8
NAFTA 2.0: DID THE USMCA MODERNIZE ANYTHING?
After nearly three decades of the NAFTA as a political “piñata for pandering pundits and politicians”, what has changed with the agreement’s “modernization” in the form of the United States–Mexico–Canada Agreement (Pastor 2011: ch. 1)? Much like the incessant debates about the merits of the NAFTA itself, one’s assessment of the USMCA, or the way in which it came into being, depends on your point of view. If the NAFTA was indeed the “worst agreement ever negotiated”, as President Trump frequently opined, or one is fundamentally opposed to trade liberalization, then renegotiation and replacement with the USMCA are not a positive outcome. If genuine “modernization” of the NAFTA was one’s goal, and by “modernization” one hoped to deepen trilateralism through greater cooperation, liberalization and institutionalization, the USMCA will also disappoint. Finally, there were also those who recognized the political potency of contemporary anti-trade populism and hoped simply to maintain the status quo.
Of the three camps, those hoping to preserve the “status quo” have the most to cheer about. The NAFTA was not formally scrapped, as the Trump administration had initially threatened. Moreover, the USMCA effectively updates the NAFTA by including topics and disciplines not considered in 1994, a number of which were the subject of the NAFTA’s never completed built-in agenda. Table 8.1 comparatively lists the table of contents, or topics, for the NAFTA, the Trans-Pacific Partnership (prior to US withdrawal) and the USMCA. There are certainly major differences between the NAFTA and the USMCA: 34 core chapters in the USMCA (not including annexes and side letters), compared with just 21 for the NAFTA. Even when topics covered mirror each other, such as chapter 4’s rules of origin, the USMCA text is several orders longer than the original NAFTA; however, as noted elsewhere in this volume, the extra length is not necessarily an improvement.
However, what is abundantly clear is that the genetic material of the USMCA can be traced to the NAFTA’s architecture. Although the NAFTA itself proved hard to update, amend or complete via its many working groups, trade negotiators from all three NAFTA countries continued building upon the foundation put in place by the NAFTA in other negotiations. In many respects, the Trans-Pacific Partnership represented a culmination of that building for each of the three NAFTA countries when they were signatories to that text in January 2016. The table of contents for the TPP is also depicted in Table 8.1, even more clearly showing the evolution of these trade agreements from the NAFTA to the USMCA. In the early 1990s electronic commerce, digital trade and regulatory transparency were not significant trade topics. However, we can see with the advent of the TPP and USMCA that such topics are now subjects of negotiation.
Table 8.1 NAFTA and its descendants
NAFTA (January 1994) |
TPP-12 (February 2016) |
USMCA (October 2018) |
Preamble |
Preamble |
Preamble |
1. Objectives 2. General definitions 3. National treatment and market access 4. Rules of origin 5. Customs procedures 6. Energy and basic petrochemicals 7. Agriculture and sanitary and phytosanitary measures 8. Emergency action 9. Standards-related measures (technical barriers) 10. Government procurement 11. Investment 12. Cross-border trade in services 13. Telecommunications 14. Financial services 15. Competition policy, monopolies and state enterprises 16. Temporary entry for business persons 17. Intellectual property 18. Publication, notification and administration of laws 19. Review and dispute settlement in AD/CVD matters 20. Institutional arrangements and dispute settlement procedures 21. Exceptions 22. Final provisions |
1. Initial provisions and general definitions 2. National treatment and market access 3. Rules of origin 4. Textiles and apparel 5. Customs administration 6. Trade remedies (antidumping/countervailing duties) 7. Sanitary and phytosanitary measures 8. Technical barriers to trade 9. Investment 10. Cross-border trade in services 11. Financial services 12. Temporary entry for business persons 13. Telecommunications 14. Electronic commerce 15. Government procurement 16. Competition 17. State-owned enterprises 18. Intellectual property 19. Labour 20. Environment 21. Cooperation and capacity building 22. Competitiveness and business facilitation 23. Development 24. Small and medium-sized enterprises 25. Regulatory coherence 26. Transparency and anti-corruption 27. Administrative and institutional provisions 28. Dispute settlement 29. Exceptions 30. Final provisions |
1. Initial provisions and general definitions 2. National treatment and market access for goods 3. Agriculture 4. Rules of origin 5. Origin procedures 6. Textiles and apparel 7. Customs administration and trade facilitation 8. Recognition of Mexican ownership of hydrocarbons 9. Sanitary and phytosanitary measures 10. Trade remedies 11. Technical barriers to trade 12. Sectoral annexes 13. Government procurement 14. Investment 15. Cross-border trade in services 16. Temporary entry 17. Financial services 18. Telecommunications 19. Digital trade 20. Intellectual property 21. Competition policy 22. State-owned enterprises 23. Labour 24. Environment 25. Small and medium-sized enterprises 26. Competitiveness 27. Anti-corruption 28. Good regulatory practices 29. Publication and administration 30. Administrative and institutional provisions 31. Dispute settlement 32. Exceptions and general provisions 33. Macroeconomic policies and exchange rate matters 34. Final provisions |
The other striking thing about the USMCA is how closely it mirrors the TPP – striking because withdrawing the United States from the TPP was among the first tasks of President Trump upon assuming office in January 2017. Yet the compressed timeline for NAFTA renegotiation initiated in mid-2017, and the fact the same negotiators from all three countries had just completed the TPP a year beforehand, meant that the TPP inevitably served as a starting point for “modernizing” the NAFTA.
The previous chapters of this volume have outlined a number of the merits and weaknesses of the NAFTA and how the politically polarizing qualities of the agreement stood in the way of its amendment, and discussed how these dynamics had fuelled calls for modernization for most of the last three decades. The brief sketch of major changes to the governance of the North American economic space that follows fall into two categories: “modernization”, as defined in terms of areas of North American governance that both needed and received updates in the USMCA; and those areas of “retreat”, wherein the USMCA represents a significant deterioration in what the NAFTA began.
Modernization
One of the most important areas of modernization for the NAFTA may turn out to be the name itself. Although the United States–Mexico–Canada Agreement, or its abbreviation, USMCA, do not roll of the tongue smoothly, a name change may turn out to be politically welcome. Rhetorically, the NAFTA became a political battering ram used for the purpose of bludgeoning political opponents. Those that used it had seldom read the agreement, never acknowledged its limited scope and liberally assigned to the NAFTA responsibility for multiple social ills unconnected to trade. The reality is that the “NAFTA” became radioactive, symbolic of anything and everything perceived to be wrong with the trade policy, the global economy, capitalism or modernity itself.
Even agreements that rhyme with NAFTA were politically poisonous. Between January 2003 and January 2009 the United States, the Dominican Republic and a group of five Central American countries negotiated what is known in the United States as the Dominican Republic–Central American Free Trade Agreement, or CAFTA-DR. Opponents of the CAFTA in the United States, such as Public Citizen, gleefully, but erroneously, attacked the CAFTA as being some kind of extension of the NAFTA, “NAFTA on steroids” or part of a NAFTA-inspired neoliberal plot to undermine the environment, organized labour and American consumers.1
Of course, the use of the term “NAFTA” to bludgeon opponents was only aided by the political vacuum left by supporters of the agreement unwilling to defend its merits. It remains to be seen whether “USMCA” will catch on linguistically. Indeed, “NAFTA 2.0” seems much more straightforward, although it is doubtful whether North American integration will ever have as many revisions to its DNA as the various computer operating systems from which this bit of colloquialism is derived.
Modernized NAFTA? Sure
Even those who viewed the USMCA negotiations mostly as a defensive victory aimed at preserving some semblance of the NAFTA’s status quo have to acknowledge there were important improvements. First and foremost, in spite of President Trump formally withdrawing the United States from the Trans-Pacific Partnership in early 2017, it was that same text that became the default starting point for the USMCA. The irony of using the text of an agreement rejected by the Trump administration is hard to ignore, but, as Table 8.1 depicts, the TPP included the most up-to-date content areas and language being used in trade negotiations by all three countries. There are important updates to areas such as intellectual property, telecommunications, and financial services around which frustratingly little progress had been made by the many working groups created by the NAFTA’s so-called built-in agenda. Other areas of the USMCA include topics and disciplines never contemplated in the NAFTA negotiations. Areas that are entirely new include digital trade, small and medium-sized enterprises and regulatory practices. Others, such as state-owned enterprises, competitiveness and competition policy, are no longer bundled together as under the NAFTA but now merit distinct treatment. And, of course, whereas labour and the environment were dealt with outside the main text of the NAFTA, bundled together in side agreements, the USMCA updates and embeds them in the main text.
The final point regarding the modernization of the NAFTA and how much of the TPP ended up in the USMCA concerns the unfortunate, unorthodox process by which the Trump administration engaged in this process. No matter where one looked, the negotiating process appeared rushed and, at times, incoherent. In many ways, the compressed timeline was a double-edged sword regardless of where one stood on the merits of the NAFTA. Legally mandated public consultations in all three countries were rushed, negotiating positions in all areas were never completely fleshed out and the Trump administration’s specific complaints and demands obsessively focused on just a couple of areas. The obsession with major changes to the rules of origin requirements, including a minimum wage provision, consumed the lion’s share of the negotiating space throughout 2017/18. Given the withering criticism of the NAFTA and the TPP by Donald Trump during the 2016 presidential election campaign, it is surprising that so much of the USMCA contains text effectively cut and pasted directly from the TPP.
That said, the political pressure to get an agreement done quickly necessitated the use of existing templates, which may have done more to preserve the status quo and “update” the NAFTA than a more normalized trilateral process could have achieved. The Trump administration had the capacity to focus only on a small subset of issues, the result being that the USMCA looks a lot like the TPP. Those for whom the cancellation of the NAFTA was a distinct fear breathed a sigh of relief that more damage had not been done.
A retrograde NAFTA? Yes, that too
However, the news is not all good for proponents of NAFTA modernization. Indeed, for all the parallels between the USMCA and the TPP, there are many reasons to read the USMCA as having taken several steps away from modernization.
First and foremost, the USMCA represents a significant decline in the already tenuous nature of trilateralism described in Chapter 3 of this volume. A significant part of the decline can be seen in the negotiating process itself. The Trump administration’s obsession with some of the unique bilateral issues in US–Mexican relations resulted in a negotiation process that appeared at times to be on two different tracks: a US–Canadian track and a US–Mexican track. The emphasis on Mexico undermined the semblance of trilateralism and exploited the tepidness of the relationship between Ottawa and Mexico City.
In the spring of 2017, when the NAFTA renegotiation process was launched, all three NAFTA parties maintained that it would be a trilateral negotiation aimed at modernizing the existing structure. Canada and Mexico, in particular, made public efforts to project solidarity in their dealings with Washington. Indeed, the Canadian prime minister, Justin Trudeau, and the Mexican president, Enrique Peña Nieto, made a public show of some new-found solidarity in advance of a June 2016 “three amigos” summit that included President Obama. That solidarity lasted through the announced modernization of the NAFTA in March 2017 and all the way through the early summer of 2018, when Canada suddenly disappeared from the negotiations. Officially, the Canadians were in regular communication with their Mexican and American counterparts, as those two parties sorted out issues specific to the bilateral relationship. However, when the United States and Mexico suddenly announced in late August 2018 that they had struck a deal, it put significant pressure on Canada not only to re-engage with the process but to find some way to strike a deal or be left out.
Whether Canada’s absence at the negotiating table during the summer of 2018 was a by-product of US preference for dual bilateralism or Canadian and Mexican indifference towards one another is not as important as the impact of a generalized lack of conviction on the part of all three parties to trilateralism.
By almost any standard of evaluation, the USMCA significantly degrades the notion of North America as a trilateral economic zone. Instead of building upon the tenuous, but real, trilateralism embodied by the NAFTA, the USMCA eats away at it in several ways, once again reducing North America to two bilateral relationships anchored by Washington, DC.
Three specific areas of the text are indicative of the decline in trilateralism. First, the US obsession with toughening the rules to qualify for tariff-free treatment in North America was clearly oriented towards protecting American workers from the perceived effects of low-cost Mexican labour, particularly in automobile manufacturing. Labour rights advocates can certainly get behind the new minimum wage requirement as a component of the much higher threshold for tariff-free treatment. Yet one does not have to be overly cynical to conclude that concern for the rights and living standards of Mexican labourers was not top of mind for US negotiators. Indeed, making Mexican production less competitive relative to that in Canada and the United States on the basis of wages alone was a fairly obvious objective.
The USMCA also undermines trilateralism by scrapping the application of dispute settlement to trade remedy laws in the US–Mexican context. In other words, disagreements between Mexico and the United States over dumping and subsidies will no longer have recourse to dispute settlement mechanisms as laid out in NAFTA chapter 19. Canada, on the other hand, much as it had in both the NAFTA and Canada–US free trade negotiations, insisted the USMCA contain these provisions. Hence, the NAFTA’s chapter 19 dispute settlement mechanisms will continue to apply in the Canada–US bilateral context. As noted in Chapter 6 of this volume, the NAFTA’s dispute resolution around trade remedy has never been without criticism. Yet, with the exception of a few especially contentious disputes, chapter 19 has been an effective mechanism, giving Canada and Mexico (but also US interests) an additional set of mechanisms through which to make a reasoned case for resolution. Hence, giving up on dispute settlement over trade remedy laws represents a bizarre concession by the Mexicans given how hard they had fought for them in the NAFTA. Only slightly less concerning is the lack of alarm at this development by Canada, since the mechanisms’ reduction to bilateral applicability merely weakens their import.
A similarly odd set of developments transpired where investment disputes are concerned. As noted in Chapter 5 of this volume, the type of investor – state dispute settlement mechanisms contained in NAFTA chapter 11 began raising controversies in the 1990s whenever they were deployed. In response to critiques, a number of civil society organizations had been lobbying for governments to eliminate ISDS altogether. Many governments responded by incorporating important reforms into newer trade agreements; others proposed eliminating ISDS entirely. When Canada and the European Union concluded their large preferences agreement in 2016 (the Comprehensive Economic and Trade Agreement), it contained ISDS but also an important set of commitments to actively promote Europe’s international investment court idea in all future trade agreements.
Under the USMCA, Canada and the United States have agreed to eliminate the bilateral application of dispute settlement in investment. Mexico and the United States, on the other hand, have agreed to continue with the application of ISDS, but only in a narrowly defined set of sectors – mostly government contracting related to petrochemicals.
In each of these areas, the USMCA has eroded the broad application of trade rules to all three countries. Instead, we now have an uneven patchwork of trilateral and bilateral rules in important areas under the USMCA that undercuts the broader objective of a unified, efficient North American economic space.
Retrograde trilateralism
There are other oddities within the USMCA that give pause for concern. For starters, unlike most trade agreements, the USMCA makes explicit reference to the management of macroeconomic policy, including exchange rates (chapter 33). There is a connection between macroeconomic policy and trade, but explicitly including these two policy areas inside a trade agreement has seldom been done beforehand. President Trump’s (or his advisors’) mistaken belief that trade deficits can be dealt with through trade policy may be responsible for the attachment of a currency provision to the USMCA. However, currency manipulation is a political football, typically managed by finance ministries and through broader negotiations over exchange rate stability and fiscal imbalances. It remains to be seen whether chapter 33 will play a significant role in the USMCA, but the insertion of macroeconomic issues directly into the text of a trade agreement may generate unpredictable outcomes.
There is also an obsession with state-owned-enterprises (chapter 22) and non-market economies (article 32.10) in the USMCA wherein none of the three USMCA parties seems to actually be the target of the agreement’s disciplines. Indeed, when coupled with chapter 33’s focus on macroeconomics and exchange rates, it is not hard to conclude that these provisions are mostly about China. Specifically, article 32.10 allows for the cancellation of the USMCA if any of the three parties to it concludes a major trade agreement with a non-market economy. The negotiators may as well have replaced “non-market economy” with “China”. It will be interesting to see how these provisions are ultimately interpreted given that, in the ensuing year since completion of the USMCA negotiations, the United States has been actively pursuing a negotiated resolution to a host of trade issues with China.
Finally, the NAFTA contained provisions for formal withdrawal, embedded in chapter 20. Under these provisions, any of the NAFTA parties could withdraw six months after formal notification of their intent to do so (NAFTA article 2205). The USMCA contains a nearly identical formal withdrawal mechanism (USMCA article 34.6). However, unlike the NAFTA, the USMCA now contains a kind of sunset review process by which the agreement will automatically terminate after 16 years unless unanimously extended by the parties (article 34.7.1). Moreover, after just six years in operation, the three parties are required to meet and indicate in writing whether they want the agreement extended (article 34.7.2–3). All extensions will be subject to the same six-year reviews, in which the future of the USMCA will again hang in the balance (article 34.7.4–5). For the populist trade sceptics in the Trump administration, these reviews are all about retaining as much latitude as possible to pull out of agreements that no longer “work” in US interests. Reviews of the operation of trade agreements are not inherently problematic. Indeed, the NAFTA Commission met annually to do exactly that, periodically publishing guidance as to how the three governments wanted the agreement to be interpreted.
The difference with the USMCA is that it will not live on in perpetuity pending an active move to extend. Indeed, the USMCA will automatically expire without the active support of all three governments to extend it. The problems this creates for private sector investment and supply chain management decisions are obvious. Long-term decision-making about these issues needs a degree of certainty about the stability of the trade and investment regime that will be in place, which, under the terms of the USMCA, is simply not there.
Although the USMCA failed to build upon the trilateral scaffolding laid down by the NAFTA in 1994, and in several respects is a considerable setback, it has to be acknowledged that the outcome could have been much worse. The contemporary politics of economic integration are much more favourable to the destruction of such arrangements than their deepening. By comparison, the chaotic effort by the United Kingdom to extract itself from the European Union is much more complicated than a withdrawal from the NAFTA by the Trump administration. Indeed, the shallow level of North American integration would make such a break-up slightly less complex. Yet the politics and rhetoric surrounding Britain’s membership in the European Union and America’s participation in the NAFTA are not dissimilar, and could easily have put North America on a similar precipice about the economic and political future of the region.
The USMCA still has a number of hurdles to overcome before it can formally replace the NAFTA. Indeed, the outcome of the November 2018 US mid-term elections has cast considerable uncertainty over the legislative future of the USMCA in the United States. There is considerable potential for bipartisan agreement about the terms of the USMCA text as currently written. However, Democratic opposition to Donald Trump’s presidency, as well as the non-trade chaos seemingly swirling around the White House, may push legislative consideration of the USMCA into the next Congress and the next president (2021) to deal with.
Assuming that President Trump does not formally withdraw from the NAFTA in an effort to press consideration of the USMCA, the original NAFTA will live on and continue to polarize our discussion of what North America is and what it can become. For some, the NAFTA remains a down payment on a return to Turtle Island, and an integrated, efficient and cohesive vision of North America with fewer divisions demarcated by borders. For others, the NAFTA will remain the symbol of everything that is wrong with the global economy, trade and investment policy and the erosion of the sovereign state.
It is perhaps a useful debate about the future of North America worth having, and one the NAFTA sparked and will undoubtedly continue to fuel.
1. Public Citizen, “Global trade watch”: www.citizen.org/our-work/globalization-and-trade (accessed 14 March 2019).