NAFTA to USMCA

On January 16, 2020 the U.S.-Mexico-Canada Agreement (USMCA) was passed on a Senate vote of 89-10.  The new USMCA is an update of the North American Free Trade Agreement (NAFTA) and includes several notable changes. The new trade agreement comes 26 years after NAFTA became effective on January 1, 1994. While the provisions in the USMCA affecting automobile manufacturing have received the most attention, there are provisions in the new agreement that deal with digital trade, the energy market, and dairy exports to Canada.

The USMCA’s provisions related to automobile manufacturing address the content originating in North America and the wages paid to auto workers. Under NAFTA, 62.5% of an automobile had to be made in North America to qualify for low tariffs. Under the new USMCA, 75% of an automobile will have to be made in North America to qualify. The USMCA stipulates that at least 70% of the steel and aluminum used in a vehicle must originate in North America, and it requires that 40% to 45% of an automobile’s content is made by workers earning at least $16 (U.S.) per hour. This last provision is aimed squarely at Mexico, as U.S. and Canada workers earn far above this amount.  Meanwhile, the current assembly line wage in Mexico is just under $8 per hour.  Finally, the agreement also commits Mexico to pursue legislative actions that improve collective bargaining and other provisions that are claimed to protect labor rights and migrant workers.

The expressed intent of these provisions is to increase manufacturing employment in North America, to protect the aluminum and steel industries, to increase auto workers’ earnings in Mexico, and to enhance the relative competitiveness of workers in the U.S. and in Canada. There are trade-offs, however. All of these provisions will tend to increase the price of inputs to the production of cars sold in the U.S., leading to higher car prices and a possible reduction in car sales.  

Bolstering manufacturing employment in the U.S. in general, and bolstering employment in U.S. automobile manufacturing in particular, are crucial goals of the U.S. trade negotiators.  The figure below shows the employment levels in overall U.S. manufacturing, and also in the U.S. motor vehicles and parts industry, from January 1990 to December 2019.  Manufacturing employment declined by 4.9 million workers over this time period.  As seen in the graph, the steepest declines are associated with recessions.  In the case of the most recent recession, overall manufacturing employment declined from 13.7 to 11.7 million workers from the peak of the business-cycle in December 2007 to the trough in June 2009.  Employment in the motor vehicles and parts industry declined from 957 thousand to 623 thousand over this same period.  Interestingly, since the end of that recession, overall manufacturing employment has risen by 1.1 million workers, or by 9.6%, and employment in the motor vehicles and parts industry has risen by 364 thousand workers, or by 58.3%.

What does the figure indicate about the impact of NAFTA?  NAFTA become effective in January 1994, and in the following six years, the level of overall manufacturing employment was relatively stable, while employment in the motor vehicles and parts industry actually grew.  There is no clear evidence that NAFTA caused a reduction in manufacturing employment.

China was granted ‘permanent normal trade relations’ by the U.S. in 2001 and joined the World Trade Organization that same year.  This occurred in the midst of a recession, clouding the attribution of causality, but certainly the large reduction in U.S. manufacturing, and the large reduction in automobile industry employment, occurred after this event.
 
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The academic literature tends to find a small impact of NAFTA, and a larger impact of China, on U.S. wages and employment.  Hakobyan and McLaren (2016) identified a negative effect of NAFTA on the wages of workers with less education.  Pierce and Schott (2016) find that the decline in manufacturing employment is larger in the industry sectors exposed to the permanent normal trade relations with China.

The figure below graphs the manufacturing share of total employment in the U.S. since 1939.  This share has been declining fairly steadily, year after year, since the late 1940s.  The declining share of jobs in manufacturing can hardly be blamed solely, or even largely, on international trade.  It is interesting that, since the trough to the Great Recession in 2009, the rate of decline in manufacturing’s employment share has slowed, so that in the last decade the share has only declined half a percentage point. 

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While the auto industry provisions in the USMCA have received most of the attention, another notable component of the new USMCA is the chapter on digital trade.  This chapter was necessary given that NAFTA was negotiated prior the advent of e-commerce. The USMCA allows law enforcement to stop suspected pirated goods in any of the three countries and includes harsher punishment for pirated movies or theft of cable and satellite signals.

The agreement includes zero tariffs on energy products in North America.  It locks in Mexico’s 2013 energy reforms, it facilitates pipeline movements of hydrocarbons, and it streamlines the regulatory process for trade in liquid natural gas from the U.S. to Mexico and Canada.
The provisions affecting the U.S. dairy market involve greater access to Canada’s markets. Canada has agreed to allow about $560 million worth of U.S. dairy products to be exported to Canada, or about 3.5% of Canada’s total dairy industry.

The figure below helps frame the size of the trade flows between the U.S. and Canada and between the U.S. and Mexico.  As the figure illustrates, the gap between U.S. exports to and imports from Canada has narrowed over the last 5 years. Since 2015, quarterly U.S. imports from Canada have, on average, been 6% higher than exports to Canada. Over the same period, quarterly U.S. imports from Mexico have on average been 30% higher than exports to Mexico. Some of the gap with Mexico may close as a result of the USMCA due to the wage provisions related to the auto industry.  However, the content provisions refer to North American content, which means that foreign auto manufacturers will have an incentive to invest more in building production facilities in North America.
 
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In summary, the USMCA update to NAFTA has some positive trade-enhancing features.  At the same time, the auto content and labor provisions will likely raise the price of cars to consumers while perhaps benefiting U.S. workers and U.S. steel and aluminum producers.    
 
References
Fort, Teresa C., Justin R. Pierce, and Peter K. Schott. 2018. “New Perspectives on the Decline of US Manufacturing Employment,” Journal of Economic Perspectives (32)2:47-72.
Hakobyan, Shushanik, and John McLaren. 2016. “Looking of Local Labor Market Effects of NAFTA.” Review of Economics and Statistics 98(4):728-741.
Pierce, Justin R, and Peter K. Schott. 2016. “The Surprisingly Swift Decline of US Manufacturing Employment.” American Economic Review, (106)7:1632-1662.
 
 

Posted: January 30, 2020 by Dennis W. Jansen, Liqun Liu, Andrew J. Rettenmaier