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).

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.

Comments

[monaj]

Great post, you have pointed out some fantastic points