Let’s Talk Trade

Baylor has a long history of involvement in international trade negotiations

By Kevin Tankersley

The connection between Baylor University and the North American Free Trade Agreement (NAFTA) dates back more than two decades, so it makes sense that one of the architects of the original agreement weighs in on its possible replacement.

Joseph McKinney, PhD, emeritus professor of International Economics, helped organize a NAFTA conference at Baylor in 1989, and the agreement—a trade treaty involving the United States, Mexico and Canada—went into effect in 1994.

The agreement opened up trade opportunities among the three countries, as tariffs and other barriers were removed. Now, however, 26 years after the signing of NAFTA, there’s a replacement on the horizon.

The United States-Mexico-Canada Agreement (USMCA) was signed by the leaders of the three countries on Nov. 30, 2018, but is awaiting final ratification in Mexico and Canada as of press time.

The USMCA adds protection to digital information and digital trade to the agreement, McKinney said. Prior to his retirement last year, he was a senior research fellow in the McBride Center for International Business at the Hankamer School of Business.

“When NAFTA was negotiated, we didn’t have things like digital trade, so it needed to be updated for those reasons,” McKinney said.

In addition, USMCA will address “rules of origin” guidelines for automobile manufacturers; tariffs on agricultural products; pharmaceutical innovations; trade secrets; and a host of other international trade-related issues.

“Well, countries change just like people change,” Lourenco Paz, PhD, associate professor of Economics, said. “Between 1994 and nowadays, you have different products. For example, things like VHS tapes—those things are meaningless today, right? All of those things are on the internet. There’s streaming and all that. The old agreements had no provisions regarding this new digital economy. This is fundamentally important for the United States because trading services is about one third of U.S. exports.”

The United States exported about $34 billion in services to Mexico and nearly $62 billion in services to Canada in 2018, according to statistics from the Office of the United States Trade Representative.

In comparison, the U.S. imported $25 billion in services from Mexico and $35 billion in services from Canada in 2018.

Those services include “travel, transportation, computer software, industrial processes and technical services,” Victor Hinojosa, PhD, assistant professor of Political Science in the Honors Program at Baylor, said. “An increasing proportion of U.S. trade is in services.”

Hinojosa said that the USMCA is a very modest updating of NAFTA, and that it took the best of NAFTA with some of the best of the Trans-Pacific Partnership, a proposed 12-nation trade agreement that was signed—but never ratified—in February 2016. After the U.S. pulled its signature from the deal, the 11 remaining countries entered into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in December 2018.

McKinney, however, said he thinks that if the U.S. hadn’t pulled out of the Trans-Pacific Partnership negotiations and we had updated NAFTA with those provisions, we would have had a superior agreement to what we have with the USMCA.

“In the USMCA, there are various restrictions put on trade, rules of origin were made more restrictive, there were adverse effects for the automobile industry, and for a number of reasons, the USMCA is a step backward,” he said.

One of the big steps backward, McKinney said, deals with the rules of origin, the criteria needed to determine the national source of a product, according to the World Trade Organization. In the case of the USMCA, those rules apply to automobile manufacturing.

“What that means for the auto industry is essentially a certain amount of production has to be in the U.S., and the larger portion of it has to be within North America,” McKinney said. “And the rules of origin are quite complicated, and this raises the cost to firms doing business, and from the analysis that I’ve seen, it is going to raise the cost of the North American auto industry and make us less competitive internationally.”

The USMCA won’t go into effect until it’s ratified by the legislature in each country. The United States House of Representatives passed the USMCA on Dec. 19, 2019, with the United States Senate following on Jan. 16, 2020. President Donald J. Trump signed the bill into law on Jan. 29, 2020.

The Senate of Mexico approved a revised version on Dec. 12, 2019, but as of press time is awaiting their president’s ratification announcement to the Federal Register. Canada’s House of Commons passed the second reading on Feb. 6, 2020, and the bill was passed to the Standing Committee on International Trade.

So while NAFTA is still in place and the USMCA is lingering in the background, the U.S. still has trade agreements in place with much of the rest of the world, especially in Latin America, but there may be additional discussion taking place.

“There seems to be some negotiation with Latin American countries, even though that’s not clear if it’s individual [countries] or several countries at one time,” Paz said. “But there are talks about that. And it’s easier to get an agreement than it was, for example, five years ago.”

There are new presidents in several of those Latin America countries, he said.

“As democracy goes, people get replaced,” Paz said. “And those are more leaning toward the U.S. than the previous ones.”

U.S. negotiations with some Latin America countries has increased dramatically since President Trump took office in 2017, he said.

“The previous administration in the U.S. pretty much ignored Latin America,” he said. “The current administration, in two or three years, has had more meetings with Latin America leaders than the eight years of the previous administration. And from what I hear, and most of my information is from Brazil, is that despite the U.S. president’s kind of public attitude, he’s someone that’s easy to talk to. So this has facilitated a lot of the negotiations. Now, it’s politics, so it can be a different story to go from happy chit chat to getting things on paper and signed.”

But, with several Latin American presidents leaning toward the U.S., now might be the time to get the agreements signed, Paz said.

“If you don’t try to do this at a good time, it won’t work at a bad time,” he said. “So I think the U.S. should jump at this opportunity.”

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