US, Mexico, Canada Sign Fatally-Flawed USMCA Draft

The current heads of state for the US, Canada, and Mexico may have signed off on the draft USMCA agreement at the G20 summit, but that’s a far cry from saying the three countries’ legislatures are going to approve it.

Mexican President Enrique Peña Nieto, Donald Trump, and Canadian Prime Minister Justin Trudeau sign off on the draft USMCA agreement on November 30,2018 in Buenos Aires. (Photo: The White House)

On November 30, Donald Trump, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto signed a proposed replacement agreement for the 1994 North American Free Trade Agreement (NAFTA).

It is important to note that signing doesn’t mean the new treaty is in effect. All three governments’ legislatures now must debate and pass the agreements. If in the process a country determines some clause(s) must be changed, all three nations will need to go back to the table and renegotiate the affected parts.

Considering that both the Mexico and the United States will need to ratify this with new leadership in place, that’s a potential major stumbling block. The President of Mexico who signed off on the deal on Friday did it in his very last day in office. His successor, Andres Manuel Lopez Obrador, is a leader with very different opinions on how to run the country than his predecessor.

In the United States, although the treaty-ratifying Senate may have slightly stronger Republican control after the 2018 mid-term elections, the House – which has the power to weigh in on the agreement – flipped to a strongly Democrat-dominated body. So even the nation which demanded the NAFTA renegotiation may find itself embroiled in arguments over changes in the agreements.

Both situations, combined with this being a far more damaging agreement to citizens’ rights than the original NAFTA, could make it difficult to secure final passage for it.

As it is written now, the new agreement, known as the USMCA (for U.S., Mexico and Canada) treaty, represents both far less and far worse than many may realize. Although Trump may have claimed at the signing that this new treaty is a “model agreement that changes the trade landscape forever”, it is neither that novel – as it covers mostly old ground from the original NAFTA – nor much of a model, unless you happen to be a major corporation seeking more control over national laws regarding North America Trade.

It also has major problems throughout the agreement, making it virtually impossible to be ratified by all three nations without significant changes.

One Major Win for Canada

One major positive for Canada in the agreement was the scrapping of the investor-state dispute settlement (ISDS) system which previously allowed companies doing cross-border business to sue governments on potential future profits, without having to go through the countries’ ordinary court system. The ISDS system, which complete bypasses the laws and courts of the individual nations’ governments, is considered highly biased towards corporations at the cost of national sovereignty and local citizens’ rights.

As a spokesman from the Canadian Center for Policy Alternatives (CCPA) said about the elimination of the requirements for Canada to have to deal with ISDS that, “ISDS fundamentally undermines government sovereignty for corporate gain at the expense of the public interest. It had been used dozens of times under NAFTA to challenge environmental regulations and other public interest measures in Canada”.

Canada was the most-litigated country under the ISDS agreement, with 41 cases filed against the country by foreign investors under the original NAFTA agreement provisions. Mexico was a far-distant second with only 23 investor-state claims. The U.S. only had to deal with 21 of these.

Canada has lost many of its ISDS cases and the threat of more prevent it from being able to enforce its own environmental, labor or property laws.

The USMCA strangely wipes out the ISDS provisions applying between Canada and the United States but leaves in ISDS settlements regarding the U.S. and Mexico.

Corporations Still Gain More Control

While the scrapping of the ISDS for Canada represents a major win for national sovereignty in the new arrangements, the USMCA keeps in intellectual property provisions that favor big corporations over national rights and provides other gifts for corporations as well.

Regardless of what local laws provide for, the USMCA explicitly provides a 10-year life for biological pharmaceutical patents, 15 years for industrial design patents, and 10 years for agricultural chemicals patents – across all three countries. Copyright laws are also now extended by an additional 20 years. These regulations override other international agreements on patents which were previously determined. More importantly, because these are written into the trade agreement, there is only limited ability for those seeking change through the court system to challenge them.

The pharmaceutical patent agreements also effectively provide de facto monopoly provisions over three countries now for medicines covered by patents in one country. The agreements in effect limit access to generic drugs where they may have been available before. This will drive out generics where they may be badly needed and allow the pharmaceutical industry to raise prices. Because Canada's healthcare system doesn't pay for medication this could mean that some people will no longer be able to afford to stay alive.

Further, according to the Council of Canadians’ trade campaigner Sujata Dey, “in the closed door negotiations of the UMCA, corporations came up with new rights: powers for corporations to monitor and change regulations before they see the light of day in areas that could affect food safety, chemicals, environmental regulations and other matters of public safety.” All that may not go through the ISDS resolution process now for Canada, but all three countries now have new processes that give them preeminent control over the process and overriding influence even on potential legislation.

Significant Changes to the Dairy and Car Industries

Two industries which will see major changes assuming the UCMCA agreement gets approved close to “as is” are Dairy and Auto.

For Canada, dairy farming is about to become a lot more competitive. The new agreements eliminate a former Canadian category of milk products called Class 7. It was originally put in place to support Canada’s dairy surplus using a pricing approach which blocked American diafiltered milk from entering Canada. Diafiltered milk is that which has been processed to remove most of the fat and lactose and is mostly protetin. By getting rid of that, the U.S. will gain market share in Canada at Canada’s expense and will be able to more easily export its milk contaminated with rBGH, a genetically modified growth hormone that is banned in Canada and most other countries due to its adverse health impacts on cows and humans.

Under the USMCA draft agreement, Canada is also restricted on the total amount of three specific dairy product categories. Those are milk protein concentrates, skim milk powder and infant formula. If those exports exceed a certain level, Canada must impose export taxes on these products.

In the auto sector, the U.S. is likely to become a winner because of other changes. While there are no new caps placed on the numbers of automobiles that are manufactured outside of the United States and then shipped into it from either Canada or Mexico, the rules on those vehicles have changed.

One rule boosts made-in-North-America regulations, increasing the percentage of car parts eligible for free trade between countries from 62.5% to 75%. A second regulatory change makes part outsourcing easier, but now requires that vehicle parts must be manufactured by production staff making at least $16 per hour.

Since the second rule makes it difficult for Mexico to make those parts because of their workers’ much lower wage rates and because the first rule requires that now three-quarters of all parts must be made in North America, these changes are likely to have a significant negative impact on the Mexican auto manufacturing sector.

While Canada may benefit somewhat from the auto industry changes, the U.S. auto industry is expected to gain the most market share. An unintended consequence of the new rules is that it is likely overseas suppliers from Japan, Korea and Europe will also begin shipping more cars into the U.S. as well, to meet demand and avoid import duties on steel that already create havoc for U.S. manufacturers.

The Poison Pills Embedded in the Agreement

There are two provisions built into the USMCA which unfortunately undermine the entire nature of an agreement of this type.

The Six Months’ Notice Clause

Complex trade agreements of this kind typically take time to settle out, as companies and countries make investments to take advantage of what they consider. As a result, although it is possible to break from the agreement without serious penalty, typically these sorts of arrangements have a long notice period. In this agreement, on the other hand, despite that the term of the agreement is nominally 16 years after the date it goes into force, Article 34.6 of the agreement provides that after notice is provided to the other parties, one party can withdraw from the agreement six months after that notice is given. The other two parties stay bound to the agreement unless they withdraw.

The Non-Market Country Free Trade Agreement Provision.

This clause was put in place to keep parties to the agreement from being able to negotiate freely with at least ‘some’ third parties about other free trade agreements. According to Article 32.10, entitled “Non-Market Country FTA”, if a party to the USMCA wants to begin “free trade agreement negotiations with a non-market country”, it must first notify the other parties in the USMCA of its intent to do so a full three months’ prior to beginning those negotiations. Then, upon request, the party must disclose “as much information as possible regarding the objectives for those negotiations”, and shall provide “As early as possible, and no later than 30 days before the date of signature…an opportunity [for the other Parties] to review the full text of the agreement, including any annexes and side instruments”. The clause also provides that “entry by any Party into a free trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice and replace this agreement with an agreement with them (bilateral agreement)”.

The definition for a non-market country is simply one that on the date of signature of the agreement “at least one Party has determined to be a non-market country for purposes of its trade remedy laws and is a country with which no Party has a free trade agreement.” Those close to the negotiations say ‘non-market country’, in the United States at least where this provision was pushed through, is a code phrase meaning China.

What this provision does, in the near term at least, is to take power away from Canada and Mexico both to negotiate its own separate free trade agreements with China (among other countries).

Trump’s Threat

With the various problems already noted, it is the right thing for the legislatures of Canada, the United States and Mexico to take time to review the proposed agreement and do what can be done to fix the most problematic sections of the agreement before final approvals.

Donald Trump, eager to ram this through and perhaps even before the new Congressional representatives take their seats in January, wants to short-cut the whole process while he still feels he has control of the Legislative Branch of the government. Shortly after the USMCA draft agreement was symbolically signed at the G20 summit on November 30, Trump let it be known that he was planning to pull the United States out of NAFTA early if Congress seemed like it might do more than just rubber-stamp what his negotiators worked out.

The agreement does little good for any of the three nations but it will help Trump feel like a winner and enable him to blame Congress for not approving the mess he created. And Trump supporters will feel like their leader has succeeded in renegotiating NAFTA without having any understanding of NAFTA or the new USMCA.

With many in Congress such as Senator Bernie Sanders (I-Vermont) disgusted with the new agreement’s “outrageous giveaways to the fossil fuel industry and big pharmaceutical companies”, as he said after the signing, Trump’s threat is not exactly a good start to discussions to get it passed in any form.

Karen Hansen-Kuhn, director of Trade and Global Governance at the Institute for Agriculture and Trade Policy, was also highly critical of the USMCA, focusing in specifically on its agricultural provisions. She said that, “This New NAFTA is a huge missed opportunity. Family farm groups in all three countries insisted on new rules to rebuild rural economies and food systems. Instead, we have a deal that locks in many of the old rules that have driven farmers out of agriculture for more than two decades.” She went on to say that, “Signing this new NAFTA is just one more step in a bad process”.

Senator Sherrod Brown (D-Ohio) also said the agreement was a bad one because it “doesn’t live up” to what the President had promised to the American people, that the USMCA would do something about the continued loss of jobs out of the country. He called the blackmail threat by Trump to pull out of NAFTA prematurely and create more economic chaos “not particularly helpful”.

With time running out for Trump to push this through the current Congress, it is possible he will exercise that threat anyway. If he does, it could send stock markets into a steeper nose dive than they have already been experiencing recently and cause even more harm to international relationships with Canada and Mexico.