November 30, 2018
USMCA Signing and What Happens Now
This morning, President Trump, joined by Canadian Prime Minister Justin Trudeau and outgoing Mexican President Enrique Peña Nieto, signed the U.S. – Mexico – Canada Agreement (USMCA), which will take the place of NAFTA, while all three were in Buenos Aires for the G20 Summit.
The final text of USMCA (found here) contains slight changes to the sections governing the Canadian dairy industry and LGBT definitions, which House conservatives had demanded the White House change from the original negotiated text.
However, the three countries were unable to finish eleventh hour negotiations to remove the U.S. steel and aluminum tariffs (and the Canadian and Mexican retaliatory tariffs that were placed in response), and all of those tariffs will remain in place for the immediate future. Negotiators have indicated that they hope the completion and signing of USMCA could clear the deck, allowing for quicker negotiations, with the hopes of having the issue dealt with before the end of the year. However, as a word of caution, we heard similar things in September after the original USMCA negotiations were completed.
When looking at the broader trade universe, the signing of USMCA also means that the side letters – focused on a wide variety of issues – are now in effect. Of highest interest will probably be how a potential Section 232 auto tariff would impact Mexico and Canada. In side letters devoted to that issue with both Mexico and Canada, the U.S. agreed to not impose tariffs on passenger vehicles (8703.21 – 8703.90), light trucks (8704.21 – 8704.31), and auto parts for at least 60 days. After that period, 2.6 million passenger vehicles, all light trucks, and $108 billion in auto parts imported from Mexico would be exempt from tariffs. Similarly, 2.6 million passenger vehicles, all light trucks, and $32.4 billion in auto parts imported from Canada would be exempt from tariffs.
All told, the signing marks a significant milestone in the process, and now all attention will turn to Capitol Hill and how the newly divided Congress will address USMCA. Seeing a potentially difficult fight to get USMCA through next year with a Democratic House, 12 Senate Republicans, including Sen. Pat Toomey (PA), Jeff Flake (AZ), Lamar Alexander (TN), and Deb Fischer (NE), urged President Trump to send implementing language to the Hill so the agreement could be passed before the end of 2018. As the days pass, and there is no sign of such language or indications that USTR is working with the Committees of jurisdiction on such language, the slight prospects of that happening seem to grow even more dim.
Most likely, as we have said previously, is that USMCA will have to be addressed in 2019. This could prove potentially challenging, as Democrats will now have control in the House. Moments ago, likely new Speaker of the House Nancy Pelosi said that she and other Democrats were withholding judgement on USMCA. Rep. Bill Pascrell (D-NJ), who could potentially be Chairman of the Subcommittee on Trade for the House Ways and Means Committee, has already expressed significant concern with the lack of enforcement mechanisms, particularly in regards to the labor and environmental sections. You only need to look as the most recent effort by a Republican president with a Democratic House to see how imperiled this could become – President Bush sent implementing language to the U.S.-Colombia Trade Promotion Agreement to Congress in April of 2007, but it did not pass Congress until October of 2011 after President Obama renegotiated portions in order to get Democratic support.
There remain concerns that if the prospects for passage are up in the air next year, it could encourage President Trump to send up notification of a NAFTA withdrawal at the same time he sends up implementing language for USMCA, in an attempt to force Congressional hands. Bipartisan leaders in both the House and Senate, especially those that sit of committees of jurisdiction have repeatedly told the Administration this action would be poorly received on the Hill and could cause significant backlash. Although the president has repeatedly threatened to withdrawal from NAFTA, it remains unclear if he would actually follow through and what the legal implications of such an action would be.
Ultimately, the fight to approve USMCA has only just begun and will likely continue on through at least the first half of next year.
Please reach out if we can be of assistance on USMCA or other trade efforts.