Elephants in the Room
The New U.S.-Mexico-Canada Trade Deal Can Work for Everyone
Republicans and Democrats have every reason to compromise and ratify the agreement.
With Mexico and Canada’s trade with the United States topping nearly $1.4 trillion in goods and services, the North American Free Trade Agreement (NAFTA) has been a tremendous success.
Yet the United States’ relationships with its neighbors to the north and south have faced strong headwinds in the past three years as a result of the mercurial occupant of the Oval Office. If both Congress and President Donald Trump’s administration can summon the political will to make tough compromises in the coming months, they will have the opportunity to rebuild those ties and provide much-needed certainty.
Beginning on the campaign trail in 2015, Trump routinely harangued NAFTA as a disaster for the United States, calling it “the worst trade deal in history.” Upon taking office in 2017, Trump withdrew the United States from the Trans-Pacific Partnership (TPP), a high-quality trade pact with Pacific Rim nations, including Canada and Mexico, which would have effectively replaced NAFTA. Shortly after withdrawing from the TPP, the president came close to withdrawing the United States from NAFTA itself. Only after realizing the harm that would do to many of his supporters did the president agree instead to renegotiate NAFTA.
The Trump administration also dubiously declared steel and aluminum imports from Canada and Mexico to be national security threats to the United States and placed heavy tariffs on them, which have since been lifted. But then, this spring, the president threatened to close the southern border completely and then to impose tariffs on Mexican products unless that country took swift action to stem the tide of immigrants and asylum-seekers crossing the U.S.-Mexican border. That threat now appears to be empty as well.
The president’s reckless actions and rhetoric have damaged the indispensable North American trading relationship, but there may be a light at the end of the tunnel. After a long, tense renegotiation, the North American allies produced a solid, but flawed, trade agreement. The renegotiated United States-Mexico-Canada Agreement (USMCA) could succeed if reality trumps posturing and raw partisanship.
House Speaker Nancy Pelosi acknowledged that her fellow House Democrats want to get to “yes” on the USMCA but are pressing the White House and U.S. Trade Representative Robert Lighthizer to make substantive changes to the agreement. The speaker recently appointed working groups to negotiate with Lighthizer over certain provisions, including pharmaceutical pricing and enforcement.
Under the terms of the USMCA, the parties agreed to provide 10 years of data exclusivity for biologics, an innovative but costly form of prescription medicines. Data exclusivity, a form of intellectual property protection, guards name-brand pharmaceuticals from generic competition for a certain period of time after the drugs have been approved by safety regulators. The United States currently grants 12 years of data exclusivity. Canada grants eight and Mexico five.
Trade watchers will remember how contentious this issue was during the negotiations over the TPP. U.S. negotiators, at the behest of Republican Sen. Orrin Hatch, then the chairman of the Senate Finance Committee, pushed member countries to accept a 12-year data exclusivity standard. TPP countries ultimately pared that back to five years with a vague provision that permits potentially up to eight years of protection. But the controversial provision bogged down the negotiations, and the United States spent a lot of political capital fighting to protect a tiny slice of the U.S. economy.
House Democrats argue that the provision will contribute to high prescription drug costs. Just as the Obama administration did, Democrats could push for a shortened domestic exclusivity standard if they control the White House and Congress after elections in 2020. Irrespective of the merits, the U.S. trade representative will need to either shorten the period of exclusivity or remove the clause from the USMCA altogether if he wants the House to pass the deal.
Another area ripe for compromise is the USMCA’s weak enforcement provisions. Democrats have long complained that NAFTA’s enforcement provisions are toothless. Under the terms of that agreement, parties can block the formation of neutral panels that would hear disputes and issue decisions. The NAFTA parties have used this power to effectively neuter the enforcement process. After some initial success in settling disputes, enforcement has been essentially nil since around 2001.
At its core, a trade agreement among countries needs to be enforceable. If one country is not abiding by the terms of the agreement, another party to the agreement ought to be able to bring an action, if necessary, to enforce the commitments in a neutral forum.
Regrettably, the text of the USMCA does little to fix this problem. Binding state-to-state enforcement and no panel blocking—that is, allowing neutral decisions by judges to take effect over a country’s objections—should be central to the House Democrats’ demands for stronger enforcement provisions. This is a vastly superior method for enforcing the terms of the USMCA than unilateral action under Section 301 of the U.S. Trade Act of 1974, as Lighthizer has suggested. Section 301 allows the United States to act as “police force (identifying the foreign government’s crime), prosecutor (making the legal arguments), jury (ruling on the evidence), and judge (sentencing the foreigner to US retaliatory punishment),” according to a memo from the Peterson Institute for International Economics. The U.S. trade representative should drop the threat of Section 301 as a tool to enforce the USMCA and instead work to strengthen existing state-to-state dispute settlement.
One area of the new trade deal that is rightly receiving bipartisan plaudits is the agreement’s digital trade chapter. The rise of the internet since NAFTA’s inception in 1994 means that the nature of commerce has changed, but the agreement itself has not. The USMCA’s digital trade chapter establishes a gold standard for the treatment e-commerce. It prohibits the parties from imposing tariffs on digital content or forcing companies to divulge software source code. Likewise, the agreement prohibits forced data localization—that is, when countries force outside companies to store their nationals’ user data domestically—a favorite protectionist tool of the modern age. The USMCA also enshrines liability protections for intermediaries similar to those contained in the Digital Millennium Copyright Act and Section 230 of the Communications Decency Act. These laws prevent websites from being sued for their users’ content, and they are fundamental to the United States’ preeminence in the digital space.
The only downside of these world-class digital trade provisions is they will only apply to Canada, Mexico, and the United States. As select members of the World Trade Organization begin negotiating their own digital trade agreement, the United States should insist any agreement negotiated in Geneva be on par with the USMCA. With their more restrictive approaches to the internet and data flows, this will be a tough pill for Europe and China to swallow. Establishing high-quality rules on digital trade in the USMCA will strengthen the United States’ hand at the WTO.
A 2018 study by Trade Partnership Worldwide estimated that eliminating NAFTA with no agreement to replace it and reverting back to higher tariff rates could lead to the loss of 1.8 million American jobs. That price is too high. The USMCA is an imperfect agreement. It contains some positive revisions and others that need to be changed if the agreement is to replace NAFTA. Policymakers can provide desperately needed certainty if they can see the forest for the trees—the larger commercial relationship is much more important than any specific provision or any partisan point-scoring.