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Key Findings of the ITC Report on the Revised NAFTA: Modest Projections Do Not Alter Pact’s Prospects in Congress

The April 18, 2019 release of the International Trade Commission (ITC) report on the revised North American Free Trade Agreement (NAFTA) does nothing to alter the reality that the fate of NAFTA 2.0 relies largely on whether the administration engages with congressional Democrats and then with Canada and Mexico to improve the text signed last year. That Democrats, unions and others who have opposed past pacts seek improvements – rather than the deal’s demise – reveals that a path exists to build broad support. But absent removal of new monopoly protections for pharmaceutical firms that lock in high drug prices and strengthened labor and environmental standards and enforcement, the deal is not likely to garner a majority in the U.S. House of Representatives. Indeed, all four of the trade deals Congress enacted in the past decade required changes to their texts after the pacts were signed in order to pass the House.

  • The official government projections of very small gains spotlight how Donald Trump has oversold the revised NAFTA, which he promised would “support many hundreds of thousands of American jobs,” “send cash and jobs pouring into the United States” and eliminate the large U.S. trade deficit with NAFTA countries. The modest findings reinforce congressional Democrats’ views that absent more improvements, the revised deal won’t stop NAFTA’s ongoing damage.
  • The ITC projects that after six years, the pact would add 175,800 jobs about the number created by the economy in a slow month and increase wages by 27/100 of one percent or an average of $2.58 per week. Almost 80 percent of projected job growth is for workers in the service sector without a college education, meaning many of these jobs are likely to be low-paid. Almost one million mainly U.S. manufacturing jobs have been lost to the original NAFTA according to Trade Adjustment Assistant certifications, which undercount trade-related job loss.
  • Only $1.8 billion in trade deficit reduction with NAFTA countries is projected over time, relative to a U.S. 2018 NAFTA goods deficit of $215 billion. Yet, based on past performance of ITC projections on trade pact deficits, the more likely outcome is a larger NAFTA deficit. Consider the ITC’s original assessment of NAFTA: Within 10 years, the goods trade deficit with Mexico had grown to almost 20 times the level the ITC had projected in its dimmest forecast.
  • Overall, the ITC projected minuscule gains from NAFTA 2.0: one-time gains of 35/100 of one percent in real GDP, 12/100 of one percent in employment and 27/100 of one percent in wages. In contrast to past reports, the agency somewhat obfuscated the time period of the projected GDP gain of $68.2 billion. It assumes a six-year implementation period, so if gains are realized steadily over that period, it means annual growth gains of only 6/100 of one percent for six years. That is smaller than a rounding error on the $19 trillion U.S. economy. The sum total effect of NAFTA 2.0 would be a GDP on January 1, 2025 that would be attained on March 6, 2025 without the deal.
    • Most of these economic gains are derived from a highly dubious new research methodology, which assigns an invented positive economic value to terms that reduce “policy uncertainty” by freezing in place environmental, consumer protection, financial and other safeguards. If the ITC had not done this, the report would have projected a negative outcome. All $68.2 billion of the deal’s supposed economic gains arise from simulating the impact of removing trade barriers that do not exist. In other words, the gains are generated not through the removal of trade barriers directly, but through the elimination of the possibility of new future regulatory policies, which are deemed to be potential trade barriers. Absent this fabrication, the revised NAFTA would have been projected to lower the United States’ GDP by $22.6 billion and reduce the number of jobs by 53,900. The very notion that “reducing policy uncertainty” generates economic benefits is questionable. But in this study, these imagined gains also are not balanced against foreseeable downsides, such as financial instability, lower worker productivity from injury or illness, and the like. Perversely, given the focus on “uncertainty” the ITC choose to simply not analyze the impact of one prominent new feature of the deal - its review and sunset provision - that industry attacks as creating new uncertainties to North American trade.
    • Absent methodological monkey business, how could a NAFTA revision that involves no major trade barrier elimination be projected to create almost 90 percent of the GDP gains as it predicted for the original NAFTA even though the first deal substantially cut tariffs? The study also projects almost 50 percent more economic gains than the Trans-Pacific Partnership (TPP), even though the revised NAFTA covers only two other countries with which the United States has had almost no tariffs and has been integrated with for 25 years under NAFTA, while the TPP included 11 nations and involved significant tariffs cuts with Japan, Malaysia and others.

 

ITC’s Projected Real GDP Gains (in 2017 dollars)

NAFTA

$77.9 billion

TPP

$42.7 billion

USMCA

$68.2 billion

 

  • The report then feeds these fabricated gains from the reduction of “policy uncertainty” into the same old computable general equilibrium (CGE) model that for decades has produced rosy ITC projections that have been systematically contradicted by trade pacts’ actual outcomes. The CGE model simply assumes away the very results that have often occurred under past pacts: long-term job loss, trade deficit increases and currency devaluations. By design, the CGE model assumes that the overall U.S. economy remains at full employment, that income inequality and the U.S. global trade balance does not change, and currency values are locked. These assumptions have systematically resulted in ITC trade-pact projections being entirely unrelated to actual outcomes.
    • IMF economists recently calculated negligible U.S. economic growth gains from the revised NAFTA relying on the same economic model as the ITC, but without the additional assumptions of gains from regulatory freeze. They found the United States would experience a welfare loss of $794 million, while Canada enjoys a small gain of $734 million and Mexico a gain of $597 million. The IMF study also found a zero percent change in real (inflation-adjusted) GDP for the United States, a 0.02 percent change for Canada and a -0.01 percent change for Mexico.
    • The ITC’s past trade-pact projections have been so entirely wrong – in direction, not just in scale – that findings of minuscule gains from the revised NAFTA would not have obtained as much attention had Donald Trump not set such a high bar by overselling this as a new species of trade deal that would miraculously reverse NAFTA’s decades of damage.

 

NAFTA: U.S.-Mexico Trade

1993 - Baseline

ITC Projection

Actual

$1.6 billion goods surplus

$2.3 billion goods deficit

$83.7 billion goods deficit

China-WTO: U.S.-China Trade

1998 - Baseline

ITC Projection

Actual

$57 billion goods deficit

$60 billion goods deficit

$281 billion goods deficit

U.S.-Korea FTA: Trade

2011 - Baseline

ITC Projection

Actual

$19 billion goods deficit

$16 billion goods deficit

$22 billion goods deficit

 

  • The ITC report projects that longer periods for patents and other intellectual property monopolies will deliver economic gains by reducing what the ITC describes as “trade costs,” while dismissing any economic losses (reduction in welfare) accruing from high medicine prices. The report explicitly admits that “originator [first-to-market] firms” will gain “from stronger IPR protections” while “follow-on or generic firms” will suffer “losses.” Not only do high medicine prices hit Americans directly, but extracting licensing payments from foreign consumers by imposing these rules on NAFTA partners can crowd out purchases of U.S. exports, entailing U.S. job loss.
  • Interestingly, for the first time the ITC considered the impact of investor protections and the related roll back of Investor-State Dispute Settlement (ISDS), concluding: “The Commission’s quantitative analysis also shows that the reduction in the scope of ISDS would have a small positive effect on the U.S. economy. In particular, U.S. domestic manufacturing and mining output is estimated to increase due to greater amount of capital available in the United States for investing in such industries because of reduced investment in Mexico.”
  • The ITC just assumes labor terms will be enforced, even though lack of enforceability is a core critique: “The USMCA labor provisions are expected to promote higher wages and improved labor conditions in member markets if these provisions are enforced.” (emphasis added) After noting that significant variable, which is not ensured in the current text, the report proceeds to project a 17.2 percent increase in Mexican union wages and then to feed that finding into the broader model to project U.S. employment and other gains. There is no alternative simulation based on non-enforcement despite the upside scenario relying on a course of action that is desirable, but far from certain: Mexico passes and implements labor law reform to comply with the agreement and the pact’s labor provisions remain enforced, which leads to more independent unions, which leads to successful collective bargaining, which leads to the replacement of thousands of low-wage “protection” contracts, which ultimately leads to higher wages. Second, if that happens, the projected gain is from $1.50-$3 an hour Mexican manufacturing wages to $1.76-$3.51 an hour wages, an increase that is too small to either improve Mexican workers’ lives or counter the low-wage pull factor to outsource U.S. jobs.
  • The ITC projects very small job gains in the auto sector from the deal’s tighter rules of origin and other auto-sector-specific terms, while the U.S. Trade Representative’s office projects more jobs in the auto parts supply chain based on data from car producers that remains confidential.
  • The ITC ignores the environmental chapter of the agreement, even as the administration claims it is the strongest such chapter of any trade agreement.
  • The ITC concludes the revised pact will have little benefit for the energy sector, contradicting industry claims. “Given the already very low most-favored-nation (MFN) tariffs for the parties, as well as the effects of recent reforms in Mexico’s energy sector, USMCA’s energy-related provisions are likely to have little impact on U.S. trade and production of energy-related products.”
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Modest Projections in Today’s ITC Assessment of the Revised NAFTA Do Not Alter Its Prospects in Congress

Statement of Lori Wallach, Director, Public Citizen’s Global Trade Watch

Note: The U.S. International Trade Commission (ITC) today released a study on the potential economic impact of the revised North American Free Trade Agreement (NAFTA) that projects minuscule economic gains in real GDP of $68.2 billion, or 35/100 of one percent. The highest projected gains in wages, employment and output are all less than one-half of one percent – with most figures much lower. Undergirding a large share of those tiny gains is an assumption that locking in lengthy intellectual property monopolies and freezing environmental and consumer safeguards leads to economic gains and no downsides. The report projects that over time, the agreement would add 175,800 jobs, which is less than one-fifth of what the U.S. government has certified as lost to the original NAFTA.  Public Citizen will soon release a detailed summary of findings.

 “The minuscule projected gains in this long-awaited official government assessment contradict Donald Trump’s grandiose claims that it will lead to ‘cash and jobs pouring into the U.S.’ and reinforces congressional Democrats’ views that absent more improvements, the revised deal won’t stop NAFTA’s ongoing damage.

The ITC’s past trade-pact projections have been so entirely wrong — in direction, not just in scale — that today’s findings of minuscule gains would have limited effect on the debate had Trump not set such a high bar by overselling this as a new species of trade deal that would miraculously reverse NAFTA’s decades of damage.

This report does nothing to alter the reality that the prospects for a NAFTA 2.0 vote rely largely on whether the administration engages with congressional Democrats and then with Canada and Mexico to improve the text signed last year. That congressional Democrats, unions and others who have outright opposed past pacts seek improvements rather than the deal’s demise reveals there is a path to build broad support. But absent removal of new monopoly protections for pharmaceutical firms that lock in high drug prices and strengthened labor and environmental standards and enforcement, the deal is not likely to garner a majority in the U.S. House of Representatives. Indeed, all four of the trade deals Congress enacted in the past decade required changes to their texts after the pacts were signed in order to pass the House.”

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Major USMCA Milestone Next Week: What Will International Trade Commission Report Show and Does It Matter?

It’s not just trade economists who are eager for the U.S. International Trade Commission’s (ITC) long-awaited analysis of the revised North American Free Trade Agreement (NAFTA). Publication of the statutorily required report usually signals that the congressional debate on a trade deal is nigh. But this ITC trade-pact report is not usual.

First, as political silly season looms this fall, whether there is a vote on NAFTA 2.0 anytime soon relies largely on whether the administration will engage with congressional Democrats and then with Canada and Mexico to resolve problems Democrats have identified with the text signed last year. That congressional Democrats, unions and others who have outright opposed past pacts seek improvements rather than the deal’s demise reveals there is a path to build broad support for it. But absent removal of new monopoly protections for pharmaceutical firms that lock in high drug prices and the addition of strengthened labor and environmental standards and enforcement, the deal is not likely to garner a majority in the U.S. House of Representatives. All of the trade deals Congress has enacted in the past decade required changes to their texts after the pacts were signed to get through the House.

Second, because the ITC has used a research methodology for decades that produces rosy projections that have been systematically contradicted by trade pacts’ actual outcomes, few people are willing to rely on the agency’s topline predictions. But the underlying assumptions in the study will be revealing, as they will reflect the agency’s sense of what is – and is not – different from the original NAFTA. 

We’ll post our initial analysis shortly after the ITC report is released.

Some Key Things We Will Look for in the ITC’s Assessment on the Revised NAFTA

  • Are any projected economic gains meaningful? For example, the ITC projection of a 0.23 percent gain in national income from the Trans-Pacific Partnership (TPP) over 15 years meant that the United States would be as wealthy on Jan. 1, 2032, with TPP as it would be six weeks later (Feb. 15, 2032) without it. Or, the ITC projected TPP gains to gross domestic product (GDP) of $47.2 billion over 15 years. But this large figure actually was equivalent to an additional 0.01 percentage point of annual growth. And relative to the U.S. economy’s size, it is tiny.
  • What about the trade balance? Though the magnitude of projected change likely will be small, does it affirm or contradict the administration’s talking points about United States-Mexico-Canada Agreement (USMCA) bringing about “more balanced, reciprocal trade” and/or Donald Trump’s campaign promises to bring down the NAFTA trade deficit?
  • What does the ITC think is a real change that merits inclusion in its modeling:
    • Were the new labor and environmental provisions considered “economically important” enough to model? If so, are a range of impact estimates provided based on the degree of compliance?
    • Will the ITC model the impact of the major rollback of investor-state dispute settlement (ISDS), inclusion of a new Labor Annex and the Labor Value Content wage rule, stronger rules of origin and other elements of the deal that have led opponents of past pacts to work to remove non-starter terms and improve others rather than launch a campaign to kill the revised deal?
    • Will the ITC continue to exclude from its core model chapters like those on intellectual property, even though the impact on consumers of locking in high medicine prices through longer patent monopolies should be weighed against other consumer welfare calculations?
  • With tariffs largely eliminated by the original NAFTA, how much of the economic gains from the revised NAFTA arise from cutting “non-tariff barriers”? In such models, health and environmental standards are labeled as non-tariff barriers and removal of them is falsely assigned an assumed positive value, while economic and social costs of eliminating such domestic policies are ignored.
  • Has the ITC inappropriately conflated projected effects of the removal of Section 232 steel and aluminum tariffs with the implementation of the NAFTA 2.0 agreement?

As Public Citizen and other organizations described last year in official ITC submissions for this report, the agency has historically overestimated the gains from previous free trade agreements (FTAs). Past ITC studies have systematically projected positive outcomes that were contradicted by the actual results, and the agency is unlikely to have overhauled its entire approach for this agreement.

International Monetary Fund (IMF) economists, using the same underlying model as the ITC, recently projected the USMCA would result in a larger U.S. trade deficit with NAFTA countries, a loss in overall welfare for the United States (alongside gains in overall economic welfare for Mexico and Canada) and zero U.S. real economic growth gains. The IMF study relied on the same economic model that the ITC uses, a so-called computable general equilibrium (CGE) model with the same underlying “GTAP” database. That model assumes away the negative outcomes that often have occurred under past FTAs – job loss, trade deficit increases and currency devaluations – and explicitly fails to model portions of the text that have negative impacts. The divergence between past ITC projections and actual outcomes means the factors not included in the model must be larger than the factors that are incorporated into the analysis.

Despite these questionable assumptions, the IMF projections based on the same methodology was that the United States would experience a welfare loss of $794 million, while Canada enjoys a small gain of $734 million and Mexico a gain of $597 million. The IMF study found a zero percent change in real (inflation-adjusted) GDP for the United States, a 0.02 percent change for Canada and a -0.01 percent change for Mexico.

As was detailed in Public Citizen’s ITC submission, the agency’s record in evaluating the economic impact of trade pacts has been abysmal. Gains to trade agreements have been consistently overestimated. After the original NAFTA was implemented, for example, the goods trade deficit with Mexico grew to almost 20 times the projected level within 10 years than even the dimmest forecast provided by the ITC (see graph).

Graph-for-itc

The use of the CGE model is even less reliable in the context of there being no significant tariff cuts in the USMCA. The CGE model originally was meant to focus on the impact of cutting tariffs. But NAFTA 2.0 cannot cut tariffs that already are zero.

So what could possibly be the basis for any findings of gains?

Will CGE modeling be used to find gains from the removal of so-called “non-tariff barriers,” otherwise known as food and product safety standards, service-sector regulations for financial stability and other public interest goals and more? Trying to guesstimate values for such changes introduce substantial uncertainty into the model, according to academic economists.

Will the ITC’s modeling take into consideration possible lack of compliance, given a proven record of just that with respect to past pacts’ ostensibly enforceable labor and environmental terms? The CGE model considers only an endpoint – a final outcome assuming full implementation – not whether other nations may not fully implement or enforce a pact’s terms. And, by design, the model assumes the trade balance does not change as a share of GDP and that overall employment levels remain constant – that workers who lose jobs simply obtain new jobs in other sectors where wages are presumed to increase.

Finally, if past practice holds, the ITC will not consider the effect of intellectual property rules that lock in high medicine prices. The most controversial component of the revised NAFTA’s intellectual property provisions are monopoly protections for drugs called biologics that comprise 70 percent of the skyrocketing growth in drug spending. Not only do these provisions hit American pocketbooks directly, but extracting licensing payments from foreign consumers by imposing these rules on NAFTA partners can crowd out purchases of U.S. exports, entailing U.S. job loss.

How the ITC handles these issues will be interesting to trade wonks. But the report is not likely to reveal much about either the pact’s probable effects or its prospect for congressional passage.

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Will the Administration’s Imminent Report to Congress on Trade Partners’ Currency Practices Once Again Fall Short of Its Mandate, Undermining a Key Trump Campaign Trade Reform Pledge?

Statement of Lori Wallach, Director, Public Citizen’s Global Trade Watch

Note: The Trump administration will release its latest report on trade partners’ currency practices imminently. Like the administration’s previous four iterations of this report mandated by Congress to identify countries whose distortion of currency values to gain trade advantages must be addressed, it is unlikely any country will be listed. Under the current criteria, set by the Obama administration, no country is again likely to be named. Public Citizen has recommended changes to the criteria that would use the authority granted by Congress to cover more countries and include broader data and thus actually identify countries that gain trade advantages using currency practices. The Trump Treasury Department has stuck with the old Obama administration criteria.

“One of Trump’s most emphatic campaign promises was to declare China a currency manipulator on Day One and crack down on any country misaligning its currency to cheat on trade, but Trump’s Treasury secretary has chosen to rely on criteria created by the previous administration that ensure no action is taken.

The Trump Treasury Department approach reflects a business-as-usual, wink-wink-nod-nod relationship with the multinational corporate job outsourcers who instead of making goods here can import products more cheaply back into the U.S. because of misaligned currencies. This situation that has contributed to the loss of millions of U.S. manufacturing jobs.

In the context of record-setting U.S. trade deficits, the administration must take full advantage of its opportunities to discipline countries that manage their currency values in a way that affects trade. While the NAFTA 2.0 deal sets an important precedent by being the first to include a currency provision in its main text, it provides no mechanism for actually disciplining countries that manage their currency values in a way that affects trade.

The Trump administration must take full advantage of the authority Congress has provided the Treasury to influence the foreign exchange practices of any trading partner through the semi-annual reporting process.”

Background: Large U.S. structural trade deficits consistent with misaligned currencies have grown in recent years. Data released on March 6 by the U.S. Census Bureau show record-setting U.S. goods trade deficits, increasing each year since Trump came into office. The U.S. goods trade deficit with China of $419 billion in 2018 is the highest ever recorded while the U.S. goods trade deficit with the world in 2018 reached $879 billion, the highest in the decade since before the 2008-09 financial crisis.

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