Even if they did not allow any more product in, that would be ok too. There is a order of magnitude difference in those economies and the US government provides an extraordinary amount of taxpayer paid subsidy to US farmers.
The countries should also have control over what happens to their citizens information when it crosses a border. Should Canadian companies do whatever they want with US resident personal information for ‘business purposes’.
The auto industry changes on whole seem good for America. Judging from the poor quality products that come out of Mexico and China the US consumer should also benefit from the North American content requirement and the minimum age requirements. Wins all around
David Henderson
Jul 9 2020 at 8:22pm
James,
You write:
But with free trade, people are always free to reject items based on quality. By restricting the supply, the government takes away that freedom. You may like that because the products are low quality. But you’re simply imposing your wishes on others. Many of them would disagree with you, either because they think the items are not low-quality or because they like the fact that the lower-quality items are cheaper.
Let’s make a deal, James. Please send me a list of things you buy and I will check off the things that I think are low quality. Then you pay me for every low-quality item you buy, so that you then have an incentive not to buy low-quality items.
Deal? And if you’re unwilling to make such a deal, why aren’t you?
Don Boudreaux
Jul 9 2020 at 12:24pm
James:
You write:
You here overlook two critical points. First, because auto sellers in the U.S. have every incentive in the market to supply that level of quality that consumers are willing to pay for, your insinuation that the quality of “products that come out of Mexico and China” is too low is unwarranted. American consumers can on their own determine the level of quality they desire in their automobiles; they do not need the U.S. government to make this determination for them.
Second, the domestic-content and minimum-wage rules in the USMCA have nothing to do with ensuring product quality and everything to do with protecting parts producers, and certain workers, in the U.S. from foreign competition. Therefore, far from ensuring that autos and auto parts will be of the quality that consumers expect, these provisions – by dimming the intensity of competition – will likely cause product quality to fall.
…..
I believe that also other parts of your comment are mistaken, but I here limit myself to taking issue with your point about product quality.
Thomas Hutcheson
Jul 10 2020 at 11:45am
Well said!
Thomas Hutcheson
Jul 9 2020 at 9:10pm
Yes. The president would not have negotiated it if it were not.
Elections have consequences. Those who favored restrictions on trade and immigration and higher structural deficits got what they were promised.
Pierre Lemieux
Jul 11 2020 at 11:30am
@David: Your idea that USMCA is not an improvement on NAFTA is an important idea. Only government propaganda, special interests, or a misunderstanding of the arguments for free trade can contradict this conclusion. The changes are an incoherent product of the protectionist goals of the US government. One estimate puts at two-thirds the number of chapters of the USMCA that can be traced to the Trans-Pacific Partnership rejected by the US government, if not to the even more progressively rechristened “Comprehensive
and Progressive Trans-Pacific Partnership” signed by the remaining partner governments.
Comments are closed.