Statement for the Record, Hearing on “Implementation and Enforcement of the United States-Mexico-Canada Agreement: One Year After Entry into Force ”

But not everything stayed the same. There were some areas in which we saw adjustments from NAFTA to USMCA. Some of these areas warrant additional scrutiny, if not concern, surrounding how they are being implemented, or what the overall goals are, or the form that implementation or enforcement takes. To that end, I lay out some lingering issues that I hope the Committee will take up in this hearing and continue to monitor in the coming years. I think it is fair to say that we all want a robust and competitive North American trading relationship that is equipped to deal with both current and future challenges. The USMCA is the focal institution in that relationship, and we must ensure that it is fit for purpose if we are to meet our shared goals.

Implementation

As I have previously noted, the greatest benefit of USMCA is that it mostly continued rules that already existed under NAFTA. The impact from the changes in the agreement are small. The overall effect of these changes, including more stringent rules of origin on automobiles, is negative: a ‑0.12% decrease in real GDP, or approximately a loss of US$22.6 billion, according to estimates put forward by the U.S. International Trade Commission (USITC).¹ Analysis from others corroborates this finding.² The topline positive figures put forward by the USITC are mainly due to “reduced uncertainty” from the inclusion of new rules on digital trade, but as I and others have noted, this modeling choice raises more questions than answers, and the baseline model does not address the fact that Canada and Mexico have already implemented many of those rules through their participation in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement, from which the United States withdrew.³

Since most of the rules from NAFTA carried over to USMCA, implementation has proceeded swiftly, despite a pandemic, and far beyond what could be reasonably expected for any trade agreement that created an entirely new set of rules. Trade between Canada, Mexico, and the United States has been fairly resilient in the face of the numerous challenges we faced over the last year. However, the pandemic did reveal that the same institutional deficits⁴ surrounding governance and cooperation that were identified during the NAFTA continue to be a problem under the USMCA.

Institutional Gaps

For instance, consultations on border crossing were woefully lacking at the start of the pandemic, leading to confusion and delays. Subsequent decisions on border restrictions have been ad hoc, adding to the already large cloud of uncertainty hanging over people’s lives. We should have learned from the border closures that occurred after 9/11 that communication, coordination, and clear and consistent guidelines for safe and efficient crossings are necessary to maintain the flow of trade. And it’s not just things that cross our borders, but people. People whose lives exist on both sides of that border, most clearly seen in our border communities, such as Point Roberts, WA. ⁵ These communities rely on a predictable border infrastructure, which has been lacking. And even as Canada has recently announced that it is opening its borders to American tourists, the United States has not reciprocated with either Canada or Mexico. These announcements should be coordinated, as our tourism industries continue to struggle, impacting countless workers in each of our countries.

The institutional deficit carried over from NAFTA could persist in other ways that impact our trading relationship as well. As Andrew Rudman and Christopher Sands from the Wilson Center explain, the work of the numerous committees created by the USMCA to oversee the implementation of the agreement will be critical to its success and growth over time.⁶ Under NAFTA, the committees quickly became defunct, not least because there was a lack of high level guidance and interest from the executive branch. It is this day to day work by civil servants working on the technical issues related to our trading relationship that is vital and requires support.

Another of the major lessons from NAFTA was assuring that there was active stakeholder engagement on cross-border issues so that initiatives could be better targeted to address real, on the ground problems. Amb. Earl Anthony Wayne, former career Ambassador to Afghanistan, Argentina and Mexico, now at the Wilson Center, writes that “an effective stakeholder process could increase public understanding of the value of trade across North America and would surface valuable ideas for improvements and problem solving.“⁷ One avenue for doing this is through the Competitiveness Committee created in Chapter 26, which could serve as a forum for discussion about North American competitiveness, including addressing issues surrounding supply chains, bottlenecks, and regulatory challenges. The committee’s mandate is broad: “The Competitiveness Committee shall discuss and develop cooperative activities in support of a strong economic environment that incentivizes production in North America, facilitates regional trade and investment, enhances a predictable and transparent regulatory environment, encourages the swift movement of goods and the provision of services throughout the region, and responds to market developments and emerging technologies.“⁸ Our experience throughout the pandemic should reinforce the importance of such a committee to identify policy areas in need of development. The knowledge of businesses on the ground is indispensable in crafting smart responses to shared trade challenges, as the pandemic has well shown.⁹

An area where input from business would be particularly useful is in the automotive sector, which has faced substantive rule changes in the USMCA as compared to NAFTA. In the USMCA, the rules of origin for autos (our most integrated supply chain) were made more stringent. Rules of origin are the rules that determine whether a product can cross duty free across the border. In NAFTA, passenger vehicles were required to have 62.5% North American content, and in the USMCA that has been increased to 75%. This means that auto producers will need to source more components from the region, in addition to ensuring that 70% of the steel and aluminum used in production also comes from Canada, Mexico or the United States. On top of this—a first ever in a trade agreement—a new labor value content requirement was added that requires auto makers to have 40–45% of their auto content made by workers making at least $16 an hour.

There is currently a disagreement about how the auto rules of origin are calculated, which was raised by Canada and Mexico at the first meeting of the USMCA Free Trade Commission in May 2021.¹⁰ As reported by Maria Curi at Inside U.S. Trade, “Auto industry representatives in all three countries, as well as the governments of Canada and Mexico, agree that the Office of the U.S. Trade Representative and CBP under the Trump administration interpreted a USMCA auto rule of origin differently than what was originally negotiated.“¹¹ The Biden administration has so far indicated support for the Trump administration’s more stringent interpretation, which could have serious economic repercussion for the auto industry. As Curi explains:

As Eric Martin and Keith Laing recently reported in Bloomberg, Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association suggested that tighter rules of origin requirements could make preferential treatment under USMCA “irrelevant,” and lead to automakers simply paying MFN tariffs instead, which would raise costs.¹³ Furthermore, they report that after a meeting between U.S. Trade Representative Katherine Tai and Mexican Economy Minister Tatiana Clouthier on July 22, 2021, the Mexican Economy Ministry released a statement, which on the U.S. position on rules of origin says that “Not abiding by USMCA rules may potentially disrupt the operations of the North America automotive industry.”

Congress should request an explanation from the Biden administration as to why it supports the same, more stringent interpretation of the auto rules as the previous administration, and what the economic costs of that interpretation are compared to how the auto industry, Canada and Mexico see it. The auto industry could offer insight into this issue through the Competitiveness Committee, for instance. Congress could also request that USTR provide an update on the impact of changes made on the auto rules through USMCA to the North American auto sector, which would help with an assessment of whether further rule changes may be required once USMCA is up for review.

Transparency

Since the USMCA includes a sunset clause that requires the review of the agreement within six years, transparency on the day to day implementation is essential. This will allow us to identify problems early, and correct them when the review process begins, and avoid the biggest pitfall of NAFTA, which was to lock in rules that quickly became out of date. For USMCA to avoid this, it must learn to adapt. Congress should request that the U.S. Trade Representative regularly provide an update on the work of the committees, and the challenges they identify with regard to implementation, as well as other trade issues that arise. Reports on the committee work will not only help Congress keep on top of North American trade issues, but also help researchers that study this to reflect on how we can improve the institutional design of trade agreements in this case, and more broadly.

A further concern with transparency involves the newly created “Rapid Response Mechanism” for labor enforcement, which was put into place to ensure remediation of a denial of collective bargaining rights. As Kathleen Claussen, Associate Professor of Law at the University of Miami School of Law explains, “the RRM is not so much a claims process but rather a quick way to deal with a ‘belief’ by a government that there is some denial of rights underway.“¹⁴ As an untested mechanism, we must proceed with utmost caution and ensure that the process by which complaints are raised through the RRM are transparent and provide the firms affected adequate time to respond. The RRM is a complex process, best summarized by a recent flowchart created by the U.S. Chamber of Commerce.¹⁵

Further complicating it is the fact that the final procedural guidelines for petitions to the USMCA have not yet been published (interim guidelines were released in June 2020). Despite this, labor disputes have already begun. This not only creates a lot of uncertainty surrounding how this new mechanism is supposed to function, but also raises serious questions about due process. The U.S. Chamber of Commerce has stated “The Labor Committee should not be acting on petitions without the final procedural guidance being published,” and also that “the Labor Committee is acting on petitions that allege a denial of rights occurred, in part, before July 1, 2020,” which is before the USMCA entered into force.¹⁶ We must be cognizant of the fact that the procedural guidelines need to be published before further actions are taken, otherwise the executive branch could use broad discretion in their interpretation and application, which could further serve to harm already strained relations between the United States and Mexico. Also, the final guidelines should take comments and concerns from the relevant stakeholders into account.

Relatedly, clarity should be provided on the content of discussions in the Interagency Labor Committee, with documents available online, to the public. Some light should also be shed on the interactions between stakeholders, the Interagency Labor Committee and the executive branch more broadly.

Another issue is that the RRM is unbalanced in its focus. As Desirée LeClercq, Proskauer Employment and Labor Law Assistant Professor at the ILR school at Cornell writes, “Specifically, the Rapid Response Mechanism requires respect for U.S. domestic processes (i.e., after an enforced order) but allows the U.S. to interfere with ongoing domestic processes in other countries. More generally, the disparate scope of the Rapid Response Mechanism makes it possible for facilities like GM to be held accountable when they are located across from Brownsville, Texas but shields those facilities when they are located in Brownsville, Texas.“¹⁷ In regard to the specific concern raised by LeClercq, it should be emphasized that Mexico must be allowed the time necessary to complete its labor reforms (a domestic process that was already underway before USMCA went into effect), and the United States should offer assistance, if requested, in the form of technical capacity. However, the United States has begun parallel efforts under the RRM, perhaps under the hope that this will “speed up” the reforms in Mexico or nudge them along.¹⁸ But this is a precarious gamble. As LeClercq elaborates, “USTR is invoking the Rapid Response Mechanism process before Mexico’s domestic processes have been exhausted, leading to potential fragmentation.” This should be of concern to those interested in the success of Mexico’s domestic reform efforts.

On a broader point, the inclusion of the Rapid Response Mechanism raises serious questions about the role of the United States in actively interfering with labor issues in other countries. There is ample debate over whether we should be doing this at all. If the United States thinks it should have a role to play here through trade agreements, then it should invite reciprocal scrutiny of its own domestic labor practices as well.

Enforcement

Enforcing international agreements is critical to securing the outcomes of what was agreed among the parties. Yet, enforcement is often incorrectly made synonymous with litigation. While trade disputes garner a lot of media attention, and policy makers pursue disputes in order to signal to their own public that they are taking some kind of action, or to compel another party to adjust its behavior, disputes on their own are an escalation of matters where diplomacy has either failed, or not been tried. It is, in fact, the regular, day to day work of implementation that can avoid the escalation of conflicts into disputes.

Energy should therefore be spent on dispute avoidance and prevention not only because disputes are costly and take many years to resolve, but also because they can disrupt trust and amicable relations between trading partners. The rhetoric of enforcement must therefore be used cautiously and surgically. As the last four years of the previous administration has shown us, treating your allies like your rivals only serves to diminish our relationships and reduce the United States’ image in the world. To the extent that we can cooperate on solutions diplomatically instead of racing to “enforce” through legal means can therefore serve to neutralize tensions and produce mutually beneficial outcomes.

As noted above, the Labor chapter’s Rapid Response Mechanism should be utilized with caution, and should also be carefully scrutinized by Congress to ensure that it meets the goals laid out in Trade Promotion Authority. This could assist Congress in crafting new guidelines in any future Trade Promotion Authority bill.

There are also two disputes under Chapter 31, the state-to-state dispute settlement chapter. The first is a dispute raised by the United States (consultations began under the previous administration) on the allocation of Canada’s tariff rate quotas (TRQ) for dairy. Canada and the United States should work to resolve this issue as soon as possible, and Canada should ensure that its implementation of the dairy TRQ is not in violation of the USMCA. The second is a dispute raised by Canada against the United States regarding actions by the Trump administration to levy safeguard tariffs of 18% under Section 201of the Trade Act of 1974 on imports of crystalline silicon photovoltaic cells and modules. Given the Biden administration’s commitment to green energy, it would be puzzling if tariffs on imports of solar products from our closest ally would continue to be imposed, considering that tariffs are born by consumers, and increasing the price of solar products will simply decrease Americans’ access to these technologies. On the latter dispute, Congress should encourage the Biden administration to lift the tariffs on Canada and to look for opportunities to further integrate the North American energy market so that it can become globally competitive.