After lengthy House approval process, Senate swiftly approves USMCA

The successor to the 1994 North American Free Trade Agreement, dubbed the United States-Mexico-Canada Agreement (USMCA), has now made its way through both chambers of the U.S. Congress.
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In December, the White House and House Democrats reached a deal over revisions to the USMCA, yielding an overwhelmingly bipartisan 385-41 vote Dec. 19 that sent the deal over to the Senate.
On Thursday, the Senate voted 89-10 to approve the USMCA via the United States-Mexico-Canada Agreement Implementation Act. Sen. Pat Toomey was the only dissenting Republican vote.

According to the United States Trade Representative (USTR), Canada was the U.S.’s largest export goods market in 2018, with total goods and services trade between the two countries reaching an estimated $718.5 billion. Meanwhile, goods and services trade with Mexico for the same year totaled an estimated $671.1 billion, making it the U.S.’s second-largest export goods market.
In short, given the trade stakes and President Donald Trump’s desire to amend what he has frequently called the “worst trade deal ever” in NAFTA, the U.S. has clearly been eager to update the quarter-century old trilateral trade deal.
Trump, Canadian Prime Minister Justin Trudeau and then-Mexican President Enrique Peña Nieto signed the deal during the G20 Summit in Buenos Aires back in November 2018, more than a year after NAFTA negotiation talks began in August 2017.
Last year, the Mexican Senate approved the deal. The legislatures of all three countries must ratify the deal before it can go into effect.
As such, that leaves Canada as the final country to approve the deal.

Deal reactions

The American Iron and Steel Institute (AISI) praised the deal.

“Today’s passage of USMCA in the Senate is great news for steelmakers, our workers and our customers,” AISI President and CEO Thomas J. Gibson said. “It will help create jobs and foster investment in manufacturing, building upon the success of NAFTA. For the steel industry specifically, the USMCA improves upon the original NAFTA by strengthening the rules of origin for steel-intensive goods, incentivizing the use of North American steel in manufactured goods and bolstering our manufacturing supply chains with customers in the automotive, auto parts, pipe and tube, and machinery industries, among others. Nearly 90 percent of U.S. steel mill product exports go to Canada and Mexico, so securing those markets for our exports is critical for American steelmakers.”

With the president’s impeachment trial looming, Senate Majority Leader Mitch McConnell also hailed the deal.
‘Yesterday we began floor consideration of the most significant update to North American trade policy in nearly 30 years,” McConnell said. “And in just a couple of hours, we’re going to pass the USMCA and send it to President Trump for his signature.
“It was back in 2018 when the Trump administration finalized its talks with the governments of Mexico and Canada. This has been a major priority for the president and for many of us in both houses in Congress.”
House Ways and Means Committee Chairman Richard Neal (D-MA) also offered praise for the deal, while also making sure to highlight House Democrats’ role in the process.
“With a bipartisan majority of Senators’ support, this landmark trade bill now moves to the President’s desk,” Neal said. “This legislation was the culmination of months of House Democrats’ work to transform the new NAFTA into a deal that respects the dignity of workers, contains meaningful enforcement provisions, and prioritizes environmental protection and remediation. The changes we achieved set a new standard for U.S. trade agreements and demonstrate that our trade deals can achieve broad bipartisan support if they empower workers, protect patients’ access to affordable health care, and improve our shared environment.”

Automotive impact from provisions on RVC

The Senate’s approval comes in a busy week for U.S. trade, as President Donald Trump and Chinese Vice Premier Liu He signed a preliminary Phase One trade deal Wednesday in the White House’s East Room.
Among other provisions, the deal raises the regional value content threshold for automotive parts toward qualification for duty-free imports from NAFTA’s 62.5% to 75% in the USMCA.
Earlier this month, we broke down some of the USMCA’s implications in our Monthly Metal Buying Outlook:

A key change for the automotive industry under the new USMCA pertains to the increase in North American content required to qualify for regional tariff exemptions. Automobiles with 75% North American content qualify for the exemption, compared to 62.5% under NAFTA, the USMCA’s predecessor.
Additionally, the agreement now includes a melted and poured provision, such that raw slabs used in production need to be melted and poured in the trading region in order to qualify toward regional content requirements.
As such, this provision also includes steel produced by both blast furnace (aka virgin steel from iron ore pellets) and electric arc furnace (recycled/scrap inputs). Production of raw steel output from both methods will qualify toward the content measure.

The deal also calls for at least 40-45% of automotive parts to be made by workers making at least $16 per hour, a provision aimed at the cheaper labor force in Mexico. The USTR says the labor provision will “ensure that United States producers and workers are able to compete on an even playing field, and incentivize new vehicle and parts investments in the United States.”

Revisiting the ITC’s impact analysis

Last April, the U.S. International Trade Commission released a report analyzing the likely impact of the USMCA on the U.S. economy.
“USMCA would strengthen and add complexity to the rules of origin requirements in the automotive sector by increasing regional value content (RVC) requirements and adding other requirements,” the ITC said in its analysis. “USMCA’s requirements are estimated to increase U.S. production of automotive parts and employment in the sector, but also to lead to a small increase in the prices and small decrease in the consumption of vehicles in the United States.”
In terms of GDP impacts, the analysis concluded the USMCA would raise U.S. real GDP by $68.2 billion, or 0.35%, and would see to the creation of 176,000 jobs.
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“The model estimates that USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world,” the report continued. “U.S. exports to Canada and Mexico would increase by $19.1 billion (5.9 percent) and $14.2 billion (6.7 percent), respectively. U.S. imports from Canada and Mexico would increase by $19.1 billion (4.8 percent) and $12.4 billion (3.8 percent), respectively. The model estimates that the agreement would likely have a positive impact on all broad industry sectors within the U.S. economy. Manufacturing would experience the largest percentage gains in output, exports, wages, and employment, while in absolute terms, services would experience the largest gains in output and employment.”

CBO estimates nearly $3B increase in tariff revenues, largely from auto sector

In December, the Congressional Budget Office (CBO) released estimates of direct spending and revenue effects stemming from implementation of the USMCA.
According to the report, the deal will yield estimated revenues of $2.97 billion, largely impacting the automotive sector.
“The estimated revenue effects of enacting H.R. 5430 mainly reflect higher expected revenue from tariffs on motor vehicles and parts,” the CBO report stated. “Because of stricter rules of origin for motor vehicles and new labor value content requirements, CBO projects that certain imports of motor vehicles and parts that currently benefit from favorable treatment under the North American Free Trade Agreement would not be eligible for favorable treatment under the new agreement.
“Because of that change in eligibility, CBO projects that duty-free imports of vehicles and parts into the United States from the USMCA partner countries would decline. A portion of that decline in duty-free imports would be replaced by domestic production while some of that decline would be replaced by imports subject to less favorable treatment. As a result of those changes, total customs revenue would rise. In addition, lower trade barriers would increase duty-free imports from Canada, leading to a small reduction in tariff revenues collected on agricultural imports subject to tariffs.”
Late last year, MetalMiner’s Don Hauser weighed in on the USMCA and how companies have prepared for its passage.
“Many companies have already taken steps to prepare for this deal,” Hauser wrote.
“In other words, businesses made changes to their operations in anticipation of the ratification of the deal.”
Overall, Hauser noted the biggest impact of the deal will be the added business certainty it would provide.
“With some of the restrictions already lifted on steel and aluminum, it remains unclear how much growth has already occurred,” he continued. “U.S. dairy farmers, for instance, will gain access to certain segments of the Canadian market previously closed off due to strict regulations.
“The true impact involves creating business certainty.
“Any expansions or investments on the sidelines waiting for the final rules can now proceed as planned. However, that appears likely to have only a marginal impact on any of the countries involved.”
The deal will also see to the formation of a Committee on Agricultural Trade composed of government representatives from each country. The committee will aim to provide a forum for the three countries to “consult and endeavor to address issues or trade barriers and improve access to their respective markets, in coordination or jointly with other committees, working groups, or any other subsidiary bodies established under this Agreement,” Article 3.7 of the agreement text states.
The full text of the USMCA can be found on the United States Trade Representative website.

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