1. NS3040 Fall Term 2018 USMCA
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview Jeff Schott, NAFTA to USMCA update, October 2, 2018
New USMCA succeeds in partially updating 25 year old NAFTA by
Imposing new obligations for enhanced environmental and labor practices
Curbing state-owned enterprises and
Fostering digital trade.
These provisions improve incrementally upon high standards in these areas developed in the Trans Pacific Partnership (TPP)
TPP was signed by the three countries during Obama administration, but then Trump withdrew in first week in office

3. USMCA Changes from NAFTA I
NAFTA’s benefits had always been through strengthening of economic integration of the three countries
USMCA moves backwards in this regard
Imposes new restrictions that will
Impede regional trade and investment
Stifle the potential for economic growth
On autos, USMCA the first free trade agreement (FTA) negotiated by US that raises rather than lowers barriers for trade and investment

4. USMCA Changes from NAFTA II
For cars USMCA adds layers of costly new regulations that producers must follow to qualify for NAFTA’s low tariffs. Will likely
Drive up costs of autos for consumers
Reduce U.S. jobs in the auto sector
Lead to a less competitive North American auto industry with less investment in U.S. plants
New rules require to qualify for tariff-free imports:
75% of a car or truck have content made in North America
70% of steel and aluminum must be produced in North America and
40% of a car or truck would have to be made by workers earning at least $16 per hour – presumably to discourage companies from moving operations to Mexico.

5. USMCA Changes from NAFTA III
Makers of passenger cars must either comply with new rules or forgo the regional tariff preference
Non compliance most likely be their preference since can import components from any country and simply pay the MFN tariff of 2.5% instead of restructuring their supply chains
Truck producers less options since the US MFD tariff on trucks is 25%
Problems
Cost of producing autos in North America will go up at a time when sales are slumping already
Since cars will cost more, will lose share in export markets

6. USMCA Changes from NAFTA IV
Implications of deal for other sectors mixed and not very significant
USMCA does remove some distortions from in Canadian pricing schemes for dairy products – however amount very small
U.S. dairy export gains very small in comparison to losses by US farmers because of barriers raised to US farm products by Canada and Mexico (and many others) in response to Trump tariffs on steel and aluminum

7. USMCA Changes from NAFTA V
Another problem area investment promotion
One advantage of trade pacts has been to create greater policy predictably, so investors can plan investment strategies without worry of sudden changes in policy or regulation
New USMCA takes different approach -- attempts to encourage investors to chose US market instead of regional partners by
Creating uncertainty about durability of regional pact’s policy reforms
Instituting a new 16 year sunset clause
Limiting access to investor-state dispute settlement procedures and
Threatening or imposing new barriers to US market for steel, aluminum and potentially autos
Over time will diminish investment in the U.S.

8. USMCA Changes from NAFTA VI
Finally USMCA seeks to discourage Mexico or Canada from deepening formal trade and investment ties with China and other non-market economies
Pact obligates each signatory to notify the text of deal with a nonmarket economy at least 30 days before signing to gauge impact on USMCA
Entry into force of the pact with a nonmarket economy is grounds for divorce after a six-month notice
Provision meant to discourage partners making deals with China
Canada has been trying to do this for several years
Both Mexico and Canada in the revised TPP
Could cause problems for the USMCA if China joins the TPP

9. Assessment Assessment
USMCA basically a step backwards on trade and investment in the U.S. and the region as a whole
While not as damaging as could have been
Will do little or nothing to help workers, consumers or economies of North America