Trade pact success tied to competence of American, Mexican presidents

The success of the United States-Mexico-Canada Agreement (USMCA) depends on competent leadership from two unpredictable presidents, according to a new brief from Rice University’s Baker Institute for Public Policy. The USMCA, which replaced the North American Free Trade Agreement (NAFTA), took effect July 1.

The final report in a series of 11 on the USMCA by the Baker Institute examines the most significant external factors that will affect the deal’s success: the leadership of President Donald Trump and Mexican president Andrés Manuel López Obrador, steel tariffs, trade wars and COVID-19.

“The USMCA will function in the context of other trade-related matters. Each of these (matters) could affect the success of the USMCA as a mechanism for encouraging investment, creating new jobs and enhancing consumer welfare in North America,” wrote David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute’s Center for the United States and Mexico.

Leadership in Mexico and the U.S. has been highly unpredictable, Gantz wrote. Both administrations’ views on energy policy, tariffs and COVID-19 show there are still uncertainties about the future of the relationship between the countries.

“Given the ongoing challenges of governing both nations, the personalities of the two presidents and the devotion of both to ‘America First’ or ‘Mexico First’ populism, it is almost certain that similar disruptive events will occur on one or both sides of the border in the future,” Gantz wrote. “If both governments can effectively deal with them when they arise, serious consequences may be avoided.”

Credit: 123rf.com/Rice University

Steel and aluminum tariffs imposed on Canada and Mexico, as well as a continuing trade war with China, increase the cost of U.S. manufacturing and production. This makes automobiles, home appliances and other durable goods more expensive than competing goods produced in other countries, including Mexico and Canada. Gantz points out this is happening at a time when global trade is expected to shrink.

“The World Trade Organization (WTO) has predicted that world merchandise trade in 2020 will fall by between 12% and 32% compared to 2019, with nearly all regions suffering double-digit declines,” Gantz wrote. “The impact is expected to be more pronounced in sectors with complex value chains, such as automotive products.”

The COVID-19 pandemic, Gantz wrote, has “added substantial pressure for the ‘reshoring’ (to the United States) or ‘nearshoring’ (to Mexico and Canada) of supply lines that rely today on China (or in some instances other Asian countries).”

Gantz wrote this may increase the percentage of total trade and investment taking place within North America and reduce the region’s imports from elsewhere (as well as exports from the United States, in particular to China). The USMCA provides a framework for such a future.

“Without the USMCA, this evolving process would have been even more costly and difficult to implement; with the USMCA it will still be challenging and economically disruptive but seems more likely to occur without causing as extensive long-term injury to the North American economies, their enterprises, workers, and consumers,” Gantz wrote.

About Avery Ruxer Franklin

Avery is a media relations specialist in the Office of Public Affairs.