ITC: USMCA’s Moderate Impact

On April 18, the U.S. International Trade Commission (ITC) issued its report on the U.S.-Mexico-Canada Trade Agreement (USMCA), concluding that it is likely to have a “moderate” impact on the United States. This post highlights the ITC’s findings, considers an assessment by the U.S. Trade Representative (USTR) of the effect of the Agreement’s new rules of origin (ROO) in the auto sector and next steps.

The ITC’s 375-page report estimates that “if fully implemented and enforced”, the USMCA would raise U.S. real gross domestic product (GDP) by $68.2 billion (0.35%) and U.S. employment by 176,000 jobs (0.12%). It also anticipates increases in U.S. exports to Canada and Mexico by $19.1 billion (5.9%) and $14.2 billion (6.7%), respectively, as well as increased U.S. imports by $19.1 billion (4.8%) from Canada and $12.4 billion (3.8%) from Mexico.

The Commission’s assessment took into account the size of the U.S. economy in relation to the Mexican and Canadian economies, as well as the reduction in tariff and nontariff barriers that has already taken place among the three countries under the North American Free Trade Agreement (NAFTA). NAFTA has eliminated duties on most goods and significantly reduced nontariff measures.

As a consequence, USMCA’s provisions are aimed at reducing remaining nontariff barriers and addressing other issues that affect trade, such as workers’ rights and  harmonization of regulations. The ITC concluded that the most significant elements of the USMCA would be its digital trade provisions, which were not included in NAFTA, and new rules of origin applicable to the automotive sector.

With regard to the automotive ROO, the ITC estimated that the USMCA’s increase in the regional value content of 75% for passenger vehicles and light trucks (in comparison to NAFTA’s 62.5%) would increase U.S. production of automotive parts and employment in the sector. It also expects that would “lead to a small increase in the prices and small decrease in the consumption of vehicles in the United States”.

The Commission observed that the NAFTA replacement would reduce the scope of the investor-state dispute settlement mechanism, which it predicted would reduce U.S. investment in Mexico and “lead to a small increase in U.S. domestic investment and output in the manufacturing and mining sectors”.

Regarding the USMCA’s government procurement chapter, the ITC noted that it “largely extends the provisions in NAFTA without additional commitments” and does not apply to Canada. It anticipates that the procurement provisions will have “little impact on U.S. firms and taxpayers”, although it recognized that the loss of the lower thresholds ($25,000 for goods and $80,317 for services) that Canada applies under NAFTA, in contrast to its thresholds under the WTO Government Procurement Agreement, “could negatively affect some U.S. firms”.

USTR issued its own estimate of the impact that the USMCA’s rules of origin will have on the U.S. auto sector, based in large part on information provided by North American automakers. It estimates that over a five-year period, the USMCA will result in: $34 billion in automotive sector investment in the U.S.; $23 billion in annual purchases of U.S.-made auto parts purchases; and 76,000 jobs in the auto sector. The jobs estimate is comprised of 22,800 automotive assembly jobs, 8,000 advanced battery supplier jobs and 45,600 automotive supplier jobs. 

The ITC’s USMCA report fulfills a requirement of Trade Promotion Authority and is a pre-requisite to Congress taking action on the Agreement. Next steps include the administration’s submission of the final USMCA text, a draft statement of administrative action and implementing legislation to Congress. 

Prospects for congressional approval of the USMCA are very uncertain. Outstanding issues include passage of Mexican labor reform legislation called for in the Agreement and removal of steel and aluminum tariffs on Canada and Mexico, which both countries, as well as many in Congress, are insisting be removed before the Agreement is approved. In addition, House Democrats are calling for re-opening the Agreement to address a variety of issues. The looming 2020 elections are also likely to be a factor in the Agreement’s approval.

Jean Heilman Grier

April 24, 2019

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