Good News

By: Dr. M. Ray Perryman
Published in syndication July 08, 2020

In the midst of the pandemic's ongoing fallout, there was a bit of very good news for the economy earlier this month that, as with so many other things, did not get the attention it should have (or would have in different times). The United States-Mexico-Canada Agreement (USMCA) has now officially gone into effect. It has taken years to negotiate and ratify the agreement among the three nations, which updates and replaces the 1994 North American Free Trade Agreement (NAFTA).

The USMCA, while not perfect, is essential to ensuring the efficient functioning and ongoing economic integration of North America. It also offers improvements ranging from better protection of intellectual property to enhanced labor standards.

Trade with Canada and Mexico is vital to the economy. In 2019, the US exported about $292.6 billion in goods to Canada and imported $319.4 billion. Exports to Mexico for 2019 were $256.6 billion, while imports totaled $358.0 billion. Subjecting these trade volumes to tariffs and additional inefficiencies would have a pronounced negative effect on the economies of all three nations and greatly diminish the competitiveness of North America in global markets. The supply chains of the three countries are inextricably linked, with many items crossing borders multiple times during the production process. Imposing layers of tariffs on these goods would eliminate our cost advantages.

To estimate the benefits of reaching a free trade agreement, 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 World Trade Organization (the default situation if NAFTA was abandoned). 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 that would otherwise be in place (including multiplier effects).

As a major exporting state accounting for over 20% of the national total in 2019, Texas would see substantial benefits. Key goods exported to Mexico and Canada include computers and electronic products, petroleum products, chemicals, transportation equipment, machinery, and electrical equipment.

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. A "no-deal" situation would have been a major step backward.

In the midst of the current situation, there are many short-term challenges and impediments to international commerce that transcend accords. Looking ahead, however, USMCA is a vital and, indeed, essential component of our ultimate economic resurgence. Be safe!!