June 2019

By Daniel P. Erikson and Gabriella Ippolito

When the North American Free Trade Agreement (NAFTA) came into force between the United States, Canada and Mexico on January 1, 1994, it created the world’s largest free trade area that now accounts for nearly 450 million people and collectively produces $17 trillion worth of goods and services. Overall U.S. trade with its NAFTA partners stands at $1.2 trillion and the two countries buy one-third of U.S. exports.

President Donald J. Trump placed NAFTA and its discontents at the center of his presidential campaign and has criticized the deal, which he has described as “horrible,” relentlessly throughout his presidency, threatening to unilaterally withdraw while holding out the prospect that his administration would try to negotiate a better alternative.

In 2017 we first described NAFTA as “in the cross-hairs” in September, while in October we wrote that NAFTA was “still on the brink,” and in November we warned of “turbulence ahead.” In May 2018, we asked whether the NAFTA negotiations were in “overtime or sudden death?” in September assessed whether there was a “deal or no deal” and in October looked at whether the “’Horrible’” NAFTA [could] become the “Historic” USMCA?” Now the Trump administration has simultaneously “started the clock” on passing the USMCA, which means that Congress will receive the deal for consideration in 30 days, and has to ratify it by the end of September, and abruptly threatened and just as abruptly rescinded the threat to slap a 5% tariff on all goods from Mexico starting on June 10 with monthly increases unless Mexico helps stop undocumented immigrants from coming into the United States.

What’s happening now?

On Thursday May 30, President Trump “started the clock” to begin a 30-day window, by the end of that window the administration must submit implementing legislation to Congress. Once Congress receives the legislation it has ninety days to hold a vote. This step came as a surprise to many because members of the Trump administration had previously said that they would wait for Speaker Pelosi to indicate that she was ready to hold a vote. The Speaker was about to appoint Democratic negotiators to discuss concerns over labor standards and enforcement with the administration and had said that prior to holding a vote she wanted to see how Mexico implemented its new labor laws. On the 30th Trump also threatened to impose rapidly increasing tariffs on Mexican products- which could violate the nation’s current trade agreement with Mexico, NAFTA. The markets reacted instantaneously to the administration’s actions and bond yields and stocks fell in the US and the Mexican peso fell by almost 3.5%. Over the past week Canada and Mexico also began their respective processes to move towards ratification, even as the United States and Mexico reached a separate agreement on migration in order to prevent President Trump’s tariff threat from going into effect on June 10. On May 30, Mexican President Lopez Obrador asked the Mexican Senate to convene a special session to approve the USMCA and on the 29th Canadian Minister of Foreign Affairs Chrystia Freeland presented a motion in Canada’s House of Commons that allowed Prime Minister Trudeau to introduce a bill that would implement the USMCA.

What are people saying?

  • On June 10, President Trump tweeted, “On my way to Iowa - just heard nearly 1,000 agriculture groups signed a letter urging Congress to approve the USMCA. Our Patriot Farmers & rural America have spoken! Now Congress must do its job & support these great men and women by passing the bipartisan USMCA Trade Agreement!”
  • On June 8, President Trump tweeted, “Nervous Nancy Pelosi & the Democrat House are getting nothing done. Perhaps they could lead the way with the USMCA, the spectacular & very popular new Trade Deal that replaces NAFTA, the worst Trade Deal in the history of the U.S.A. Great for our Farmers, Manufacturers & Unions!”
  • On June 8, House Speaker Nancy Pelosi said, ““President Trump undermined America’s preeminent leadership role in the world by recklessly threatening to impose tariffs on our close friend and neighbor to the south…. and temper tantrums are no way to negotiate foreign policy.”
  • On June 8, economist Paul Krugman said, “As far as I can tell the Mexican standoff has ended, for now, pretty much along the lines of NAFTA/USMCA: Trump huffed and puffed, U.S. business managed to convey the message that a trade war would be a disaster, and he basically caved while pretending that he won.”
  • On May 30, Speaker Pelosi responded to White House efforts to start the clock on USMCA that this indicated "a lack of knowledge on the part of the administration on the policy and process to pass a trade agreement."
  • On May 30, Senator Chuck Grassley, the chairman of the Senate Finance Committee, said that, "Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent. Following through on this threat would seriously jeopardize passage of USMCA, a central campaign pledge of President Trump's and what could be a big victory for the country."
  • While speaking in Canada on May 30, Vice President Pence said, “Our administration is working earnestly with leaders in the congress of the United States to approve the USMCA this summer.”
  • S. Trade Representative Robert Lighthizer wrote, "We believe that the USMCA can — and ultimately will — attract broad bipartisan support in both Houses of Congress."

What’s next?

By the end of June, the Trump administration should submit implementing legislation to the US Congress and the Mexican Senate and Canadian House of Commons should begin considering their nations respective implementing legislation. Congressional support in the US is not assured – particularly since the Trump administration decided not to hold discussions with the Democrats before sending the formal notification of its intent to submit the implementing legislation. In addition, President Trump has indicated that the accord with Mexico to avert the tariffs contains a “very long and very good” secret agreement and “it will go into effect when Mexico tells me it’s O.K. to release it.”