It is easy to believe the United States’ future will include less international trade. U.S. President Donald Trump insists other countries import more from the United States or face high tariffs, and his top Democratic critics basically just quibble with the details. But a better path is already being forged, thanks to last month’s United States-Mexico-Canada Agreement, or USMCA. With USMCA, the United States can quickly move forward on trade with up to half-a-dozen countries, a process which has already started.
The deal was a political winner, passing with enormous bipartisan support. Because it governs trade with our two biggest partners, it is comprehensive enough to be the template for negotiations with everyone else. While far from perfect, the agreement’s problems stem primarily from the U.S.-Mexico relationship. Most of its imperfections can be fixed or avoided in negotiations with other countries. Further, Trade Promotion Authority is in effect through at least June 2021. This mandates an up-or-down Congressional vote on trade deals, which makes passing them much easier.
During this year, it is possible to finish free trade agreements with the United Kingdom and Kenya and to upgrade existing deals with Israel and possibly Jordan. If Switzerland and Taiwan are willing to use the USMCA as a basis, as they have suggested, those talks could also rapidly progress.
USMCA Setting the Stage
Trade agreements make sense when they allow countries do more of what they do best, exploiting their comparative advantage. The United States leads the global economy in agriculture, innovation and most services. The USMCA scorecard on this is decent, though not ideal. Because all three participants are competitive farm exporters, they were willing to accept more open trade than most farm importers. USMCA agriculture terms are an ambitious target for others, requiring for example harmonization of health and safety guidelines among the partners.
For innovation, a key driver is the protection of intellectual property. There is a legitimate debate over how much to protect intellectual property here, but protection around the global is clearly too weak. IP-intensive sectors employ tens of millions of Americans, pay better salaries than other sectors and generate hundreds of billions of dollars in annual exports. The USMCA is solid on intellectual property, for instance in extending the core principle of national treatment to copyrights. It breaks new ground in protecting trade secrets, for example by including penalties even against government officials for abetting loss of trade secrets.
The services outcome is mediocre. Services comprise the bulk of American gross domestic product, and the United States runs the world’s largest services trade surplus, nearly $250 billion in 2019. Trade deals cannot help most Americans without liberalizing services. While the principles laid out in the USMCA are fine, Mexico’s non-conforming measures with those principles are extensive, particularly in transportation and finance, leaving little in new gains for the United States.
Related to all three areas of comparative advantage is perhaps the best element of USMCA: guarantees for open digital trade. The growth of e-commerce, which passed half a trillion dollars in global trade in 2018, gives world governments incentives to tax and regulate, which would blunt American competitiveness in any product or service provided at least in part electronically. Chapter 19 of the USMCA sharply limits this kind of government interference.
There is a set of issues best described as trade irritants. The most important in the USMCA itself mixes automobiles and labor. The Trump administration hiked the North American content requirement for vehicles to qualify for low trade barriers, creating more of an auto bloc. House Democrats added a wage floor for auto workers. Both were aimed chiefly at Mexico.
Important to both USMCA and future agreements is a sunset clause, which schedules reviews of the terms and opens the possibility of revision or of withdrawal with notice. While this has drawn criticism, trade agreements, like all laws, benefit from re-examination and updating. If public opinion shifts, it is not helpful to insist an unpopular trade agreement be maintained indefinitely.
Another, partial review can be triggered if a USMCA party starts trade talks with a non-market economy such as China. USMCA is weak on state-owned enterprises, missing the fact that such firms never fail due to competition and thus unavoidably block foreign goods and services. The clause on non-market partners can lock out countries which abuse state ownership.
A final trade irritant does not matter in USMCA but can elsewhere: exchange rate policy. Canada and Mexico are rarely accused of currency manipulation, and prohibitions of manipulation remain vague in the treaty. But currency manipulation can cause trade deficits, and President Trump, Senator Bernie Sanders, and others believe trade deficits cost jobs and cannot be allowed to rise further.
Who’s Next?
One free trade agreement passed with overwhelming support plainly makes the next one easier, but a more subtle advantage of USMCA is that most partners have less baggage than Mexico. They are either rich economies with higher wages, or small economies that matter less to the United States. Examining key USMCA outcomes and America’s most likely partners makes clear that at least three free trade agreements can be wrapped this year, with progress possible on several more.
Earlier this month, President Trump disclosed talks with Kenya, which could lead to the United States’ first free trade agreement with a sub-Saharan African country. It’s a low-risk deal with potentially large benefits, if only in the longer term. Annual imports from Kenya have yet to reach $700 million - no agreement with Kenya will affect the American economy. This minimizes concerns over currency manipulation and the like, allowing the United States to immediately offer Kenya unhindered market access. In addition, the size of Kenya’s economy simplifies negotiations.
Benefits would come from establishing precedents for economies at Kenya’s development stage to slowly improve protection of intellectual property; open digital trade; and expand agriculture and services access in phases. The two sides should move quickly on one issue among these where Kenya is most comfortable. The bigger goal, of course, is other African countries finding the agreement attractive, in which case mutual U.S.-Africa gains could soar over the course of the 2020s. A review clause would be entirely appropriate, given that both sides hope for rapid Kenyan development.
The most discussed potential FTA partner is the United Kingdom. While London must consider its evolving relationship with the European Union, an Anglo-American deal will strengthen the British negotiating position with Europe and build business confidence. Annual economic gains for the United States are again limited, in this case because bilateral trade is already open. But the United Kingdom will not only effectively expand the USMCA, it will do so on more liberalizing terms.
In particular, because the United Kingdom needs fewer exceptions, services will be improved over USMCA and far better than the Trans-Pacific Partnership, which was overrun with non-conforming measures. The importance of services alone makes an Anglo-American FTA worthwhile. The UK will be a valuable signatory to the digital trade framework, and there is no issue with labor practices. All of this could also be said of fellow EU outsider Switzerland, but that country has a deal in place with China. The biggest barrier to a Swiss goal of an FTA with the United States is ensuring Chinese-owned firms like Syngenta cannot engage in non-market behavior, a difficult topic that needs addressing.
That’s two entirely feasible free trade agreements and a long-shot third. What has been overlooked is more upgrades of older deals. The oldest American free trade agreement is with Israel, and it is badly out of date. It was signed 35 years ago, and Israel now is a very different economy, a technology center with roughly seven times the level of personal income it had in 1985. A review clause then would have led to quicker and broader liberalization now. A modernized U.S.-Israel free trade agreement could be done in a few months and will be, among other things, a useful step for global IP protection.
As with Kenya, however, the bigger gains would come from potential regional expansion. The existing American free trade agreement with Jordan is 19 years old. If politics do not intrude, it is easy to improve. (There is also a deal with Oman.) Other small Gulf states, such as Kuwait, could follow as long as state control of the energy sector is accepted at the outset. As a group, these countries will be large-scale agriculture importers indefinitely - natural partners for the United States.
A final opportunity lies on Taiwan. It has a deep economic relationship with China that will demand complex negotiations. It risks charges of currency manipulation and auto-parts import barriers. But Taiwanese labor practices are sound, and the auto issue with Taiwan is easier than Mexico. Despite a tiny population and complaints about access, Taiwan is already a top 10 buyer for American farmers without an FTA. As much as any partner, the USMCA template opens the door for Taiwan to meet U.S. trade standards.
Beyond 2020
Deals with Kenya, Britain, and Israel can be finished and pass Congress this year. With Trump or most Democrats, Taiwan and others have time to pursue an American FTA. With a President Sanders, time may run out. However, Congress will not permit renegotiation of USMCA, and it seems unlikely that even Sanders would oppose free trade agreements with small partners in Africa and the Middle East featuring labor and environment rules approved overwhelmingly by Democrats. The trade door is largely open.
The views expressed are the author's own.
