ITC Report on Economics of USMCA Out; Next Up, Politics

The U.S. International Trade Commission (ITC) released its report on the likely impact on the U.S. economy and specific industry sectors from the U.S.-Canada-Mexico Agreement (USMCA). The main finding is unsurprising: “if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment.” Since the North American Free Trade Agreement (NAFTA) was already beneficial to Canada, Mexico and the United States, the changes were not expected to be on net negative.

However, the topline figure which “estimates that USMCA would raise real U.S. GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent)” is slightly higher than expected, but still small in terms of its overall impact on the U.S. economy.

Both exports and imports will increase as a result of the deal, though many of the gains remain small or modest, such as in textiles and apparel, chemicals and pharmaceuticals, electronic products, energy products and services. The reason why smaller gains are expected here is because NAFTA already liberalized most trade in these sectors, so any additional reductions would be minor.

There are two notable outcomes worth highlighting. First, the largest gains are expected to come from new rules on international data transfers and e-commerce, which were not part of the original NAFTA. Locking in existing commitments on the free cross-border flow of information is likely to deter future barriers to data transfers, such as data localization. The reduction of policy uncertainty in these areas is a key factor in the higher than projected gains. In addition, the higher de minimis thresholds on e-commerce exports is also net liberalizing, and likely to increase exports to Canada by $332 million and $91 million to Mexico.

The biggest harm, and largest impact of the USMCA, comes from an area that was expected—the restrictive rules of origin (ROO) on the automotive sector. The report states that these new requirements “would strengthen and add complexity to the rules of origin requirements in the automotive sector” and are “estimated to increase U.S. production of automotive parts and employment in the sector, but also lead to a small increase in the prices and a small decrease in the consumption of vehicles in the United States.” Essentially, cars will become more expensive (0.37 percent for pick-up trucks and 1.61 percent for small cars) and total consumption will decline by 140,000 vehicles. These production costs will be the result of, as footnote 7 states, “the shifting sourcing of core parts to the United States, even though the non-preferential tariff rates they would face (for many vehicle types) if they did not comply with the new automotive ROOs would be small.” Basically, the economic analysis assumes that companies will be willing to pay non-preferential tariffs instead of complying with the stricter auto ROO.

Furthermore, footnote 66 of the report states:

“Commissioner Kearns notes that, as described above, the model appears to suggest that the trade restrictiveness of ROO is inversely related to its positive impact on the U.S. economy. Carried to its logical conclusion, this would appear to suggest that the best ROO is a very weak or nonexistent ROO.”

This essentially means that one of the biggest trumpeted gains, the new auto rules, are actually the worst part of the new agreement.

There are a number of other small increases expected, such as in agriculture, particularly due to the fact that Canada increased its tariff rate quotas on dairy products, poultry, meat, eggs, and also wheat and alcoholic beverages. The gains, however, are still modest, projected to increase U.S. agricultural and food exports by 1.1 percent.  

The main takeaway is that since NAFTA removed almost all tariff barriers, the gains from USMCA are modest and largely come from reductions in the remaining non-tariff barriers. While the gains are higher than expected, this is likely due to the change in methodology by ITC to incorporate the impact of the gains from reducing these non-tariff barriers. At the end of the day, the final number is still modest, and is unlikely to sway anyone in Congress from changing their already strongly held opinions on the agreement. If anything, the release of the ITC report clears the way for implementing legislation to come forward and the real battle for the passage of USMCA to begin.