A New Deal

By: Dr. M. Ray Perryman
Published in syndication December 25, 2019

A strong trade agreement with Mexico and Canada is clearly a "win" for the US economy. While the US-Mexico-Canada Agreement (USMCA) must still pass the US Senate and be ratified in its revised form by Mexico (which has some concerns) and Canada, it appears that a structure has been essentially finalized to replace the 25-year old North American Free Trade Agreement (NAFTA). The original pact redefined the economies of the entire continent, and the next generation will allow the momentum to continue.

The USMCA ensures the free flow of trade, protecting business ties among the three nations. For example, cross-border supply chains are quite common along both borders, with certain aspects of production occurring in each country depending on relative comparative advantages. Without a trade agreement, such arrangements and other imports and exports would become more difficult and more costly in that trade would revert to tariff schedules provided by each country to the World Trade Organization (WTO) and would compound as various elements traversed back and forth.

We recently estimated the benefits of reaching an agreement to illustrate the importance of a deal. We compared a scenario with the USMCA in place to one where the US, Canada, and Mexico trade under the terms of the listed tariffs with the WTO (as the US has maintained that it would abandon NAFTA in the absence of a new agreement). For the United States, we estimate that having the USMCA in place leads to an additional $64.9 billion in gross product and almost 600,900 jobs compared to trading under the terms of the tariffs that would otherwise be in place.

As a major exporting state, Texas would see substantial benefits. We estimate that for Texas, annual gross product will be a projected $17.6 billion higher and employment 164,700 higher under the USMCA. These effects far exceed those in any other state. For California, the second most impacted state, the USMCA will likely lead to a $6.2 billion boost in gross product and almost 58,700 jobs compared to current WTO tariffs.

A strong trade agreement has benefits beyond more favorable tariffs. Many of the core aspects of NAFTA remain in place, but the USMCA also incorporates some changes and updates. A key sticking point was the treatment of labor, and that has apparently been worked out. Stronger protection of intellectual property was also achieved, including patents for medications and criminal penalties for pirating movies and music.

Clearly, the USMCA is good for the US economy, particularly in trade-intensive border states. It's been more than a year since the initial signals that a deal had been reached, and the time is rapidly approaching to get it signed, sealed, and delivered!