Why The USMCA Deal Could Weigh On Economic Growth In The Long Term

Topline: Although Wall Street cheered the signing of a new North American trade deal announced by the Trump administration and congressional Democrats last week, in their relief many investors overlooked specific provisions of the deal—especially with regards to autos—that could dampen economic growth.

• The new U.S.-Mexico-Canada Agreement (USMCA), or so-called Nafta 2.0, replaces the 26-year old North American Free Trade Agreement and is expected to win approval from the House of Representatives with bipartisan support on Thursday.
• But some aspects of the deal are underwhelming, and could actually weigh on economic growth in the long run: “It’s better than not having anything, but worse than NAFTA, from a growth perspective,” says Adam Crisafulli, founder and president of Vital Knowledge Media.
• The deal is still a “net negative for all three economies,” according to a recent post from the Peterson Institute for International Economics. “Its regulatory mandates, especially in autos, will restrict trade and hurt US industry.”
• The USMCA sets higher standards for more automobile content to come from North America: The deal imposes a 75% regional content requirement—up from 62.5% in NAFTA, for instance, as well as new mandates on using regional steel and aluminum, according to Reuters.
• New estimates from the Congressional Budget Office (CBO), for example, found that the USMCA deal, with its higher regional content requirements for cars and parts, will cost automakers nearly $3 billion more in tariffs over the decade.
• “Those are certainly some headwinds,” says Crisafulli. While the deal could help autoworkers and lead to increased auto manufacturing in North America and the U.S., it will place more of a burden and more cost on the auto industry, he says.

Crucial statistic: An assessment by the U.S. International Trade Commission found that the USMCA deal will cause U.S. growth to actually decline by 0.12%.

Crucial quotes: “In aggregate, it makes the whole North American auto industry less competitive and that could weigh on economic growth over the long run,” Criisafulli says. “It’s not going to be instantaneous.”

“U.S. auto companies say they can live with these higher costs, but other manufacturers may not,” points out the Wall Street Journal editorial board, who similarly argued that in many respects, the USMCA deal is worse than NAFTA and makes North American products less competitive worldwide.

Key background: The revised North American trade deal, signed by the U.S., Mexico and Canada last week, was touted by President Trump as the “best and most important trade deal ever made by the USA.” While his administration had reached an agreement with Canada and Mexico for a revised trade deal in 2018, congressional Democrats spent months pressing for better labor and environmental protections, as well as advocating against a pharmaceutical provision that they argued hurt consumers. The USMCA’s approval will likely boost Trump’s reelection bid in 2020, according to the New York Times, since it follows up on his 2016 campaign promise to rip up NAFTA.