USITC Releases Report on Likely Effects of USMCA

On April 18, 2019, the USITC released (News Release 19-032 Inv. No. TPA-105-003) U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors.

Full Report: Publication Number: 4889

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.

Textiles and Apparel

The USMCA's modifications to the NAFTA textile and apparel ROOs ease the requirements for duty-free treatment for certain products, but tighten the requirements for other products. Overall, the anticipated shifts in qualifying products are not likely to affect the aggregate volume of trade in textile and apparel. The USMCA modifies some "fiber-forward" and "yarn-forward" tariff shift rules, meaning that finished goods qualify for origination so long as the yarn and fabric are formed and finished in one of the partner countries. The tariff shift rules for goods classified under chapters 61 and 62 (knit and woven apparel) of the Harmonized Tariff Schedule of the United States (HTS) are also modified. The NAFTA requirement that visible linings be sourced from one of the parties is eliminated, but new requirements specify that sewing thread, narrow elastic fabrics, and pocket bag fabrics must be sourced from one of the parties. The agreement has new rules for certain made-up goods described in HTS chapter 63, which are made from fabric coated with plastic.

Additionally, USMCA maintains tariff preference levels for bilateral imports in all directions, with modifications to scope of coverage and quantitative limits in some cases. USMCA would also add textile-specific enforcement language comparable to that found in other U.S. free trade agreements; the language provides guidance for on-site verification visits to producers in the exporting party.