Does the ITC oversell the USMCA?

The U.S. International Trade Commission (ITC), released its highly anticipated report on the proposed United States-Mexico-Canada Agreement (USMCA) on April 18, 2019, as mandated by U.S. law. The USMCA was signed by the three parties on Nov. 30, 2018, and is intended to replace and update the original North American Free Trade Agreement (NAFTA), which entered in to force on Jan. 1, 1994.

A lot has changed in 25 years, including the trade relations among the three partners and the significant deepening of production supply chains. The common view of the new USMCA is that it is at most a modest improvement, without major economic impact, unlike the original NAFTA agreement. Its greatest significance may be that it consolidates the overall gains from NAFTA, which would be endangered from a dissolution of the three-country free trade area.

The report manages to clearly explain the complexities of a modern trade agreement and condense the complexity of both the law and the economics into a manageable set of policy indicators that are amenable to numerical quantification. Nonetheless, many trade policy analysts were initially puzzled by the potential gains estimated by the USITC staff.

The headline number is a GDP gain of 0.35% for the United States, which would be high in most contexts, but particularly high for this agreement, which is associated with very modest changes in market access. A recent report of the USMCA from the International Monetary Fund produces no gains in U.S. GDP or workers’ wages and is also consistent with a Farm Foundation/GTAP report. The one channel that generates this relatively sizable gain estimated by the ITC is an assumption that the USMCA, as it consolidates the gains from NAFTA, reduces future uncertainty and that this can be translated into a measurable lowering of trade costs. The key table to understand these gains is Table 2.6 that highlights the role of “uncertainty.” The ITC report shows GDP gains from three scenarios—no impact of reducing uncertainty, a moderate impact (their base case), and a high impact of reducing uncertainty. The “worst-case” scenario is a GDP loss of 0.12%, the “standard” case of the two other reports.

What’s generating the loss in the “standard” case? Largely the new treatment of trade in auto and auto parts. The new rules of origin clauses (that state how much of the content of traded goods must be made of domestic parts to be imported duty free) would raise the overall costs of automobiles for U.S. consumers, even as it modestly increases production of parts in the United States.

In summary, the ITC report, impressive in its details, largely reflects the common view of the new USMCA agreement, i.e. it will have modest economic impacts. The largest positive impacts come from the report’s assumption that quantifies the reduction in uncertainty that will emanate from ratifying the agreement. However, the new agreement includes periodic sunset clauses that introduce a new source of uncertainty.

A full copy of the ITC’s U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors can be found here.

Authors: Dominique van der Mensbrugghe, Ph.D.,  is Research Professor and Director of the Center for Global Trade Analysis (GTAP) at Purdue University. Prior to joining Purdue, he worked at the Food and Agriculture Organization of the United Nations (FAO), the World Bank and the Organisation for Economic Co-operation and Development (OECD). Wally Tyner, Ph.D., is the James and Lois Ackerman Professor of Agricultural Economics and GTAP Senior Policy Advisor at Purdue University, where his research focuses on the area of energy, agricultural, and natural resource policy analysis and structural and sectoral adjustment in developing economies.

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