Did we HAFTA?

Last week, the governments of the USA, Mexico and Canada agreed to terms on a new free trade agreement. The US-Mexico-Canada Agreement (USMCA) is the result of over a year of negotiations and posturing that threatened to disrupt what might be the most active trading region on the planet.

On numerous occasions President Trump has tweeted his disdain for NAFTA, declaring it “one of the WORST Trade Deals ever made” and one that the US “should never have signed”. In contrast, he declared the new USMCA as “an amazing deal for a lot of people”.

The changes however, aren’t all that dramatic. For the most part USMCA looks and acts like NAFTA. There are new provisions for autos, dairy, IP and financial services. USMCA also prohibits Canada or Mexico from signing a FTA with China without the US’ permission. But overall, the new agreement won’t result in a huge, dramatic change in the way the three countries trade with one another.

If the changes aren’t that significant, then why are we here?

Rhetoric aside, NAFTA was showing its age. The document was 25 years old, introduced at a time when Windows 95 was still a year away, and Netscape Navigator was the gateway for the estimated 10,000 websites that existed at the time.

One of the more significant updates to USMCA is the new Digital Trade chapter. It makes the following provisions.

• Customs duties and other discriminatory measures are prohibited from being applied to digital products distributed electronically
• Data can be transferred cross-border, and that limits on where data can be stored and processed are minimised
• Enforceable consumer protections, including for privacy and unsolicited communications
• Protections for proprietary computer source code and algorithms
• Collaboration in tackling cybersecurity challenges
• Open access to government-generated public data.

USMCA used provisions from the TPP as its starting point, but makes a number of key departures. For example, USMCA’s language around data localisation is much stronger.

Those in the know are cautiously optimistic, if not disappointed. USMCA’s digital trade chapter is the strongest set of digital trade provisions yet negotiated (at least outside of the EU). The chapter sets a new standard for how other FTAs will need to deal with digital trade issues — for better or worse.

By a long shot, USMCA is a better outcome than the counterfactual that saw the US leave NAFTA altogether. And yes, the steps towards freer digital trade are welcomed. But the rest of the document is being interpreted by most as a backward step. As the Economist writes, trade deals should not be judged by how well they protect domestic industries, but rather by how well they serve the public as a whole. A marginal liberalisation of the Canadian dairy industry is welcome but is not worth higher costs and lower productivity in car making — Canadians spent $11bn on dairy products in 2017; Americans spent $498bn on cars and parts.

 Job losses by state if the US withdraws from NAFTA

Source: AEI/Trade Partnership Worldwide.