What Happens if the USMCA Doesn’t Happen?

Executive Summary

The U.S. Congress has not yet ratified the United States-Mexico-Canada Agreement (USMCA). If Congress does not ultimately ratify the deal, the United States could potentially withdraw from the North American Free Trade Agreement (NAFTA). A revocation of duty-free trade between the United States and its North American neighbors likely would not have meaningful macroeconomic effects for the U.S. economy, at least not in the short run, but it could lead to significant adjustment costs for individual industries, especially for the automotive industry.

Does No USMCA Lead to NAFTA Withdrawal?

Due to the surge of Central American migrants that have streamed into the United States to seek asylum, President Trump recently threatened to close the U.S.-Mexico border, or at least parts of it. Not only would a closure of the southern border impede the flow of people, but it would also have a detrimental effect on the flows of goods that are traded between the United States and Mexico. We addressed the potential economic fallout from a border closure in a recent report.1 However, the president subsequently softened his stance, so a closure of the U.S.-Mexico border does not seem to be an imminent possibility at present. But there is still an outstanding trade issue between the United States and Mexico that has not received much attention recently. Specifically, the USMCA, which was finalized and signed by the leaders of the three North American economies last autumn, has not yet been ratified.

The USMCA made some changes to NAFTA, which has governed the trade in goods and services among the three North American economies since 1994. One of the more notable alterations to NAFTA was the domestic content stipulations of automobile production. Under NAFTA, 62.5% of an automobile had to originate in one of the three NAFTA countries to qualify for duty-free trade. The USMCA raises this proportion to 75%, and at least 40% of a car must be produced by workers who make at least $16/hour. In addition, the USMCA would exempt Canada and Mexico, at least for the foreseeable future, from any tariffs that the United States may impose on auto imports later this year. Some of the dispute settlement procedures among the three signatories have been altered, the United States won expanded access to Canada’s dairy market and the countries agreed to review the overall USMCA deal after six years. However, the United States Congress has not yet ratified the USMCA, and passage remains uncertain. What happens if Congress does not ratify the deal?

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