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Quick passage of new NAFTA slowed by thorny issues

This story is a collaboration between S&P Global Market Intelligence and CQ Roll Call, a news service specializing in Washington policymaking.

The Trump administration is ramping up its courtship of Democrats as it prepares for high-stakes votes in Congress that U.S. Trade Representative Robert Lighthizer says could either replace the 1994 North American Free Trade Agreement or derail the president's trade agenda.

Democrats and even Republicans have raised multiple issues that threaten to block passage of the agreement with Canada and Mexico this year or even before the presidential elections in late 2020.

Lighthizer, the administration's point person on trade, and the White House do not have a statutory deadline under Trade Promotion Authority to send Congress implementing legislation for the United States-Mexico-Canada Agreement, as the replacement NAFTA is being called.

However, the political calendar for both Republicans and Democrats likely means the window of opportunity closes in late summer, if not earlier.

At the same time, hurdles exist, such as concerns over the environment, pharmaceutical prices and labor provisions raised by the AFL-CIO.

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Canada's Foreign Minister Chrystia Freeland, left, Mexico's Economy Secretary Ildefonso Guajardo Villarreal, center, and U.S. Trade Representative Robert Lighthizer in Mexico City, Sept. 5, 2017.

Source: AP Photo/Marco Ugarte

"There is no trade program in the United States if we don't pass USMCA. There just isn't one," Lighthizer told the House Ways and Means Committee in late February. "It’s $1.3 trillion in business. Millions and millions of people are affected, and it just has to pass. If it doesn't, you have no credibility at all with China. And you will have no credibility on any deals with your other trading partners," he said.

As the nation's largest labor group with more than 12 million members, the AFL-CIO's threats to lobby against the proposed pact are key because many Democrats share their concerns. Among them, the AFL-CIO says the proposed deal does not stop the outsourcing of jobs to Mexico. In the meantime, Canada and Mexico are waiting for the U.S. to act before they move ahead with the proposed agreement.

Since Congress cannot change the agreement under the Trade Promotion Authority process, getting the trade deal approved will require the Trump administration winning over a majority of Republicans in each chamber and enough Democrats. Navigating the House is trickiest, because Democrats hold a 235-197 voting edge with three vacancies.

Hanging over the proposed deal's uncertain path is President Donald Trump's threat that he will withdraw from NAFTA if lawmakers drag their feet. If Trump initiated a withdrawal, he could face pushback from Congress where members argue he cannot act unilaterally.

Rep. Ron Kind, D-Wis., co-chair of a trade task force for the New Democrat Coalition, thinks the House and the Senate must vote before fall. He fears the trade agreement will become a casualty of an expected fight between Congress and the Trump administration over the president's $5 billion fiscal 2020 request for border wall construction and the start of congressional and presidential campaigns.

"If we're hoping to move it, we're going to have to be serious about pre-August recess," Kind told reporters after the Lighthizer briefing.

The great outreach

To keep things on track, Lighthizer recently visited Capitol Hill several times for separate closed-door meetings with the House Democratic caucus and New Democrat Coalition to gauge what the administration must do to move the proposed deal through the House.

In the Democratic Caucus meeting, Lighthizer faced an audience that included trade skeptics such as Rep. Marcy Kaptur, D-Ohio.

"Trade has governed our economics now for almost half a century. It has been a net loser for my part of America," said Kaptur, whose district is home to auto manufacturers and auto parts suppliers. "I think we need to table (the agreement). It needs to be a presidential issue and each of the candidates in both parties needs to address how they are going to fix it," she said in an interview.

Kaptur said she, like Trump, is concerned about trade deficits but noted Trump has not delivered on promises to reduce the U.S. global trade deficit in goods. The U.S. global trade deficit in goods climbed to a record $891.3 billion in 2018, according to Commerce Department data.

That is higher than in 2017 and 2016, the last year of the Obama administration.

Some of the trade gap comes from the current NAFTA. The U.S. deficit in goods with Mexico was $81.5 billion and $19.8 billion with Canada in 2018, up from $71 billion and $17.1 billion, respectively in 2017, according to the Commerce Department.

Among the concerns raised by Democrats to Lighthizer are:

* Enforceability of labor provisions. Several lawmakers said the House should not vote before Mexico approves legislation that would overhaul its laws on unions to end company-sponsored unions and allow the creation of worker-run unions more likely to push for higher pay and better work conditions. A vote could occur in April. Some Democratic lawmakers favor renegotiating the labor provisions in the USMCA to include labor tribunals empowered to review violations and impose remedies. "We don't actually have direct punitive actions in the agreement itself. What if [Mexican officials] don't pass laws, what are the consequences? They could pass laws, but they could be very weak," California Rep. Judy Chu said after a Lighthizer briefing to Democrats.

* Delayed development of generic drugs. Congressional members said the 10-year minimum for drugmakers' exclusive production of biologic drugs will increase the number of years consumers in Canada and Mexico have to wait for the development of cheaper, generic versions of drugs known as biosimilars. Democrats worry the provision could prevent Congress from reducing the number of years for patent exclusivity to less than 10 years as part of Democratic efforts to speed development of biosimilars. "We continue to have serious concerns, particularly, with the giveaway to pharmaceutical drug manufacturers," said Rep. Pramila Jayapal, D-Wash., co-chair of the Congressional Progressive Caucus.

* Section 232 steel and aluminum tariffs. Lawmakers of both parties see the continuation of Trump's 25% steel tariff and 10% aluminum tariff, imposed during NAFTA renegotiations, as a stumbling block to the trade agreement. Trump had indicated he would lift the tariffs once an agreement was reached. Opponents say tariffs are a tax on manufacturers and consumers that should be lifted. Some Democrats also warned against a House vote before the administration ends Section 232 steel and aluminum tariffs on imports from Canada and Mexico. Once the United States ends its tariffs, Canada and Mexico would end retaliatory tariffs on a range of U.S. products.

Business lobbyists pushing for passage of the new NAFTA say House leaders are finding it difficult to get preliminary vote counts of supporters because some congressional members refuse to commit either way as long as the tariffs are in effect. The vote counts are used to gauge whether it makes sense to send implementing legislation to the Hill.

* Speaker Nancy Pelosi. Republicans say Pelosi, D-Calif., holds the key to how quickly the House will move on the proposed agreement.

During her previous stint as speaker in 2007, Pelosi delayed action on implementing legislation for the U.S-Colombia Free Trade Agreement with a House vote to disregard Trade Promotion Authority rules. The Democratic majority had warned President George W. Bush, a Republican, against sending the legislation. Pelosi, then-Ways and Means Chairman Charles Rangel, D-N.Y., and the Bush administration negotiated a framework on labor and environment changes to several pending trade agreements.

Chris Sands, the director of the Center for Canadian Studies at Johns Hopkins University's School of Advanced International Studies, predicted there is roughly a 60% to 65% chance that Pelosi will introduce a related bill in the House. "If that happens, the odds the agreement passes I'd put at almost 95% because there is a lot of support for trade in Congress in both parties," Sands said.

House Ways and Means Chairman Richard Neal, D-Mass., told reporters that Lighthizer's talk to the Democratic Caucus "was just the opening opportunity to try to persuade caucus members. I think there was some vigorous discussion of that in the room. Of that, there is no doubt."

Lighthizer's Capitol Hill visit followed a trip to Dearborn, Mich., where he spoke to top leaders and 250 rank-and-file members of the United Auto Workers union. According to a Detroit Free Press report on the nearly three-hour closed meeting, Lighthizer took questions. UAW officials focused on how the proposed trade provisions could push car manufacturers to increase production in the United States and prevent future plant closures. General Motors announced recently that it will close four U.S. plants because it is ending production of the Chevrolet Cruze.

Lighthizer has touted several changes to rules of origin for cars as designed to keep auto jobs in the United States and to make it financially less attractive to open plants in Mexico's low-wage economy.

For example, the proposed trade deal would give tariff-free treatment to cars with 75% of the components manufactured in one or more of the three countries and requires that 40% to 45% of auto components be made by workers who are paid at least $16 an hour. The wage provision is expected to favor U.S. and Canadian workers who earn more than their Mexican counterparts.

Jeannine Ginivan, a spokesperson for General Motors Co. which is slated to close a major car production plant in Canada by the end of 2019, said the company is pushing for the removal of steel and aluminum tariffs.

"The certainty of such agreement is very important," Ginivan said. "These actions must be viewed holistically to determine the impact on our GM operations and the supporting supply chain."

A Ford Motor Co. spokeswoman said the automaker will be a "collaborative partner" in supporting the ratification of the USMCA, but called for the elimination of the steel and aluminum tariffs to ensure the "full potential of the deal."

Coalitions of agriculture, auto, pharmaceutical and other business interests that back the agreement are sending letters and making visits to the Hill to generate congressional support for the pact.

The U.S. imported $82.50 billion worth of automobiles and auto parts from Mexico in 2018, while it exported $20.83 billion of American autos and parts to the southern neighbor over the same period, according to Panjiva, a division of S&P Global Inc. Meanwhile, U.S. companies imported $50.73 billion worth of vehicles and parts from Canada last year, while the U.S. shipped $43.46 billion worth of the products north across the border over that span.

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The proposed USMCA also would provide marginal benefits for American dairy, including increased access to the restrictive Canadian market for eggs, milk and poultry, while also boosting access for Canadian exports of dairy, peanuts and sugar to the U.S.

Imports of some agricultural products, including fruits, vegetables and beef, reach billions of dollars per year, according to Panjiva. The U.S. also exports billions of dollars in agriculture and pork products to Canada and Mexico.

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Political climate

Despite the GOP's 53-47 vote majority, the Senate could also pose a challenge for Trump.

Senate Finance Chairman Charles Grassley, R-Iowa, has repeatedly said there is no point on voting on the proposed trade pact as long as U.S. steel and aluminum tariffs on Canada and Mexico remain in place.

Grassley said he has told Trump he could lose Republican votes if the White House moves ahead with implementing legislation while the U.S. tariffs are still in effect.

On March 14, Grassley delivered a brief declaration about tariffs in remarks on the Senate floor.

"I am calling on the administration to promptly remove the Section 232 tariffs on steel and aluminum imports from Canada and Mexico. These tariffs and retaliatory actions are having a negative impact on Americans," Grassley said in the speech, a day after speaking to the president at the White House.

House Ways and Means Committee ranking member Kevin Brady, R-Texas, is working to solidify GOP support for the proposed pact. Brady said he, a small team of lawmakers and Minority Whip Steve Scalise, R.-La., are talking with members to address GOP concerns. "We believe we will need to maximize Republican help and support for the agreement. We've begun that work," he said.

Republicans are expected to meet with the president on March 26 to discuss the trade pact, Rep. Vern Buchanan, R-Fla., said in an interview. Buchanan, who is ranking member of the Ways and Means subcommittee on trade, is expected to attend the meeting.

Some trade experts are skeptical that this strategy will work.

"The Dems in recent years have been very dubious about these trade agreements," Peter Allgeier, president of international trade at consulting firm Nauset Global LLC and a former U.S. deputy trade representative under the Bush and Obama administrations, said in an interview. "And certainly there will be some Democrats who don't want to give Trump a victory. I think it's going to be a very, very rough ride."

"I would not be surprised that if at the end of Trump's first term, we do not have a new USMCA," Allgeier added.

Editor's note: Ferguson reports for CQ Roll Call and Fallor reports for S&P Global Market Intelligence.