Reviewing the USMCA

Pursuant to the review of the USMCA provided for in Article 34.7, USTR has requested comments and is holding a hearing. USTR's comments portal shows 1,515 comments submitted, so a lot of people had things to say! (There were 173 requests to appear at the December 3-5 hearing.)

Canada and Mexico are also holding hearings to get input from their stakeholders.

With all this input, the three countries will then meet and ... well, we don't really know how it's going to go, because this kind of review has never been done before!

On the U.S. side, we submitted a comment of our own, which we will summarize briefly here.

First, we make the basic point that the USMCA is good, and should be refined and improved rather than abandoned. With regard to specific refinements, we argue that it's worth thinking about (1) how well the RRM is doing in terms of protecting labor rights in Mexico and (2) giving Congress a bigger role in the review process.

Second, as a "worthwhile North American initiative" (to borrow from this famous phrase), we argue for expanding cooperation among Canada, Mexico, and the U.S., which could include deeper integration in the auto and semiconductor sectors, as well as more regulatory and economic security cooperation.

And finally, we say that the USMCA should incorporate a presumption that import restrictions under Section 232 will not be applied to Canada and Mexico. Our instinct here is that there is no need to amend Section 232 to accomplish this, and that the Commerce Department and the president have the discretion to implement a commitment of this sort made pursuant to the USMCA.

One big question about all of this is whether the USMCA will actually be extended in 2026. Pursuant to Article 34.7, if the parties do not agree to extend it, there will be another review each year, with an opportunity to agree on an extension each time until the USMCA expires in 2036.

To be more concrete here, the practical question is what it would take to convince the U.S. (i.e., the Trump administration) to extend it. Canada and Mexico would probably be happy to extend it under the current terms. While they may be unhappy with some actions the Trump administration is taking, extending the USMCA would generate a bit more certainty in the trading environment. But the view on this issue in the U.S. is less clear.

As a condition for agreeing to an extension this year, will the Trump administration make demands from Canada and Mexico that are so significant in terms of the domestic political objections they might generate in those countries that it becomes impossible for Canada and Mexico to make the concessions the U.S. is looking for? Or, will the Trump administration be willing to settle for something less, so that the governments can reach an agreement on an extension and have North American trade be a bit more settled (at least temporarily)?

One thing we suggest the three governments avoid is a revision to the USMCA along the lines of what Oren Cass recently proposed in relation to "balanced trade":

First and foremost, the agreement must centre on the substantive commitment to balanced trade that ensures all parties benefit. ...

If Mexico, Canada and the US commit to maintaining balanced trade among themselves, labour and environmental standards need not be so carefully policed. Each country will have an incentive to manage its currency in a co-operative manner. An agreement would establish protocols where imbalances do emerge. Tariffs could increase or decrease accordingly — a safety valve to open and shut, rather than one unscrewed and tossed aside.

As has been explained many times over the years, there are widespread misconceptions about both bilateral trade deficits and overall trade deficits. Using the USMCA review to try to ensure that bilateral trade between and among all three parties is in balance, however that might be measured, makes no sense and illustrates a fundamental misunderstanding of the causes of trade deficits.

In this context, Cass mentions a "safety valve" for increasing tariffs, which may be the most problematic point here. Presumably he is talking about something beyond the existing safety valve, which is anti-dumping and countervailing duties, although he is not very precise about what he does mean. If it is the ability to raise tariffs at any time trade is "unbalanced," though, then the main purpose of the USMCA – providing economic integration and stability – will have been completely undermined. (Of course, that may be his objective!) The inclusion of such a clause would provide paper thin legitimacy to what would otherwise constitute breaches of the USMCA, and likely on asymmetrical terms. If that's the idea, it may be better to have no deal at all.