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 free trade agreement between the U.S., Mexico and Canada, in the framework the G-20, in November 2018 [Shealah Craighead-White House].

article / Ramón Barba

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

Put in place in 1994, the agreement had been described by Trump as "the worst trade agreement in history". Since the beginning of his presidency, Trump has proposed to modify some aspects of the agreement to reduce the large trade deficit with Mexico (about $80 billion, twice the deficit that the US has with Canada), and at the same time to 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 lost in the renegotiation of the treaty? And, above all, what effects will it have on the Economics of each country? 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 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 almost 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 he challenged with breaking the treaty for good, "succeeded in obtaining modest concessions from his partners."

On the core topic of the automotive industry, the US managed to increase from 62.5% to 75% the proportion of car production 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 US unions, since in Mexico the average wage of an automotive worker is currently $4/hour-, and to set a tariff of 25% for cars coming from abroad.

Mexico and Canada were satisfied in their demand that an autonomous termination clause not be introduced after five years if there was no prior consensus on the renewal of the agreement, which had been put on the table by Washington. In the end, 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 be 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 the other, the treaty update was necessary after 25 years of an agreement that was signed before the Internet revolution and the digital Economics that it brought. On the other hand, the change of name of the treaty was a "trick" devised by Trump to sell to his electorate the renewal of an 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 in the US congress , where Democrats will insist on reinforcing guarantees that Mexico will implement the committed labor measures. Before the vote the US will have to apply an exemption to Canada and Mexico from 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 into 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 forecast 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 U.S., boosting employment in that country, but causing a rise in the price of products and, therefore, negatively affecting exports. The report also predicts 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 International Monetary Fund's assessment, although both bodies agreement in ruling out major effects of the 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 a combined gain of $538 million". He adds that the effects on real GDP 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 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. A sample in which the ground is especially shaky is the fact that in January and February 2019, Mexico became the first trading partner of the USA (an exchange of 97.4 billion dollars), 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 pretensions.