Canada has ratified the USMCA

The Weekly Trade Report by L.C.

Canada ratified the USMCA (United States-Mexico-Canada Agreement) sooner than anticipated. This is one of the few positive developments recently for a world economy badly rattled by spreading COVID-19 (Wuhan coronavirus) infections in Europe and the Federal Reserve’s foolish and unnecessary revival over the weekend of 2008 “anti-recession” measures. The measures, quantitative easing and a one point reduction of the Fed funds lending rate to nearly zero percent, are causing an unwarranted panic now just as it did then. All the Fed should be doing is to maintain liquidity by lending, for good collateral, to temporarily cash-short but otherwise viable businesses. That’s been classic advice for central bankers from Walter Bagehot’s time down to the present. Fortunately, the Fed does seem to be doing at least that.

Canada’s House of Commons, followed quickly by the country’s Senate, approved the USMCA implementing legislation on March 13th, ahead of a surprise recess called until April 20th because of the COVID-19 crisis. It was then signed by the Governor General, providing “Royal Assent,” a required step for Canadian bills to become law.

The bill had been debated in the House but was then sped through the Senate and passed without amendment – though it is understood that opposition parties still had concerns. However, passage of the legislation was never really in doubt as most of the opposition didn’t want to jeopardize the North American trading accord. There has been a feeling all along that any major obstacle to USMCA implementation could provoke a Trump administration announcement of withdrawal from NAFTA.

Implementation details being discussed

Since the US and Mexico have already completed their ratification procedures, news that the Canadian Parliament has ratified the USMCA makes it possible for the USMCA to enter into force as early as June 1st. There are other steps that the three countries must take to prepare for implementation – requirements set both in the agreement and in the US implementing legislation – but they have been consulting with each other and moving forward in these areas. Hence everything should be ready by early summer, though that’s not assured.

Among areas where final arrangements have to be put in place is the auto sector, where complying with the new rules-of-origin is expected to be particularly challenging, though the new rules will be phased in to give auto companies time to adjust their supply chains. The Trump administration has already put its NAFTA partners on notice that it intends to strictly enforce the agreement once it takes effect.

Reactions in US and Mexico

US Trade Representative (USTR) Robert Lighthizer released a statement on the Canadian ratification that repeated the President’s consistent if inaccurate claim that the USMCA, which mainly tweaked NAFTA to make it more trade-restrictive, is “an historic new chapter for North American trade” and a “landmark achievement” due to “President Trump’s leadership and determination to strengthen our economy.” He also stated that “USMCA is the gold standard by which all future trade agreements will be judged.” In truth, the narrow trade deals the administration has been concluding elsewhere fall far short even of the USMCA.

Although the COVID-19 crisis sped up Canadian ratification, giving the USMCA a boost, it also led to Ottawa considering closing its border with the US in response to the virus. Mexico too, in an ironic development, is considering closing its border with the US. Noting the current large discrepancy in COVID-19 cases between the two countries, Health Minister Hugo Lopez-Gatell told reporters, ‘Mexico wouldn’t bring the virus to the US, rather the US would bring it here.”

The higher rate of coronavirus infection in the US than Mexico is a further suggestion that the Wuhan virus, like the common flu, thrives better in cold, dry climates, which most of Mexico is not.

US response to the Wuhan virus (COVID-19)

The president is planning, within a few weeks, to issue an executive order making it harder to obtain medical supplies and equipment from abroad. This anticipated new “Buy American” order comes as the COVID-19 crisis has spurred stepped-up calls from the private sector and from Capitol Hill to terminate at least a portion of the Section 301 tariffs on China and the Section 232 tariffs on steel and aluminum. This would be on two grounds:

• that it is harmful to force up the price of some needed products, and
• that ending the tariffs to make imports cheaper would act as a stimulus to the faltering US economy.

USTR did grant tariff exclusion requests for a number of Chinese medical-related imports, but the White House has rejected the idea of broader tariff relief.

Trade adviser Peter Navarro said on March 11th that the new “Buy American” order meshes with concerns in Congress that the US is too reliant on Chinese sources for these items. It would bar federal agencies from getting such supplies from China, the predominant source for many of them. A group of senators met with the president on 3/10 on how to help the economy get through the COVID-19 crisis. Sen. Marco Rubio (R-FL) said that he asked the president to support the Senate’s “efforts to invest in diversifying our supply chain, especially in pharmaceuticals and medical equipment.” The president agreed and told the senators that Navarro is working on an executive order on the matter.

Tariff exclusions on select medical imports

The order, Navarro told reporters, will cover over 400 “essential medicines” that “satisfy the priority health care needs” as well as “medical countermeasures” aimed at protecting against chemical and biological threats and infections as well as radiation/nuclear threats. He also said in an interview that the administration is considering a three-pronged strategy to tighten domestic medical procurement comprised of the Buy American executive order, streamlining regulations on domestic production, and incentivizing the development of new technologies.

“China has managed to dominate all aspects of the supply chain using the same unfair trade practices that it has used to dominate other sectors – cheap sweatshop labor, lax environmental regulations and massive government subsidies,” Navarro told reporters. “As President Trump has said, what we need to do is bring those jobs home.”

The prospect of cutting off foreign supply comes at a time when the US is competing with other countries to obtain what is being produced. That underlines the rationale for promoting domestic production over the longer term, but proposals for doing so don’t do anything to remedy the current difficulty in obtaining adequate supplies. Twenty-four countries have restricted their exports of medical equipment, Global Trade Alert reports, and on March 15th the EU announced that it too is doing so for “protective” products. A presidential order to block these imports in the future may make more countries reluctant to sell to the US.

The president was warned

Meanwhile, the US has cut the Section 301 tariffs the administration had added on medical products. It should be remembered, however, that when the Section 301 tariff hit-lists were first unveiled two years ago, according to PIIE’s Chad Bown, “health experts warned Trump” that “putting tariffs on medical products would hurt US preparedness for pandemics. He did it anyway.” They warned “how Trumps tariffs may contribute to shortages at the time of a national health crisis.” And so, “Despite warnings from health experts, Trump began imposing 25% tariffs on Chinese medical equipment in July 2018” which “resulted in a sharp decline in US imports from China of many of these critical medical products between 2017 and 2019. USTR has granted some exclusions, but they are temporary, partial, and massive uncertainty remains.”

Bown released a longer analysis on March 13th saying that about $5 billion in medical products were originally covered by Section 301 tariffs, and “Now that there are potential supply shortages globally, the US health crisis demands that the administration comprehensively and permanently reverse these policies of self-harm.”

During the hearings in advance of imposing the Section 301 tariffs, US medical industry executives warned that items on the tariff list included some essential for dealing with epidemics, so the picture painted in Bown’s analysis is not a surprise.

Remaining tariffs still harm

There are nonetheless still tariffs, mostly at 25%, on about $360 billion of imports from China, that weren’t included in the small tariff suspension of the Phase One trade deal. A number of medical items, especially high-tech equipment, remain under these tariffs.

US agriculture, too, is suffering harm from the US tariffs and Chinese retaliation especially. Farm representatives said this week they want tariff relief, not more federal assistance.

Lighthizer met with House Ways & Means Committee members on March 11th. Rep. Stephanie Murphy (D-FL) said afterwards that she told him, “There is one lever currently entirely in the administration’s hands to provide a significant tax break to both businesses and consumers… and that’s initiating a detente in the trade wars… started with the Section 232 and Section 301 tariffs. It… would have an immediate economic impact and help stave off a global recession.” She proposed at least a temporary reduction that could be revisited after the crisis passes. But she and others who were in the meeting told reporters that the USTR wasn’t receptive to the idea though he did acknowledge that the virus will cause economic pain.

Non-medical tariff cuts are unlikely, however

Given that Navarro – the president’s other main trade adviser – rejects the tariff-cut idea even more forcefully, it seems it won’t be on the immediate agenda of White House responses to COVID-19’s economic impact. When Politico asked Navarro, he replied, “There is no discussion within the White House about [tariff cuts]. That is simply a fake news gambit by the usual Wall Street suspects who never met an American job they didn’t want to offshore for the sake of a buck.” In fact, he said, the proposal is “absurd.” Treasury Secretary Steven Mnuchin also dismissed the idea in testimony to the Ways & Means Committee last week. “We’re not considering [cutting tariffs] at the moment,” he stated. That’s a blanket rejection of a proposal pushed hard by members of both political parties and the US business community.

Much of the private sector is pushing hard for tariff cuts, led by the NAM and US Chamber of Commerce. NAM released an action plan on March 9th. It called for suspending or eliminating some of the tariffs on imports from China, especially for expediting entry of medically important products. The White House should, NAM urged, also create a list of Chinese products on which “tariffs and retaliatory tariffs can be suspended or removed to spurt economic growth.” And it should accelerate the talks for a Phase Two accord.

A US Chamber official said it would “support any decision by the administration to reduce, eliminate or suspend tariffs,” and said that exempting more imports of medical goods from China “would be a welcomed step to support efforts to combat the virus.” The group has set up four new task forces that will work to help businesses coping with fallout from the virus and to provide policy recommendations for the government on dealing with the crisis.

Tariffs and COVID-19, a one-two punch

Also this week, a study came out showing that even before the COVID-19 outbreak, tariffs were doing severe harm. The Association of Equipment Manufacturers released a study on March 11th done by IHS Market Research on the impact of the tariffs, reviewing the period from the start of Trump’s tariffs through end-2019. The findings were grim. Because the additional tariffs on metals and on intermediate goods from China raised costs for US manufacturers, they lost market share while their top ten foreign-based rivals – led by companies based in Mexico and Japan – gained 9% more of the US market. Ultimately, the study reports, 3,400 jobs will be lost in the domestic industry, as some US companies lose competitiveness and others move offshore. According to AEM President Dennis Slater, “The benefits of tax reform and regulatory change have largely been canceled out” by the tariffs and trade wars they fostered.

This suggests that Canadian ratification of the USMCA will need to be followed up many more trade-friendly initiatives by the Trump administration than seem presently to be contemplated.