Trump team readies PR offensive on North America trade deal's economic effects

[April 18, 2019]  By David Lawder and David Shepardson

WASHINGTON (Reuters) - The Trump administration is readying a public relations offensive over the economic impact of its new North American trade deal to counter a crucial report expected on Thursday that economists see as likely to show minimal gains at best.

Industry sources familiar with the administration's plans told Reuters the U.S. International Trade Commission's analysis of the U.S.-Mexico-Canada Agreement would be met with a rosier forecast from the U.S. Trade Representative's office.

The three countries agreed last year to the deal to replace the 25-year old North American Free Trade Agreement after President Donald Trump's relentless criticism of NAFTA, calling it "the worst trade deal ever made" and insisting it be improved or scrapped.

The ITC report has been kept under wraps and is being keenly awaited by U.S. lawmakers to help them decide whether to support USMCA. A report showing little or no gain from the changes would be a setback for the administration and give some Democrats an excuse to deny Trump a major political victory.

The report will measure USMCA's effects on gross domestic product, income, job creation and specific sectors against a baseline of NAFTA - a trade deal that already has eliminated nearly all tariffs among the three countries.

"You wouldn't expect big effects compared to the existing NAFTA," said Laura Baughman, president of Trade Partnership Worldwide LLC, a consulting firm that analyzes the economic impacts of trade actions and policies.

Baughman estimated the overall gain in U.S. GDP in the deal's 15th year would be barely perceptible at about 0.01 percent and could be negative if the ITC fails to give enough weight to new provisions on digital trade, increased customs efficiency and services.

The ITC report will analyze areas that are more difficult to measure than tariffs, such as new rules of origin, intellectual property protections or elimination of non-scientific food safety barriers.

But people familiar with the matter said the USTR was expected to argue that the ITC analysis fails to adequately capture the full benefits of the trade deal.

The USTR is expected to emphasize how the new rules of origin for autos create incentives for companies to invest in research and development and increase production of auto parts, steel, aluminum and textiles. The trade agency also is expected to emphasize new provisions on digital trade and small parcel shipments, stronger intellectual property protections including those for drug makers, as well as increased dairy and poultry access to Canada.

The deal already faces an uphill battle among Democrats now in control of the House of Representatives, who have voiced concerns about the enforcement of labor rights provisions in Mexico and USMCA's effect on drug prices. Canada and Mexico are seeking exemption from U.S. tariffs on global metal imports imposed last year.

AUTOS RULES

A major question mark is whether tighter regional content rules for the automotive sector will be a positive or negative in the report.

USMCA requires that 75 percent of a vehicle's value be made in North America, with 40 to 45 percent produced in high-wage areas paying at least $16 an hour, requiring significant automotive production in the United States and Canada.

President Donald Trump, Canada's Prime Minister Justin Trudeau and Mexico's then-President Enrique Pena Nieto attend the USMCA signing ceremony before the G20 leaders summit in Buenos Aires, Argentina November 30, 2018. REUTERS/Kevin Lamarque/File Photo

The Trump administration had hailed the provision as a centerpiece of USMCA that would stem the flow of automotive jobs to Mexico and incentivize "billions annually in new U.S. vehicle and auto parts production." Commerce Secretary Wilbur Ross said at one point the deal would bring back "the vast majority" of the 250,000 auto parts jobs lost over the years.

But economists from the International Monetary Fund analyzed the deal using the same economic model used by the ITC and found a negligible impact on U.S. GDP over the medium term, but a slight loss of $794 million in consumption, a broader measure of economic benefit, due to reduced activity in autos and textiles.

"The results show that the tighter rules of origin in the auto sector and the labor value content requirement would not achieve their desired outcomes," the IMF researchers said in the paper, published in late March. "The new rules lead to a decline in the production of vehicles and parts in all three North-American countries, with shifts toward greater sourcing of both vehicles and parts from outside of the region."

A spokeswoman for the U.S. Trade Representative’s office declined to comment on a query about plans for an alternative analysis.

SMALL GAINS FOR TPP

In 2016, the ITC's report on the Trans-Pacific Partnership trade deal showed that by its 15th year, the reduced tariffs and increased trade among the 12 member countries would boost U.S. GDP by 0.15 percent, or $42.3 billion, compared with no deal.

Employment in the TPP analysis would be higher by about 128,000 full-time equivalent jobs. While automotive exports would increase over the long term, auto imports from Japan would rise in the near term. Trump withdrew from the TPP in 2017 in one of his first actions as president.

The U.S. Chamber of Commerce also sought to temper the expected impact of the trade commission's report on USMCA by pointing out that ITC had traditionally focused just on goods tariff reductions.

"In this case, the USMCA eliminates some remaining Canadian barriers facing U.S. dairy and poultry exports, but the bottom line is that there just aren’t many tariffs left to cut," John Murphy, the Chamber's senior vice president for international policy, said in a blog posting on Tuesday.

He said members of Congress should keep in mind the bigger picture of NAFTA's importance to the U.S. economy, with $1.4 trillion in trade among the three countries last year.

Trump has frequently threatened to withdraw from NAFTA if Congress fails to approve USMCA, a scenario that experts have said would lead to widespread economic damage as tariffs among the three countries snap back to 1994 levels, spiking costs for auto production and crippling U.S. agricultural exports.

"Looking at USMCA against a baseline of no NAFTA, it’s a big gain," said Gary Hufbauer a senior fellow at the Peterson Institute for International Economics.

(Reporting by David Lawder and David Shepardson; Additional reporting by Chris Prentice in New York; Editing by Peter Cooney)

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