USMCA deal made for short-term political benefit may have long-term "unintended" effects

Today the USMCA trade deal became “official,” at least from the U.S. side of things. As I pointed out before, the “deal” will have almost no impact on the U.S.’ overall trade deficit; it is merely a reflection of Donald Trump’s and some Democrats’ typical desire to scapegoat Mexicans for all the country’s “problems,” which is plain horsespucky given that the economy is supposed to be doing so well (Trump keeps reminding us) under the “old” NAFTA agreement. It is obvious that Canada and Mexico agreed to the “small” changes to the “old” deal” just to get Trump off their backs, because they have seen from this administration that Trump will inflate even the tiniest change—whether actually good or bad—into a “major triumph,” so why not just indulge his vast ego?

The Economic Policy Institute pointed out last spring that the alleged “benefits” to economic growth and the U.S. labor market are at best minimal, and only slated to occur if the USMCA is “fully implemented” in another six years. That’s right—the changes will have no immediate effect on the economy, but will be “incremental”—and a lot can happen in six years. Backers of the “deal” claim that it will create 175,000 new jobs, but only over that six year period, and given the ups and downs of the labor market, it will likely be difficult to tell if the USMCA has anything to with any increase in jobs. Furthermore, a 0.35 percent increase in GDP over that span isn't exactly anything to write home about either. The “heroic” claims of  benefit are being pushed by the U.S. International Trade Commission (ITC), and the Institute suggests that its overly rosy picture is exactly that. It isn’t just that even the ITC’s claims of economic benefits from the USMCA are remarkably “modest,” but the models it uses have made disastrously wrong predictions in the past, such as in regard to the U.S.-South Korea trade deal, and the effect of allowing China into the WTO on bi-lateral trade. 

Skeptics of the USMCA, such as a position paper by the International Monetary Fund,  have pointed out that among other things, the “regional content” requirement—meaning that at least for the U.S. market, a higher percentage of  parts for cars imported from Mexico to the U.S. must be made in the U.S. (obviously not a requirement expected from other foreign-manufactured cars) and that labor costs in Mexico must be more in line with U.S. labor costs (which would likely lead to price inflation  out of the reach of non-auto workers)--are not likely to have the positive effects its supporters are claiming. In fact, the USMCA is more likely to reduce job and manufacturing growth in both Mexico and the U.S., due to loss of sales of automobiles  from increased costs. 

In order to avoid these increased costs, it is likely that U.S. manufacturers will simply go further “offshore” for parts and labor that would have come from  Mexico, instead seeking out supply from China, Vietnam or Malaysia—and the USMCA does nothing to prevent that from happening. Of course, job loss due to higher labor costs in Mexico means the greater the likelihood that Mexicans will look elsewhere for work—like, say, in the U.S. For all the tough talk about illegal immigration, the USMCA may in fact be yet another catalyst for it, due to short-sighted and short-term political gain.

Democrats who pushed for “changes” in the agreement—establishing an “enforcement” mechanism to insure that Mexico abides by labor union and wage standards imposed by the new deal—clearly have no real interest in the state of the Mexican labor force, but believe that increasing wages in Mexico will mean that goods manufactured for export to the U.S. will be higher, and thus allowing solely U.S. manufactured goods to be more “competitive.” Unfortunately, it is a bit hypocritical to be pushing this when in the U.S. labor union representation has been steadily eroding, Republican administrations have been actively reducing labor rights, and nothing is being done to stop that. 

A more likely result of the USMCA if implemented will be more expensive automobiles, and the loss of sales both in the U.S. and Mexico. It is not that higher wages would not be good for Mexican workers, but the U.S. is trying to impose a minimum standard that is simply not realistic for the Mexican economy, and if anything, would create job losses and thus a decrease in consumer spending for U.S. goods. By individual countries, Mexico is the second biggest importer of U.S. goods, behind Canada; the USMCA, if actually implemented as U.S. politicians intend, U.S. imports may in fact decrease rather than “increase” as the deal is being sold as here.

All-in-all, full implementation of the USCA deal may very well have effects that Trump and its Democratic supporters will not have “foreseen” for the sake of politics. It is very much like the problem of trade with China: People complain about the trade deficit with China, and it is a problem because China does have a considerable consumer base that ought to benefit U.S. exporters more than it does. But on the other, U.S. consumers crave cheap Chinese products, which is why it seems that virtually every apparel and electronics product sold in the U.S. seems to have a “Made in China” tag on it. The USMCA “deal” came about because of ingrained scapegoating of anything “Mexican,” and if it is fully implemented—and that is still a big “if”—it may very well only transfer the “problem” the U.S claims to have with one country (Mexico) in which it is foolish to weaken economically, to countries who pose even greater threats and we are less likely to be able to bully.