USMCA Review and Extension Predictions

When the idea of an expiration clause was suggested during the NAFTA renegotiation, I was against it from the start, and Inu and I wrote a pretty critical piece about it at the time. A review is great, we said, let's definitely have reviews, and there are plenty of ways to do that. However, putting an expiration clause in there is not necessary and is going to cause a lot of chaos.

But despite our best efforts, a "review and term extension" provision made its way in there as Article 34.7 of the USMCA. The way the provision works is that there is a 16 year term for the agreement, with a joint review by the three governments taking place 6 years after the July 1, 2020 entry into force. On the six year mark (July 1, 2026), the governments can make a decision on whether to extend the agreement for another 16 year term. If that extension does not happen, there will be annual reviews of the agreement, through which there will be subsequent opportunities for the three governments to decide to extend.

Now that the review and extension decision are almost upon us, we'll find out if Inu and I were right to be concerned. At this point, I will confess that I have very little idea what is going to happen. Even without everything else going on in the trade policy world, it would be a tough prediction to make, but combining the USMCA review with so much other trade policy chaos makes things particularly difficult.

Over at CSIS, Diego Marroquín Bitar and Bill Reinsch have mapped out six scenarios for what will happen with the USMCA extension decision:

I don't disagree with any of that, but I do want to highlight a bit of possible political strategizing here. It feels to me as though in both domestic politics and international affairs, everyone is waiting for the midterm elections. The thinking is that if the Democrats win one or both houses of Congress, it would significantly change the power President Trump has in U.S. politics, and perhaps make dealing with him a bit easier. With that in mind, I wonder if Canada and Mexico have an incentive not to go for the "painful extension" option. Instead, they could hold out until after the midterms, in the hopes that they would be in a better negotiating position. And if it turns out their position is not much better then, they could even try waiting until after the 2028 presidential election.

One risk with this strategy is that it could trigger a Trump withdrawal from the agreement. However, while we might see threats along those lines (which we have seen before), I'm skeptical there would be follow-through here. The stock market fall such an action would likely trigger is probably enough to prevent this.

I also want to mention that if I'm reading USMCA Article 34.7, paragraph 4 correctly, if the extension does not happen on July 1, it can be agreed to at any point thereafter:

If, as part of a six-year review, a Party does not confirm its wish to extend the term of this Agreement for another 16-year period, the Commission shall meet to conduct a joint review every year for the remainder of the term of this Agreement. If one or more Parties did not confirm their desire to extend this Agreement for another 16-year term at the conclusion of a given joint review, at any time between the conclusion of that review and expiry of this Agreement, the Parties may automatically extend the term of this Agreement for another 16 years by confirming in writing, through their respective head of government, their wish to extend this Agreement for another 16-year period.

(emphasis added)

I don't mean to make a definitive prediction that extension will take place at some random time under this part of the provision. However, I will note that if at some point a particular political leader decides a "win" would be useful, a decision to extend the USMCA could be made, even if we are outside the joint review window.

With the caveat that I have a low degree of confidence in my trade policy predictions these days, my current view is that it would be surprising if there were a decision to extend the USMCA on July 1 or soon thereafter. But given everything going on in international affairs, I can imagine some sort of package deal that comes together a few months or so later, bringing in a few non-trade issues as well. At the same time, I can also imagine we just slide into the annual review option for the next couple years. That may not be ideal, but it does leave plenty of time to make the extension decision prior to the agreement's expiration. (And if this decision is made after 2029, people could even think about using the review process to eliminate the expiration provision, and just have normal reviews instead.)

(As I was working on this post, U.S. Trade Rep. Jamieson Greer commented on the USMCA joint review as part of a think tank event yesterday:

Well, remember, the joint review, what happens on July 1? This is the question, right. On July 1, what has to happen is, the United States tells Canada and Mexico what we intend to do. Do we intend to just rubber stamp this thing and say, All right, renewed, everything's fine, let's hold hands and move on. Or do we say this is not sufficient, we have to have modifications to this agreement, we have to change it. And so we'll enter into a period, we'll be on the path to going out, which is actually a 10 year period, but we'll be in negotiations during that time and try to resolve something sooner rather than later. So my own sense is we want to resolve as much as we can. We've worked really closely with the Mexicans over the past year, they resolved a lot of issues. The Canadians, we have some issues with them that haven't been resolved yet. So I think, I don't want to get ahead of myself, because I have to tell Congress on June 1 what we're going to do. ... I think that we aren't probably going to be able to resolve all issues by July 1, but I think we are on track to resolve many of them and to move as quickly as we can.

So factor that into any predictions as well.)