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Amid Tariffs and Elections, Ratification of New NAFTA Is Ever-Moving Target

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The logic of politics can be anything but logical.

In 2016, when then-presidential candidate Donald Trump vowed to pull the United States out of the North American Free Trade Agreement (NAFTA) and negotiate a better deal, his Democratic critics dismissed the idea as populist madness. Three years later, with a new pact on the table in the form of the United States-Mexico-Canada Agreement (USMCA), it is the Democrats insisting that a still better deal can be achieved — with House Speaker Nancy Pelosi and others calling for clearer measures to enforce its environmental regulations and labor provisions.

a2.usmca.congress.senate.storyAnd last month, President Trump himself seemed to bury an axe in his own agreement with the threat of escalating tariffs against Mexico if President Andrés Manuel López Obrador did not immediately stop the flow of migrants across the U.S. border. Then, just as suddenly, the president backed off his threat, saying that because Mexico had agreed to take “strong measures” to curb migration, the U.S. would not be slapping tariffs on its neighbor to the south — for now.

Trump’s latest trade gambit threw yet another wrench in the effort to replace NAFTA. Last October, after over a year of negotiations, the U.S., Canada and Mexico agreed to overhaul the 1994 agreement responsible for $1.2 trillion in annual trade among the three nations. But NAFTA’s replacement must still be approved by a bitterly divided Congress.

Democrats have been circumspect in questioning Mexico’s sincerity about labor reforms designed to empower workers’ unions. Meanwhile, even though the USMCA is a priority for his administration, there’s always the chance Trump could sabotage his own trade deal given his frequent attacks on Mexico, especially as he begins campaigning for re-election. Those attacks ramped up as a flood of Central American migrants inundated the U.S. border. In response, Trump characteristically tweeted that “Mexico is an ‘abuser’ of the United States, taking but never giving.”

a2.usmca.pelosi.storyBut many Mexicans feel they have been the ones abused by a U.S. president who has labeled them rapists and placed the onus on them to stem the current tide of migrants, despite their own limited resources. Nevertheless, the Mexican government — aware of its economic dependence on the U.S. — has adopted a conciliatory wait-and-see approach to the president’s bombast.

Former Mexican President Enrique Peña Nieto agreed to concessions in the USMCA that would, among other things, boost the minimum wage of auto workers, putting Mexican workers at a disadvantage. Similarly, Peña Nieto’s successor, López Obrador, has tread carefully with Trump, emphasizing cooperation over confrontation while reforming Mexican labor laws to address Democratic concerns about the USMCA.

But Trump’s latest tariff brinkmanship has shaken confidence that Congress will ratify the USMCA this year, let alone before the summer recess, said Alejandro Gómez-Strozzi, a partner at international law firm Foley & Lardner LLP who focuses on international trade compliance and Mexican administrative law.

“This is still politics in the U.S.,” Gómez-Strozzi said, pointing out that the tariff threats were intended to influence border control measures, not trade. “Judging by the merits themselves on trade, the USMCA will be passed. However, politics are getting in the way.”

Exactly what those politics are may be difficult to parse. Was the president resorting to reverse psychology, raising the specter of a second trade war to spur Congress into ratifying the pact? Does he really believe tariffs imposed to stop immigration (and drug trafficking) can remain separate from the broader trade relationship? Is he setting up Congress as an obstructionist foe, the way anti-immigration, populist leaders across the Atlantic have demonized the European Union? Was the threat of economically crippling tariffs actually a ploy designed to prod the Federal Reserve into lowering interest rates, as the president has long demanded? Or did he simply sense that the world’s attention had momentarily drifted from the ratings-topping Trump Show?

Border Breakdown

Whatever Trump’s intentions, there is no doubt that the president is facing a growing border crisis. In May, U.S. authorities made nearly 145,000 arrests at the border with Mexico — a 13-year high. Many of those detained are families with children whom the U.S. has struggled to house.

U.S. officials have also expressed frustration with Mexican President Andrés Manuel López Obrador, commonly known as AMLO, who initially took a compassionate approach to migrants fleeing violence and poverty in Central America. He issued expedited humanitarian visas that let Central Americans work in Mexico and largely allowed migrant caravans to travel northward unfettered.

But as tens of thousands of migrants swamped the border and pressure from the U.S. mounted, AMLO began to crack down. He stepped up enforcement of migrant caravans, significantly increased deportations and agreed to Trump’s plan to keep asylum applicants in Mexico while their cases were being processed in the U.S.

Despite tensions at the border, it appeared as if the president was ready to move ahead with the USMCA. To help push the agreement through the legislatures of Canada and Mexico, he agreed to drop the controversial tariffs of 25 percent on steel and aluminum imported from Mexico and Canada — which in turn led both countries to lift their retaliatory tariffs on U.S. goods. And on May 30, the administration sent a draft agreement of the USMCA to Congress, setting in motion a timeline that puts pressure on House Democrats to speed up ratification of the deal.

In fact, prior to the tariff threats, proponents of the agreement like former Republican Congressman Erik Paulsen, now honorary co-chair of the Pass USMCA Coalition, were convinced that the pact would be ratified before the end of the year. “There’s wind in the sails now for passage in all three countries in the near future,” Paulsen said, suggesting that the discussion of “nitty-gritty” details in the House Ways and Means Committee signaled a desire for progress rather than obstruction.

a2.usmca.pompeo.obrador.storyOut of the spotlight for months and unaffected by the latest development, the Canadian government is still pushing to ratify the agreement despite the proximity of the country’s own federal election on Oct. 21. Immediately following Trump’s latest tariff threat, Canadian Foreign Minister Chrystia Freeland appeared flummoxed by what she described as a bilateral issue between the United States and Mexico. But a few days earlier, Prime Minister Justin Trudeau formally introduced a bill to ratify the deal in parliament and the leader of the opposition Conservatives said his party would “reluctantly support” it in the House of Commons, according to Reuters.

Meanwhile, despite the border confrontation with Trump, in mid-June, Mexico became the first nation to ratify the USMCA, with little opposition from the Mexican Senate. The fact that the deal overwhelmingly passed in a 114-4 vote signals Mexico’s desire to move past the recent trade spat — and is a reflection of just how economically reliant the country has become on the U.S.

Tariffs Averted, For Now

Mexico recently become America’s top trading partner, exporting just over $345 billion in goods to the U.S. last year. The U.S. market, in fact, accounts for 80 percent of Mexico’s exports.

Trump’s threat to impose a 5 percent tariff on those products would have amounted to a $17 billion tax on everything from refrigerators to jeans to avocados. Economists warned that the move would upend tightly woven supply chains between the U.S. and Mexico, raising prices for American companies and consumers.

Trump’s surprise announcement stunned officials, both abroad and at home. The news dropped the same day that Trump issued an urgent call for Congress to ratify the USMCA — and in the middle of Vice President Mike Pence’s visit to Canada to discuss the pact with Trudeau.

Members of Congress seemed blindsided. “Trade policy and border security are separate issues,” said Republican Sen. Charles Grassley of Iowa, warning that tariffs on Mexico would seriously jeopardize passage of the USMCA.

Initially, AMLO responded to the president’s tariff Twitter screed with a snooty letter reminding him of the examples set by Abraham Lincoln and Franklin D. Roosevelt. And Mexico’s ambassador to the United States, Martha Bárcena, told reporters that the tariffs would have the perverse effect of spurring more migration by damaging the Mexican economy, similar to Trump’s decision to cut U.S. aid to Central America. “There is a clear limit to what we can negotiate, and the limit is Mexican dignity,” Bárcena said.

But as the June 10 deadline Trump set for imposing the first round of tariffs loomed, Mexico signaled in last-minute negotiations that it was willing to agree to almost anything to protect its exports. To wit, it pledged to send up to 14,000 national guard troops to its border with Guatemala to stop migrants and dismantle trafficking networks.

The government also agreed to expand a program to keep some migrants in Mexico while their claims are heard in the U.S. Bárcena tweeted that her government agreed to “strengthen measures for the application of its immigration law” and would provide health, education and job opportunities for migrants waiting in Mexico.

Officials are also reportedly working to adopt new rules requiring asylum-seekers to apply for refuge in the first country they entered after leaving their homelands, potentially allowing the U.S. to send Guatemalans back to Mexico and Hondurans and El Salvadorans back to Guatemala.

Notably absent, however, was a “safe third country” agreement whereby Mexico is legally required to take in all asylum-seekers going to the U.S., although Mexican officials have hinted they might be open to some type of asylum arrangement if the burden is shared among other nations in the region.

The concessions staved off Trump’s tariffs, but the U.S. will review Mexico’s progress in 45 days. If the situation has not improved, the two sides will work on alternative solutions for another 45 days. After that, tariffs could be back on the table.

a2.usmca.trump.announce.rose.storyUSMCA Hits Wall in Congress

Meanwhile, the nuts and bolts of the USMCA have been virtually forgotten in the trade scramble. Ottawa appears to be pressing ahead with the agreement, although the government said it will move forward in tandem with the U.S. And even though Mexico has ratified the USMCA, it would still need to sign off on any future changes that U.S. lawmakers make to the deal.

That means all eyes are on Congress, where the USMCA faces its toughest test. If lawmakers don’t pass the deal by the summer recess, it could get pushed into the 2020 election season, leaving its fate even more uncertain.

Democrats have expressed various concerns about the agreement, notably over its labor provisions. Despite the passage of landmark labor reforms in Mexico in April, Pelosi says Democrats need to see those reforms being implemented before considering a vote on the USMCA.

a2.usmca.trump.trudeau.storyProponents of free trade like Paulsen say the USMCA offers at least modest improvements over NAFTA, and is certainly better than no deal at all.

The new pact offers stronger protections for intellectual property and the misappropriation of trade secrets, including by state-owned enterprises. It incorporates its labor commitments into the body of the agreement rather than a side letter, as was the case with NAFTA, making these provisions central to the deal. It mandates that Mexico adopt labor reforms to limit company-controlled “yellow unions” by allowing workers to vote on unionizing and other workplace policies by secret ballot. It establishes stricter local content rules requiring more car and truck parts to be made in North America to boost manufacturing in the region and prevent China and other countries from channeling near-finished products through Mexico to avoid U.S. tariffs. And it requires that 40 percent of automobile content be produced by workers earning at least $16 per hour — theoretically encouraging wage increases in Mexico and protecting jobs in the U.S. and Canada.

However, critics on both the left and the right have argued that those improvements could be meaningless because the USMCA lacks teeth to enforce its labor and environmental rules. In fact, the deal relies on essentially the same country-to-country mechanism for dispute resolution that failed under NAFTA, Luis de la Calle and Arturo Sarukhan argue in a May 22 post for the Brookings Institution.

Under NAFTA, companies in all three countries could raise complaints over suspected treaty violations. But the dispute resolution mechanism broke down after Mexico objected to American restrictions on sugar imports in 2000. That’s when the U.S. hit upon a strategy to freeze such complaints indefinitely by blocking the confirmation of members on the adjudicating panel assigned to the case. Since 2001, only four complaints have been lodged, and none of them have gone to a panel for resolution, Simon Lester and Inu Manak of the Cato Institute pointed out.

Fixing this missing dispute resolution piece is essentially what Democrats and organized labor are talking about when they say the pact needs stronger enforcement measures. “Our starting point is that the current enforcement procedure has not learned from past mistakes,” said Cathy Feingold, director of international development at the AFL-CIO. “If we’re going to create a new model that works for workers not just in the United States but in Mexico and Canada as well, we have to get it right this time.”

a2.usmca.flags.mexico.city.story

But as the original hamstringing of NAFTA to protect the U.S. sugar industry suggests, not everyone is in favor of stricter enforcement.

It remains to be seen if the lack of strong enforcement mechanisms will derail the deal. Trump’s willingness to start trade wars may encourage legislators to press ahead with ratification of the USMCA and defer their concerns about enforcement to the debate over the rules of implementation. Members of Congress have also come under intense pressure by trade and lobby groups that say the uncertainty over the USMCA is hurting American businesses by preventing them from planning for the future.

There’s also an outside possibility Trump will put a drop-dead deadline on the new deal by formally announcing America’s withdrawal from NAFTA — which would then go into effect in six months.

What’s more likely, though, is an extended debate over enforcement provisions like the ones outlined in a proposal by Democratic Senators Sherrod Brown of Ohio and Ron Wyden of Oregon — which skeptics say would likely require reopening negotiations on the original pact to be meaningful.

Pelosi says that Democrats “have been on a path to yes,” and she has assigned Democratic lawmakers to four working groups to coordinate with the White House on the changes her party wants to make to provisions on labor, the environment, pharmaceuticals and enforcement.

But Pelosi, who controls the fate of the agreement because only she can bring it to the floor for a vote, has yet to set a date for a ratification vote. She has said that the administration needs to reopen trade negotiations with Canada and Mexico to exact more concessions. Mexico and Canada, however, have made it clear they are not open to renegotiations.

That makes ratification before 2020 an increasingly remote possibility, said Gómez-Strozzi, pointing out that if neither the House nor the Senate approves the pact before the summer recess, there may not be enough time left to ratify it before the end of the year.

“That of course would take us as well into full electoral mode,” he said. “And during the campaign, candidates can state their message in whatever language they think will help get them elected — that will not necessarily align with the pros and cons of the USMCA.”


About the Author

Jason Overdorf (jasonoverdorf.com) is a freelance writer in Washington, D.C.

Last Edited on June 28, 2019