The positive consequences of the free trade agreement will derive more from the end of uncertainty than from the new provisions introduced.

After a year and a half of negotiations, the new treaty between the United States, Canada and Mexico (this country has named it T-MEC, the other two speak of USMCA) is still pending approval by the legislative chambers of each country. In Washington, the political discussion should begin shortly; it will be important what effects are foreseen for the US Economics and that of its two neighbors. The first programs of study disagree on some aspects, although they agree that the changes introduced in the renegotiation of the agreement that existed since 1994 will not have a special impact.

▲ signature of the U.S.-Mexico-Canada free trade agreement at framework of the G-20 in November 2018 [Shealah Craighead-White House].

article / Ramón Barba

The renegotiation of the formerly North American Free Trade Agreement (NAFTA, or NAFTA for its acronym in English) and now baptized as the Treaty of the United States, Mexico and Canada (T-MEC or, in its Anglo-Saxon version, USMCA), has been one of the main points on the Trump Administration's diary . C by the three negotiating parties at the end of 2018, now the treaty is pending ratification by the legislative chambers of each country.

Launched in 1994, the agreement had been described by Trump as "the worst trade agreement in history". From the beginning of his presidency, Trump set out to modify some aspects of agreement to reduce the large trade deficit with Mexico (some $80 billion, double the deficit the US has with Canada), and at the same time refund activity and jobs to the US Rust Belt, where the echo of his promises had been decisive for his electoral victory.

What has each country gained and what has each country lost in the renegotiation of the treaty? And, above all, what effects will it have on each country's Economics ? Will the United States improve its trade balance? Will Mexico or Canada be negatively affected by some of the modifications introduced? We will first examine how the claims of each of the partners were left at the end of the negotiations, and then we will look at the possible economic effect of the new version of the treaty in the light of two recent reports programs of study, one by an independent body of the U.S. Administration and the other by the IMF.

Tug of war

In the negotiations, which dragged on for nearly a year and a half, Mexico and Canada managed to "maintain the status quo in many important areas," but while the actual changes were modest, as analyzed by the Brookings Institution, they "went almost uniformly in the direction of what the United States wanted." "Trump's aggressive and threatening approach ," which challenged with breaking the treaty for good, "succeeded in obtaining modest concessions from his partners."

In the automotive industry core topic , the US managed to increase from 62.5% to 75% the proportion of the production of a car that must be made within the free trade area , to force 30% of the work needed to manufacture a car to have a wage of $16/hour (40% as of 2023) -a measure aimed at appeasing the US unions, since in Mexico the average wage of an automotive worker today is $4/hour-, and to set a tariff of 25% for cars coming from outside the country.

Mexico and Canada were granted their demand that an autonomous termination clause not be introduced after five years if there was no prior consensus for the renewal of the agreement, put on the table by Washington. Finally, the T-MEC will last for 16 years, renewable, with a review in the sixth year.

Justin Trudeau's government had to make some concessions to the U.S. dairy sector, but preserved what had been its main red line from the beginning: the validity of Chapter 19, concerning the settlement of disputes through independent binational arbitration.

Mexico, for its part, gained the peace of mind that comes with the survival of the agreement, avoiding future uncertainty and guaranteeing close trade relations with the large U.S. market. However, the labor conditions of Mexican workers can work as a double-edged sword for the Aztec Economics , since on the one hand it can favor an improvement in the standard of living and encourage consumption, but on the other hand it can affect the location of companies due to less competitive salaries.

Regardless of these changes in one direction or another, the update of the treaty was necessary after 25 years of a agreement that was signed before the Internet revolution and the digital Economics that it has brought. On the other hand, the change of name of the treaty was a "gimmick" devised by Trump to sell to his electorate the renewal of a agreement whose previous name was associated with criticisms made over the last two decades.

The discussion on the text will take place in the fall at the US congress , where Democrats will insist on strengthening assurances that Mexico will implement the committed labor measures. Prior to the vote the US must apply a exemption to Canada and Mexico of the steel and aluminum tariffs that the Trump Administration has imposed internationally.

Economic effect

The United States International Trade Commission (USITC), an independent body that has the status of a government agency, considers that the T-MEC will have a limited but positive impact on the US Economics . Thus, in a report published in April, it estimates that the entrance in force of the reformulated agreement will increase US production by 0.35%, with an increase in employment of 0.12%, figures somewhat lower than those predicted when NAFTA came into force in 1994, when the US expected a 0.5% increase in its Economics and a 1% rise in employment.

In any case, this timid impact would not be so much due to the content of the agreed text, but to its mere existence, since it eliminates uncertainties about US trade relations with its two neighbors.

The report believes that the T-MEC will lead to an increase in the production of automotive accessories in the US, dragging up the employment in that country, but making the products more expensive and, therefore, negatively affecting exports. The report also foresees that maintaining the current arbitration system, as demanded by Mexico and Canada, will discourage US investments in the Mexican market and boost them in the US.

These conclusions do not coincide with the assessment of the International Monetary Fund, although both bodies agree with agreement in ruling out major effects of agreement. Thus, an IMF study published in March believes that, at the aggregate level, the effects of the new wording "are relatively small". The new provisions "could lead to less economic integration of North America, reducing trade among the three North American partners by more than $4 billion (0.4%), while giving their members combined gains of $538 million". It adds that the real GDP effects of the free trade area are "negligible," and qualifies that many of the benefits "would come from trade facilitation measures that modernize and integrate customs procedures to further reduce trade costs and border inefficiencies."

The result of the study sample that the more demanding rules of origin in the automotive sector and labor value content requirements, issues that especially concern the US-Mexico relationship, "would not achieve their desired consequences". According to the IMF, "the new rules lead to a decline in vehicle and parts production in the three North American countries, with shifts toward increased sourcing of vehicles and parts from outside the region. Consumers will find higher vehicle prices and will respond with lower quantity demand".

As for Canada's dairy market, an issue of particular relevance in the US-Canada trade relationship, the effects of increased US access "would be very small and macroeconomically insignificant".

This disparity in forecasts between the USITC and the IMF is due to the fact that several variables are undetermined, such as the future of the trans-Pacific agreement , in which Canada and Mexico are involved, or the ongoing trade discussions between the US and China. One sample where the ground is especially shaky is the data that in January and February 2019 Mexico became the first trade partner of the US (a exchange of $97.4 billion), ahead of Canada ($92.4 billion) and China ($90.4 billion). That raised the US trade deficit with Mexico by $3 billion, just in the opposite direction of the Trump Administration's claims.