Big pains for small gains: USMCA & its lacklustre future

What was considered to be a major achievement and win for the Trump administration has experienced a setback within days of the USMCA trade deal coming into effect in July 2020.

The USMCA is the successor to NAFTA, a deal struck in 1994 between the North American nations and one that has come under increased scrutiny over the last few years and marked one of Trump’s major speaking points. Comments that the USMCA is NAFTA 2.0 or NAFTA with a facelift do not seem exaggerated when listening to Senator Chuck Grassley from Iowa who after initial negotiations said, “95% of what we will be voting on is the same as NAFTA”, adding that other rules were lifted from the Trans-Pacific Partnership (TPP), a trade deal Trump did not even consider.

Among the most significant changes in the new deal, were the “rules of origin” for automakers, making sourcing from Mexico more difficult. Though as trade commentator Phil Levy for Forbes highlights, it is more a choice rather than a requirement. Analyses looking into auto firms’ incentives showed automakers are more likely to pay the 2.5% tariff resulting in no production being moved to the US. Especially considering the complexity introduced with USMCA, Tom Gould, VP of customs and trade advisory at Flexport, said “under the USMCA it’s more like five or six different factors that we have to track all the way back through the supply chain. So it’s one thing to know where an engine was built, but it’s another to know where the steel was mined”. Shippers will experience a range of impacts through the rules of origin, labour enforcement, de minimis levels as well as the sunset clause, terminating the deal after 16 years if not renewed making long-term investments riskier.

However, within days of the agreement taking effect the Trump administration announced tariffs on Canadian aluminium. The re-imposition of aluminium tariffs may sound like a throwback to 2018, when the Trump administration had used tariffs as a central tool to express dismay with agreements and renegotiate them with friends and foes alike. Those tariffs had been lifted before the signing of the USMCA in 2019, but also exempted Canada to enable the passage of the deal. Under the new deal the United States has the right to impose tariffs if Canadian imports surge “meaningfully beyond historic volumes of trade over a period of time”, which is precisely what the US trade representative’s office stated had happened.

Canadian Deputy Prime Minister, Chrystia Freeland, described the tariffs as “unwarranted and unacceptable”, and continued “Canadian aluminium does not undermine US national security […] the last thing Canadian and American workers need is new tariffs that will raise costs for manufacturers and consumers, impede the free flow of trade and hurt provincial and state economies”. The tariffs will be targeting unalloyed, unwrought aluminium and increase manufacturing costs that will likely be passed on to consumers when buying beer cans, appliances and cars, according to Freeland. Canada reacted with disappointment and announced imposing swift “dollar-for-dollar countermeasures”, around C$3.6bn, potentially on golf clubs, bicycles, and washing machines. Freeland said they would consult with industry leaders for a period of 30 days to determine specifics but hopes for a cancellation before the US tariffs take effect on August 16.

Meanwhile, the US Chamber of Commerce, a business group, has also stated that this is “a step in the wrong direction”. And continued in its statement, “These tariffs will raise costs for American manufacturers, are opposed by most US aluminium producers, and will draw retaliation against US exports – just as they did before. We urge the administration to reconsider this move.”

While these actions do not jeopardise the entire deal itself, it fails to instil trust in the efficacy of trade deals and reliability of a once global, pioneering leader. As the world faces one of its most practical challenges to date, global cooperation is treated like an option when it should be a requirement.

Source: Transport Intelligence, August 11, 2020

Author: Dila Cebeci