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USITC Sees Moderate USMCA Economic Impact

April 22, 2019

The U.S. International Trade Commission (USITC) released its report assessing the likely impact of the United States-Mexico-Canada Agreement (USMCA) that the President entered into with Mexico and Canada on November 30, 2018.

As requested by the U.S. Trade Representative and required by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the USITC’s report, United States-Mexico-Canada Agreement: Likely Impact on the U.S. Economy and Specific Industry Sectors, provides an assessment of the likely impact of the agreement on the U.S. economy as a whole and on specific industry sectors and the interests of U.S. consumers.

In making its assessment, the Commission investigated the impact the agreement would have on the U.S. gross domestic product; exports and imports; aggregate employment and employment opportunities; and the production, employment, and competitive position of industries likely to be significantly affected by the agreement. In addition, as requested, the Commission, in making its assessment, has reviewed available economic literature regarding the agreement, including literature concerning any substantially equivalent proposed agreement. The Commission provides a description of the analytical methods used and conclusions drawn in such literature as well as a discussion of areas of consensus and divergence between the Commission’s analyses and conclusions of other economic assessments reviewed.

The Commission’s quantitative analysis of USMCA is broader than the quantitative analysis done in prior Commission reports. Some of the new analysis represents improvements to modeling approaches that were used in previous studies, improvements made possible by recent advances in economic research and greater availability of data. For example, many nontariff provisions such as the changes to automotive rules of origin, increased intellectual property rights protections, collective bargaining requirements, de minimis thresholds, and reductions to investor-state dispute settlement mechanism are quantified to a greater extent than possible in past studies. In another example, the USMCA analysis incorporates the estimated effects of commitments to maintain current regulatory conditions, such as those affecting international data transfers and cross-border trade and investment in services sectors.

Main Findings:

The Commission used a combination of detailed quantitative and qualitative industry analyses and an economy-wide computable general equilibrium model to assess the likely impact of USMCA on the U.S. economy and industry sectors. The model estimates that, if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment.

The elements of the agreement that would have the most significant effects on the U.S. economy are (1) provisions that reduce policy uncertainty about digital trade and (2) certain new rules of origin applicable to the automotive sector. Of interest to stakeholders in many sectors, particularly services industries, are USMCA’s new international data transfer provisions, including provisions that largely prohibit forced localization of computing facilities and restrictions on cross-border data flows. Industry representatives consider these provisions to be a crucial aspect of this agreement in terms of changing certain rules of trade across industry sectors, especially given the lack of similar provisions in the North American Free Trade Agreement (NAFTA).

Because NAFTA has already eliminated duties on most qualifying goods and significantly reduced nontariff measures, USMCA’s emphasis is on reducing remaining nontariff measures on trade and the U.S. economy; addressing other issues that affect trade, such as workers’ rights; harmonizing regulations from country to country; and deterring certain potential future trade and investment barriers.

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. 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.

The agreement would establish commitments to open flows of data, which would positively impact a wide range of industries that rely on international data transfers. USMCA would reduce the scope of the investor-state dispute settlement (ISDS) mechanism, a change that, based on modeling results, would reduce U.S. investment in Mexico and would lead to a small increase in U.S. domestic investment and output in the manufacturing and mining sectors. The agreement, if enforced, would strengthen labor standards and rights, including those related to collective bargaining in Mexico, which would promote higher wages and better labor conditions in that country. New intellectual property rights provisions would increase protections for U.S. firms that rely on intellectual property. These changes are estimated to increase U.S. trade in certain industries.

The Commission’s model estimates that USMCA would raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent). 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. 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.

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