Largest benefit of passing Trump USMCA trade deal would be ending uncertainty it generated, critics say

Christine McDaniel, a senior research fellow at George Mason University’s Mercatus Center, said that parts of the deal will have a marginal negative effect on trade only balanced out by the effects of removing uncertainty related to Trump’s decision to reopen the question of trade among the three countries. “The International Trade Commission said that USMCA would actually have a small but negative effect on the U.S. economy. It was only when they added this assumption of decreased uncertainty did they get the needle to move to the other side of zero,” she told the Washington Examiner.

Rep. Ron Kind, a Wisconsin Democrat, argued during committee passage of the agreement on Tuesday that any benefits from USMCA were mostly attributable to the resolution of the three-country trade dispute.

“The only reason why we got the positive growth is because of the new ‘certainty quotient’ that is being used right now because of the volatility and unpredictability of President Trump,” Kind said, noting that Trump threatened periodically to pull out of the North American Free Trade Agreement and enact new tariffs on Canada and Mexico. Passing USMCA puts those fears to rest.

Kind did argue, however, that NAFTA needed to be modernized and updated through renegotiations. The deal is expected to be voted on by the full House by the end of the week.

The lawmaker’s point is echoed by many advocates of free trade, such as Sen. Pat Toomey, a Pennsylvania Republican. Overall, USMCA represents a modest updating of NAFTA, mainly by addressing trade items that were not issues at the time that deal was passed a quarter century ago, such as digital trade. In some cases, it restricts trade, rather than liberalizing it, such as by setting higher standards for allowing auto imports to be duty-free.

USMCA requires that 75% of an automobile’s parts must be made in North America to be duty-free, up from 62.5%. In addition, the deal says that at least 40% to 45% of a car’s components must be made by factory workers earning at least $16 an hour or its equivalent. The measures are meant to limit Mexico’s competitive advantage on labor costs but will increase the cost of making cars.

Otherwise, the update does little to affect the current flow of trade.

“The main benefit is removing uncertainty,” said Gary Hufbauer, a nonresident senior fellow for the Peterson Institute for International Economics. “Feels so good when you stop hitting your head against the wall.”

Hufbauer noted that businesses will be able to ramp up investment knowing that they won’t be hit by new tariffs on North American trade.

NAFTA had already eliminated duties on most trade goods and rolled back most nontariff measures, so USMCA’s emphasis was on reducing the few remaining nontariff measures on trade and ensuring that new tariffs wouldn’t happen, the ITC, a nonpartisan government agency, reported.

“Many of the USMCA provisions reflect commitments to refrain from making current trade and investment regulatory practices more restrictive. These provisions will likely benefit U.S. businesses by reducing business uncertainty, potentially lowering trade costs for businesses,” the commission noted.

The report found that USMCA auto provisions would have some negative effects, such as reducing U.S. vehicle production by 1.3% and increasing U.S. consumer prices by up to 1.6% At the same time, the ITC estimated that the provisions that prohibit tariffs and levies on digital trade would eliminate a lot of uncertainty and that would balance out the impact of the auto sections.

“The first question, is how do we know the digital trade section would uncertainty and, number two, how do you measure that?” McDaniel said. “Nobody really knows how to measure the effects of uncertainty on trade policy.”