After months of negotiations and the insertion of new enforcement provisions that provide for U.S. monitoring of Mexico’s labour-market practices, with penalties for non-compliance, U.S. House Democrats announced this week they had reached an agreement with President Trump to pass a modified United States-Mexico-Canada Agreement (USMCA) into law. The House of Representatives must vote to approve the trade agreement, followed by approval by the U.S. Senate, before Trump signs the agreement into law.
The agreement modifies the USMCA in several ways. Perhaps most significant are the enforcement terms, which would create an “inter-agency committee” to monitor Mexico’s implementation of labour reforms with “labour attaches” based in Mexico to provide on-the-ground information about Mexico’s labour practices. Failure to comply with the labour reforms in the USMCA, which include higher wages for Mexican auto workers and enhanced worker rights to organize and bargain collectively, would lead to U.S. actions, possibly including stopping goods originating in Mexico from crossing into the United States. There will also be mechanisms to monitor whether environmental standards are met.
A second modification involves the U.S. administration dropping a provision in the USMCA that would give drug companies 10 years of data exclusivity for new biologic drugs. Before this modification, the USMCA called for an extension of the period of data exclusivity from six to 10 years, as it applied to Canada. This modification reflects the growing antipathy of U.S. government officials towards high domestic drug prices and it’s an unusual instance where the U.S. government has acted against the interests of domestic producers in trade actions.
The much-enhanced prospects for implementing the USMCA is, on balance, good news in the near-term for the Canadian economy, as it obviates a growing uncertainty about whether the U.S. Congress would ever enact USMCA into law. It’s particularly good news for Canadian auto companies and their employees, at least in the short run. Specifically, stronger enforcement of labour provisions in the USMCA will, if anything, provide greater assurance that manufacturing costs will increase in Mexico, which was a major U.S. objective in USMCA negotiations.
Canadian politicians will likely to be happy to accept credit for any resulting increases in employment and wages in Canada’s auto sector, although they will be less willing to acknowledge the role the amended USMCA will play in raising the prices of automobiles sold in Canada or the long-run reductions in the competitiveness of domestic suppliers encouraged by the greater protection they will enjoy from exports of auto assemblers and parts suppliers based in Mexico.
The reduced period of data-exclusivity will win Canadian politicians applause from Canadian taxpayers who fund inpatient use of prescription drugs, and companies that finance their employee private drug insurance plans. It will also be cheered by domestic manufacturers of generic drugs since it should lower their costs of producing biosimilars. However, in the long run, as national governments suppress drug prices, they will reduce the incentive for innovation on the part of multinational drug manufacturers who contribute to breakthroughs in new life-enhancing and life-extending drugs.
But perhaps the most concerning implication of the amended USMCA is the celebration by U.S. politicians on both sides of the political aisle of a further movement towards managed trade agreements that focus on benefitting U.S. workers and producers. House Speaker Nancy Pelosi called the new agreement “a victory for America’s workers.” President Trump tweeted that the USMCA will benefit U.S. farmers, manufacturers, the energy industry and labour unions. No U.S. politician heralded any benefits for U.S. consumers resulting from the agreement. Nor was there any mention made of the broader benefits to productivity growth from increased specialization of production on a continent-wide basis. The latter manifestation of the potential benefits of international trade are inconsistent with a U.S. approach to trade that’s now firmly mercantilist.
Hence, while the modified USMCA might be good news in the short-run for Canadian government officials, the longer-run implications are nothing to cheer about.
View original blog post at the Fraser Forum.