USMCA and China trade pact approval likely

The Weekly Trade Report by L.C.

The US-Mexico-Canada Agreement (USMCA) implementing bill passed the House on December 19th and is expected to pass the Senate and be signed into law. Similarly, the US and China announced that a phase one trade deal between the two countries had been agreed upon, although texts approved by both sides have yet to be released. A January date for both USMCA and China trade pact approval is now regarded as likely, and the stock market has been reacting with predictable enthusiasm.

The 239-page bill fully repeals the North American Free Trade Agreement (NAFTA). That’s not surprising since almost all of the USMCA is simply the same thing as NAFTA, with a few tweaks. However, one of the tweaks is inclusion of a sunset provision that allows for periodic review and possible withdrawal. That goes beyond the standard withdrawal provision that NAFTA included, and so makes the permanency of the accord a little less assured. Some are concerned that this built-in uncertainty could undermine long-term investments.

Senate and trade pundit criticism

Although there was no Republican pushback in the House, there is already in the Senate. The complaints concern:

• the USMCA’s union-friendly labor provisions
• the skewing of the North American automotive supply chain,
• the dropping of biologic patent protection,
• the sunset clause, and
• changes to the Investor-State Dispute Settlement mechanism, which weakens protections for US investors treated unfairly abroad.

The strongest Republican opposition in the Senate is coming from Pennsylvania senator Pat Toomey. He published an opinion column in the December 19th Wall Street Journal sharply opposing the USMCA. Separately, he argued that the implementing bill shouldn’t receive fast-track treatment because it hasn’t adhered to the requirements for fast-track laid out in the Trade Promotion Authority law. He is also criticizing the USMCA for “its unprecedented intent. It is the first pact ever whose purpose is to discourage commerce between nations.” This would also make the USMCA technically WTO-illegal since approved trade agreements must be trade-liberalizing.

The auto provisions also got attention this week after the Congressional Budget Office released the budgetary impact statement it provides Congress for any trade agreement. It found that the deal will cost the US about $3 billion in new auto tariffs over 10 years due to vehicles and parts not meeting the new regional-content standards. “Because of that change in eligibility, CBO projects that duty-free imports of vehicles and parts into the US from the USMCA partner countries would decline.” Thus more vehicles and parts would be paying duties.

The Peterson Institute for International Economics also believes that the USMCA will have a net negative impact. While it said the Protocol made some positive changes, these don’t outweigh “the negative impact on national economies from the restrictive regulations that limit Canadian and Mexican auto plant access to the US market,” making the USMCA a “net negative for all three countries.” The Peterson paper suggests that Canada and Mexico only agreed to the changes because they feared that rejection would cause the the US president to “carry out his threat to cancel NAFTA,” which would be a “catastrophic event.”

The National Taxpayers Union also provided an assessment and tweeted that the USMCA “would be the first trade agreement in American history to increase trade taxes instead of reducing them.”

US-China Phase One murky but signing expected soon

The text and details of the phase one trade deal announced by the US and China last week have still not been released. The two sides have nonetheless begun implementation in the form of lowering certain tariffs, and US officials assured that the details will be released when the legal scrubbing is finished and the deal is ready to be signed, which they say should be in early January.

President Trump tweeted on December 20th, “Had a very good talk with President Xi of China concerning our giant Trade Deal. China has already started large scale purchases of agricultural product & more. Formal signing being arranged. Also talked about North Korea where we are working with China, & Hong Kong (progress!).” This appeared to confirm that this time, both sides are seriously motivated to conclude an agreement that will be signed. This would halt tariff war escalation.

The phase one deal does not involve a reduction in the 25% tariffs imposed last year on $250 billion of imports, and those now look to be perhaps a “permanent” feature of the US-China trade relationship, including therefore also the Chinese retaliatory tariffs. That Beijing agreed to a deal that doesn’t address those tariffs appears to be a concession on its part.

Leaving those tariffs in place means that the US’s average tariff on imports from China will be 19.3%, up from 3.0% before the trade war began and a huge average tariff for any developed country to impose. China’s average tariff on imports from the US will be 20.9%.

The toughest question raised this week concerned the details of China’s pledge to vastly increase purchases of US commodities. Not only is the amount questioned, but there also hasn’t been information released on just how China’s pledges would be enforced. When pressed on the question, Lighthizer told reporters that the deal indeed includes “specific breakdowns by product.” He also confirmed that “We have a commitment for $40 to $50 billion in sales” of commodities over the next two years – “Just massive numbers,” he said.

Speaking after the deal was announced last week, the Chinese raised some questions by refusing to state any specific number for increased purchases, saying this will be determined by market conditions and the competitiveness of US products, and the need to adhere to WTO rules. They didn’t question that there would be an increase in imports from the US but related that in part to China’s need to import pork and poultry as well as grains. The issue for US analysts is whether China needs or is able to up its buys from the US in line with what US officials claim they agreed to. Moreover, some question whether US farmers could meet such a large increase in sales to China – or if they’d want to since they may not wish to risk losing current markets by diverting sales to the less certain China market. The lack of specifics from Washington spurred all this speculation.

Even less clear is what might be in the deal regarding intellectual property protection and elimination of forced tech transfers. A key problem is that Beijing doesn’t admit to encouraging IP or tech theft, and so would only promise – as it already has on many occasions – to increase punishment for these practices. On tech transfers, the US Trade Representative office said last week in its fact sheet that “for the first time in any trade agreement, China has agreed to end its long-standing practice of forcing… foreign companies to transfer their technology.” But trade experts quickly pointed out that in fact China made such a binding commitment all the way back in its WTO Accession Protocol. So of course the issue here is precisely what commitment China made in the deal and how it might be enforced.

Tariff on Brazil steel called off

It was finally confirmed this week that the announced reimposition of the Section 232 tariff on steel from Brazil won’t be implemented. President Trump spoke by phone with President Jair Bolsonaro and, according to the Brazilian president, Trump “was convinced by my arguments and decided to tell all Brazilians that our steel and aluminum will not be hit by additional tariffs.” It is not clear if the president still intends to reimpose the tariffs on Argentina.

This messy situation may impact the president’s credibility when he issues other trade threats. Certainly, it suggests that the president can be talked out of announced policies. Bolsonaro had said after the original Trump tweet, “I’m going to call him so that he doesn’t penalize us…. I’m almost certain he’ll listen to us.” It does not appear that he has offered the US any promises on currency or on restricting exports to China since then. But the legality of reimposing the tariffs — so long after the initial Section 232 action — has been called into question. It is likely that the president’s advisers informed him before he spoke with Bolsonaro that the tariff threat shouldn’t be carried out. Argentina is therefore probably also off the hook.

With USMCA and China trade pact approval likely, the administration will now likely begin turning its attention to trade relations with the UK, the EU, and India.