On Friday, May 17 the US agreed to exempt Canada and Mexico from tariffs on steel and aluminum. This action is one of the final steps in the process of replacing the North American Free Trade Agreement (NAFTA) with the United States – Mexico – Canada Agreement (USMCA).
The exemptions granted by the US to Canada and Mexico were part of the original terms of USMCA agreed last year. However, the US lifted the exemptions partly to pressure Canada and Mexico to agree to the USMCA and partly as a means of ensuring that China would not be able to circumvent US – China trade restrictions via the markets of Canada and Mexico.
The US changed its stance on the exemptions for Canada and Mexico due to recent setbacks with US – China negotiations and the desire to present USMCA for final ratification in the three North American countries and close this deal for good and all.
In addition, the US and Canada have closed ranks due to mutual discord with China. Last year, Canada arrested Sabrina Meng Wanzhou, the chief financial officer of Huawei and the daughter of the Chinese telecom equipment giant’s founder Ren Zhengfei, on suspicion of dealings with Iran in violation of international law. Earlier this month, China retaliated by arresting two Canadian executives in China on espionage charges.
In the US, the breakdown of US – China trade negotiations were marked by hard feelings due to perceived backpedaling by China on points that were considered settled by US negotiators.
The US’s action in lifting tariffs was immediately reciprocated by Canada and Mexico who announced the lifting of corresponding tariffs on the US the following business day. And the removal of these tariffs makes ratification of USMCA in Canada and Mexico highly likely.
Mexico stated that the key reason they agreed to lift their tariffs was the U.S. ending the metals tariffs and not replacing them with a quota system or another limitation on trade. “The Ministry of Economy was always opposed to considering a solution via quotas, recognizing the potential distortions of a managed trade and its conviction that free trade will continue to strengthen the competitiveness and prosperity of North America,” Mexico said in a statement.
Lifting of the tariffs was cause for heartfelt celebration in the Canadian industrial sector and by the supporters of Canadian Prime Minister Justin Trudeau who is up for re-election this fall.
Canadian Finance Minister Bill Morneau said, “With these developments, Canadian and American businesses can now get back to what they do best: working together constructively and supporting good, well-paying middle-class jobs on both sides of the border. The removal of tariffs and countermeasures is a true win-win for everyone involved, and great news for Canadian and American workers, for our communities, and our economies.”
Ratification of the treaty in the US, however, is not assured. Some US lawmakers are insisting that USMCA include a revamping of the Mexican system of organized labor so that wages in Mexico could become more in-line with wages in the US and Canada.
Traditionally, a labor ‘union’ in Mexico would be unrecognizable as such in the US or Canada. In Mexico, a company grants a labor contract to an organization that is a ‘union’ in name only. This ‘union’ then controls the jobs under that contract and proceeds to hire workers to fill the jobs, keeping the wages low enough to extract a handsome profit. Union members in Mexico are employed at the will and discretion of the owner of the employment contract, with no rights of representation, and generally scant benefits.
President of the AFL_CIO Richard Trumka, at a recent speech in Washington, DC, described the Mexican system as “a low-wage system that’s been in effect for a long time, with over 700,000 protectionist contracts, illegitimately negotiated and put in place, designed specifically to keep wages down in Mexico.”
The Mexican legislature recently passed legislation that address some labor-related issues but it is a far cry from establishing the sea change that would be required to establish US style labor unions.
Some US lawmakers are asking that USMCA require Mexico to change this system over four years. This would require a pace of eliminating 175,000 protectionist union contracts per year. When one considers that these contracts benefit the richest and most powerful members of Mexican society, it is hard to regard this stance as designed to achieve a real-world agreement.
Nonetheless, some influential US trade groups continue to speak optimistically about getting a deal passed this year. Intra-North American trade constitutes the lion’s share of the economies of each of Canada, Mexico and the US, so passage of USMCA is important to each country. And the solid support of both Canada and Mexico certainly helps the prospect of passage by the US.
However, some Democrats in the US do appear anxious to prevent President Trump from achieving one of the cornerstones of his 2016 Campaign Platform, i.e. repealing and replacing NAFTA. With the 2020 US Presidential election looming larger, the prospect of bipartisan cooperation and the passage of the USMCA in the US becomes more problematic with each passing day of 2019.
Now how can that be when Trump says he will not work with the House until investigations into him are stopped and it takes the House and Senate to pass laws on trade deals, a President can only negotiate the deals Congress must OK the same deals.