The New NAFTA: Progressive Change or Neoliberal Continuity?

Todd Tucker
Dec 18, 2019 · 9 min read

The House of Representatives is scheduled to vote Thursday on the new North American Free Trade Agreement (NAFTA) — also known as the US-Mexico-Canada Agreement or USMCA.[1] Like many of the US’ contemporary trade agreements, this deal goes far beyond traditional trade matters like tariffs and includes restrictions on how governments can regulate within their own borders on matters like consumer protection, environmental conservation, and financial market stability. Many of these provisions were included in the original NAFTA in 1993 and have not appreciably changed in the new deal, while others present novel issues. This post takes a look at the new NAFTA provisions and asks whether the USMCA represents a break from the neoliberal trade model that has dominated US politics over the last 25 years.[2]

Implications for Consumer Protection

· Food safety: In the coming years, climate change will damage food systems and introduce new types of crop contamination and disease.[3] Chapter 9 (“Sanitary and Phytosanitary Measures”) of the USMCA generally requires that countries pick food safety regulations that are least restrictive to trade flows and based on scientific and international consensus. Yet there is an asymmetry between the issues regulators must consider. On the one hand, agribusiness industries have ample experience intervening in the regulatory process to share readily quantified and quantifiable (usually negative) impacts of regulation on their business models. On the other, regulators face substantial uncertainty surrounding new food safety risks, some of which are not easily quantified.[4] This amounts to a bias against experimental and precautionary regulations. Indeed, the chapter requires countries to consider not regulating as an option.[5] In these rules, the USMCA closely tracks the provisions of other trade agreements — including NAFTA — that the US has ratified over the past 25 years.

· Product safety: Lawmakers and regulators face a variety of trade-offs when designing rules. In designing restrictions on tobacco purchases by minors, informational labels on the country and place of origin of products, or disclosures of possible harm to animal welfare in the making of a product, regulators have to consider the gain to beneficiaries of these policies versus the cost to third parties and businesses. Over the last 25 years, trade agreements have been used to tip the scales in favor of the promotion of commerce. This is captured succinctly by the titles of the chapters of trade deals that restrict product standard rulemaking: instead of “Consumer Safety Rules,” the chapters rebrand these “Technical Barriers to Trade.” The US has lost a number of cases at the World Trade Organization (WTO) over rules on teenage smoking, country-of-origin labeling of beef, and dolphin-safe tuna labels.[6] Like NAFTA before it, the USMCA’s Chapter 11 incorporates these restrictions.

Implications for Green Economic Development

· Procurement and Local Content Rules: A new generation of leaders is calling for the US to enact a Green New Deal. A common component of this is requiring the government to use its considerable purchasing power and rulemaking authority to give benefits to local, state, and national production. For instance, many states have enacted subsidies for solar power that are conditioned on using renewable energy products that were manufactured in-state. However, earlier this year, the WTO ruled against eight US state renewable energy plans on the grounds that they had the potential to restrict trade.[7] Chapter 13 of the USMCA generally forbids such favoring of local producers in the procurement process. Moreover, it requires that governments specify their procurement needs in terms of function rather than how products were made (Article 13.11). This can limit governments’ ability to leverage their power to promote change in the labor, environmental, and other conditions in private contractors. Article 2.11 of the USMCA bans local content rules more generally.

· Investor Rights: Chapter 14 of the USMCA retains substantial rights for investors to sue governments over environmental and other regulation for cash compensation. This system — often called investor-state dispute settlement, or ISDS — was included in the original NAFTA. It has been extensively criticized by scholars and observers across the political spectrum because of the worry that it encourages deregulation and offshoring and gives foreign corporations asymmetric powers vis a vis governments and their local competitors.[8] In the revised USMCA, the Trump administration succeeded in substantially scaling back the number of corporations that had access to these rights. However, many foreign investors in Mexico’s oil, gas, and energy industry will continue to have access to the ISDS mechanism, as will all North American corporations against the US, Mexico, and Canada until 2022. Moreover, most of the controversial substantive rules in the original NAFTA are maintained for states to sue one another over.

Implications for Corporate Regulation

· Financial Regulation: The USMCA goes considerably further than the original NAFTA in granting benefits to Wall Street and financial services corporations. The 1993 deal preserved substantial policy space for governments to change regulations on banks and insurance companies in response to societal needs. This type of flexibility is what allows countries to respond effectively and efficiently to financial crises. Even with this policy space, financial firms have over the years complained that regulations violate NAFTA rules.[9] In the USMCA, financial services firms are given greatly expanded entitlements, including the right to expect a stable regulatory environment.[10] While they can only directly enforce some of these rules through the transitional period of 2022, governments will be able to raise these disputes on their behalf in perpetuity.

· Intellectual Property: A major reason that US corporations pushed for the original NAFTA was to restrain Mexico’s ability to use health or developmental concerns to infringe upon patents held by US pharmaceutical or technology firms. Accordingly, it included a range of benefits for patent monopolists.[11] One consequence of this is that it set a floor under which the US itself could not go, were it to remake its health care system, or change its approach to the regulation of technology companies. Chapter 20 of the USMCA expands upon those rights still further, including for biologics companies. Through subsequent negotiations with Democrats, the number of provisions that go further than the NAFTA baseline were scaled back — though not totally eliminated.[12] On intellectual property, the USMCA basically preserves the status quo ante — which was very favorable to pharmaceutical companies.

· Technology Companies: Chapter 21 of the USMCA goes considerably further than NAFTA in adopting a tech monopoly-friendly vision of anti-trust regulation. Article 21.1 requires anti-trust and anti-monopoly rules to be geared towards increasing “economic efficiency and consumer welfare,” which in the US context has meant monopolistic abuses by tech companies are exempted from scrutiny (because they offer their services for free). This so-called “consumer welfare standard” is not something that anti-trust advocates would want to see at home, much less exported.[13] Moreover, Article 20.89 extends the US “safe harbor” system that protects internet service providers from legal liability if their platforms are used to post patent-protected content. This has had a chilling effect on innovation in the US context, and lawmakers are currently attempting to pare back that harbor in US law.[14] These matters were not addressed in the recent reforms attained by Democrats.

Implications for Labor and Environmental Protection

· Labor: Chapter 23 of USMCA generally brings NAFTA’s notoriously weak labor provisions up to the standard established by President George W. Bush. This latter standard has been extensively criticized for being virtually unusable, and requiring often reluctant governments to take the lead on prosecution. The only case ever brought under these rules dragged on for years and the US was unable to ultimately prove its considerable evidentiary burdens that Guatemala was violating workers’ rights.[15] The changes that Democrats were able to achieve in late 2019 lessen those evidentiary burdens somewhat (though how much is unclear). And the enforcement of these provisions are still left up to the discretion of governments, though the US implementing legislation for USMCA creates a number of means by which labor experts and Congress could prod action.[16] The biggest innovation of the latest changes is the creation of a Labor Rapid Response Mechanism, which will allow the US to raise facility-by-facility complaints over violations of collective bargaining rights — ultimately potentially leading to firm-level sanctions. Labor law experts are divided over how effective these new rules are likely to be.[17] Put in a broader context, these rules are not likely to do anything directly to improve the lives of US workers. Canada had originally proposed that the US eliminate anti-union state-level so-called “right-to-work” laws, but Democrats refused to even engage on the matter.[18] These labor reforms should have been much more ambitious if they were to aid in rebuilding labor’s strength.[19]

· Environment: The latest changes to the USMCA in late 2019 return environmental rules to the standard established by the George W. Bush administration. Given the looming climate crisis, environmental groups had requested strong decarbonization commitments and a linkage of USMCA to the Paris climate accords. None of this is contained in the final text, and other provisions are included that go in the opposite direction — like the previously noted rights for oil and gas companies in Mexico. For this reason, environmental groups have come out against the deal.[20]

Conclusion

While the USMCA breaks some new ground, it is more like the original NAFTA and George W. Bush-era trade deals than not. In certain key ways — such as the rules for financial services and technology companies — it is considerably more favorable to business interests than the original NAFTA. Its labor provisions are an innovation, though when set against the skyrocketing inequality and collapse in labor power of recent decades, the deal overall lacks in ambition.

In the coming years, regulation needs to be nimble and focused on structural reform if policymakers are to effectively address inequality and the climate crisis. This will require substantial changes to the way government does its work, including risk assessment, cost-benefit analysis, explicitly phasing out industries that present obstacles to these reforms, and building up constituencies like labor that can help further these goals. Passing a USMCA that reinforces ideas about regulation from 1993 does not get us closer to these big structural changes.

[1] Full text available at: https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between. To search these PDFs within a single file, see https://github.com/abhworthington/USMCAStuff/blob/master/USMCA%20Dec%202019.pdf

[2] For a general introduction to that model, see Nell Abernathy and Todd N. Tucker, “Toward Sustainable, Equitable Trade Policy — Not False Solutions” (New York: Roosevelt Institute, September 9, 2019), https://rooseveltinstitute.org/toward-sustainable-equitable-trade-policy-not-false-solutions/.

[3] https://www.who.int/foodsafety/_Climate_Change.pdf

[4] Frank Ackerman and Lisa Heinzerling, Priceless: On Knowing the Price of Everything and the Value of Nothing (New Press, 2005).

[5] Article 9.6.9: “Each Party shall consider, as a risk management option, taking no measure if that would achieve the Party’s appropriate level of protection.”

[6] Todd N. Tucker, “The WTO Ruling on the United States’ Flavoured Cigarettes Ban,” in The Global Tobacco Epidemic and the Law, ed. Tania S. Voon and Andrew D. Mitchell (London: Edward Elgar Publishing, 2014), 87–104. Trade adjudicators greenlit the tuna rules only after ruling against the US multiple times over several decades and the US made multiple accommodations to Mexican fishing fleets that use risky fishing methods, including allowing them to sell in the US market. See Todd N. Tucker, “Dolphins!!!,” Under Two Ceilings (blog), November 21, 2015, https://toddntucker.com/2015/11/20/dolphins/. David Lawder, “U.S. Expands ‘dolphin Safe’ Tuna Rules to End Trade Dispute,” Reuters, March 22, 2016, http://www.reuters.com/article/us-usa-mexico-tuna-idUSKCN0WO32T.

[7] Todd N. Tucker, “There’s a Big New Headache for the Green New Deal,” Washington Post, June 28, 2019, https://www.washingtonpost.com/politics/2019/06/28/theres-big-new-headache-green-new-deal/.

[8] Todd N. Tucker, Judge Knot: Politics and Development in International Investment Law (London: Anthem Press, 2018).

[9] Grant Robertson and Tim Kiladze, “Canadian Banks Warn Proposed Volcker Rule Could Violate NAFTA,” Globe and Mail, accessed December 18, 2019, https://www.theglobeandmail.com/report-on-business/international-business/us-business/canadian-banks-warn-proposed-volcker-rule-could-violate-nafta/article1359765/.

[10] This can be found in Article 17.2.2, which incorporates the so-called “minimum standard of treatment” of Article 14.6. For an extended discussion of how this standard has been interpreted by ISDS panels, see Jonathan Bonnitcha, Substantive Protection under Investment Treaties: A Legal and Economic Analysis (Cambridge: Cambridge University Press, 2014).

[11] Lori M. Berg, “The North American Free Trade Agreement & (and) Protection of Intellectual Property: A Converging View Comment,” Journal of Transnational Law & Policy 5, no. 1 (1996 1995): 99–122.

[12] Burcu Kilic, “NAFTA 2.0 Chapter 20 Pharmaceutical-Related Patent Provisions” (Washington, DC: Public Citizen, January 21, 2019), https://www.citizen.org/wp-content/uploads/nafta-2.0-pharmaceutical-related-patent-provisions.pdf.

[13] Todd N. Tucker, Ganesh Sitaraman, and Marshall Steinbaum, “Trump’s New NAFTA Supports Tech Monopolies like Facebook and Google,” Quartz, October 16, 2018, https://qz.com/1424817/trumps-new-nafta-supports-tech-monopolies-like-facebook-and-google/.

[14] Inside US Trade, “House Judiciary Leaders Chastise USTR for IP ‘safe Harbor’ Language in USMCA,” Inside US Trade, September 23, 2019, https://insidetrade.com/trade/house-judiciary-leaders-chastise-ustr-ip-safe-harbor-language-usmca.

[15] Jeffrey S. Vogt, “The Evolution of Labor Rights and Trade — A Transatlantic Comparison and Lessons for the Transatlantic Trade and Investment Partnership,” Journal of International Economic Law 18, no. 4 (December 1, 2015): 827–60, https://doi.org/10.1093/jiel/jgv046.

[16] https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/USMCA%20Final.pdf

[17] Isabelle Isco, “Unpacking USMCA Labor Tweaks: Some Praise, Some Questions about a New Tool’s Effectiveness,” Inside US Trade, December 16, 2019, https://insidetrade.com/daily-news/unpacking-usmca-labor-tweaks-some-praise-some-questions-about-new-tool%E2%80%99s-effectiveness.

[18] Adam Behsudi, “New NAFTA Ideas Still Marinating,” Politico, January 26, 2018, https://www.politico.com/newsletters/morning-trade/2018/01/26/new-nafta-ideas-still-marinating-084480.

[19] See Sarah Jones, “A Paris Agreement for the Workers of the World,” The New Republic, September 20, 2018, https://newrepublic.com/article/151316/paris-agreement-workers-world. Kate Andrias and Brishen Rogers, “Rebuilding Workers’ Voice in Today’s Economy” (New York: Roosevelt Institute, August 2018), http://rooseveltinstitute.org/wp-content/uploads/2018/07/Rebuilding-Worker-Voices-final-2.pdf.

[20] Rachel Frazin, “Green Groups Urge Lawmakers to Oppose USMCA,” TheHill, December 13, 2019, https://thehill.com/policy/energy-environment/474504-green-groups-urge-lawmakers-to-oppose-usmca.

Todd Tucker

Written by

I write about democracy, political economy, and trade. Fellow at the Roosevelt Institute and Roosevelt Forward.

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