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A week of developments in international trade

By   /   Friday, December 20th, 2019  /   Comments Off on A week of developments in international trade

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By Gerhard Apfelthaler

To much surprise and public drum rolls, the majority leader of the House of Representatives announced on Dec. 10 that Congress will most likely ratify the United States-Mexico-Canada Agreement in early 2020.

This trade agreement among the United States, Mexico and Canada, which will replace the 25-year-old North American Free Trade Agreement, has been held up for months after its initial drafting so that important improvements could be made. The question is, will it live up to expectations and has it really improved?

Generally, NAFTA has been replaced by the new agreement with the intention to create more high-paying manufacturing jobs in the U.S. For example, a greater proportion of materials used in cars will now have to be produced by workers with higher hourly wages and/or originate in North America to avoid duties.

Other key points in the negotiations of recent months concerned the enforcement of labor and environmental regulations. These are important clauses in international trade agreements as a certain harmonization of employment standards helps to level the playing field for companies competing across national borders.

Under the revised agreement, there is now a mechanism to address issues such as collective bargaining or unionization at Mexican companies. Similarly, environmental standards in Mexico are subject to oversight by an intergovernmental body. If these rules can actually be enforced remains to be seen.

A last-minute addition requires Mexican car and truck makers to source their steel and aluminum from the United States seven to 10 years down the road. With the current structural changes in the automobile industry, it remains to be seen if these rules will actually have a significant impact on U.S. manufacturing. The agreement also gives U.S. dairy farmers better access to the Canadian market. While many of the areas of the USMCA play in favor of U.S. companies, others clearly don’t. For instance, much to the dismay of U.S. pharmaceutical companies, the revised agreement has dropped the protection for biologic drugs from generics.

When comparing USMCA and NAFTA, we have to bear one thing in mind. Although the negotiation of the USMCA is portrayed as a major win (or a “win-win-win,” as a former U.S. ambassador to Canada has put it), it doesn’t have the same significance as NAFTA had when it was signed in 1994. (So maybe it’s more like a “collective sigh of relief,” as one journalist on National Public Radio put it.) NAFTA broadened access to new markets, while USMCA just fine tunes some of the old agreement’s deficiencies that were bound to develop over the years as economies and trade flows changed the landscape.

The other big news, of course, concerned China. At the 11th hour before new tariffs were set to be imposed, the U.S. and China agreed on a “phase one” agreement. In exchange for purchases of agricultural goods by China, the agreement rolls back existing tariffs against Chinese goods and cancels new ones that were set to go into effect on Dec. 15. Again, a win? It depends on what comes next and whether you consider an only partial undoing of the damage that tariffs have done since their introduction a win.

On another front, the noise over the USMCA and the “phase one” trade agreement drowned out less positive global trade news. The World Trade Organization seems to slip ever deeper into a severe crisis.

The ongoing stalemate between the United States and the global trade watchdog has entered an entirely new phase. As the U.S. has been withholding budgets and blocking appointments, the appellate body, a seven-judge panel that reviews trade arbitration rulings, is now down to only one final judge. Under WTO rules, it now can no longer function.

The White House has repeatedly attacked the WTO for a hostile position against the United States and taken unilateral actions against many of its trade partners.

While some might say that it is legitimate to defend one’s interests, one could also say that just because one loses repeatedly at a game of chess, that doesn’t mean that chess is a bad game or a game whose rules need to be changed.

Gerhard Apfelthaler is the dean of the School of Management and a professor of international business at California Lutheran University.

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