Gov't Panel Told Section 232 Tariffs Undermine USMCA; Others Say USMCA Hurts US Workers

The witnesses were speaking to a panel of government officials on Dec. 3, the first of three days of hearings on what the Office of the U.S. Trade Representative should emphasize in its review of the pact. They also argued that the growing trade deficit with Mexico is a positive, as it shows a declining reliance on imports from China.

However, witnesses from a variety of left-of-center advocacy groups pointed to that trade deficit as proof that USMCA did not fix NAFTA's fatal flaw -- that it encourages companies to move manufacturing from the U.S. to Mexico to take advantage of lower wages.

Rep. Josh Riley, D-N.Y., also made that argument, saying, "NAFTA was a disaster for towns like mine." He grew up in Endicott, which grew up around the Endicott-Johnson Shoe Corporation. That company stopped tanning leather in Endicott in 1966, long before NAFTA; other factory buildings closed through the ’60s, ’70s, ’80s and mid-’90s. NAFTA went into effect in 1994; leather shoe imports climbed in the 1980s, mostly from China.

Riley said his father worked in maintenance at IBM. He said that multinational corporations, which fund big donations to politicians, "made out great with those trade deals," and said, "Back home we call that corruption."

"Don’t allow us to be sold out again," he said.

Ed Gresser, a former career employee at USTR now writing on trade policy for the left-of-center Progressive Policy Institute, argued that USMCA is "working reasonably well."

He said that U.S. production of light vehicles was at 10.3 million last year, slightly below the 10.7 million average across NAFTA years, so the promise that USMCA would increase domestic auto production was not fulfilled. He said he doesn't know how much of that is a hangover from the pandemic-era disruptions, but said that the imposition of 15% to 25% tariffs on autos and auto parts (except for parts that meet USMCA rules of origin) makes U.S. auto manufacturing more expensive, which will hurt both domestic sales and exports.

When the officials asked Gresser about his concerns over Section 232 tariff actions, he noted the tariffs now apply to cans of condensed milk, balance beams and propane tanks as metals derivatives. He said imposing 25% tariffs on upholstered furniture but not case goods, is odd, and raises prices.

Gresser said imposing a 25% tariff on cabinets and a 10% tariff on wood are making building houses more expensive. He said linking the lumber action to thermal protection for nuclear reentry vehicles and to missile systems "struck me as pretty farfetched."

"We have entered a pattern of taking steps for political reasons," he said.

Jamie Tronnes, executive director of Canada's Center for North American Prosperity and Security, argued that 68% of the trade deficit with Canada is due to the import of inputs, and that steel, aluminum and lumber costs have skyrocketed as a result of Section 232 actions. She said those tariffs should be removed on Mexico and Canada as part of the review.

"USMCA is being overstepped by sectoral tariffs," she said.

She also argued that USMCA should focus on the energy strengths of a Canadian-U.S. alliance, and should bar unilateral pipeline vetoes, as under President Joe Biden. In response to a question from the panel on that issue, she said, "The inputs to the grid have been tariffed at 50%; quite frankly, it's going to make it quite difficult for utilities to modernize the grid." She said if utility grid lines can't get built to send electricity from new nuclear power plants in Canada to the U.S., or from new sources in the U.S., "there’s going to be [electricity] shortages."

David Gantz, a scholar of trade at the Baker Institute for Public Policy, said that USMCA's complementary production chains help the region compete with Asia. "First, do no harm," he said, arguing that changes to USMCA that discourage cost savings by locating some production in Mexico will increase consumer costs and jeopardize exports.

He said tariff rate quotas for Mexico and Canada could be a solution to the Section 232 actions on steel, aluminum, copper and automotive goods, and that preferential treatment should be restored.

He said there should be a heightened focus on the transshipment of Chinese goods primarily from Mexico, but that the definition should not be based on Chinese content alone. He said that while there is a heavy presence of Chinese inputs in Mexican electronics, if a product meets USMCA rules of origin, that should mean it is not transshipped.

A number of panelists said that Mexico should institute investment screening aligned with the approach of the Committee on Foreign Investment in the United States. Several went further, saying that a "Fortress North America" needs to be constructed, at least for strategic goods, by a common external tariff on imports of those goods, either from China, or more broadly.

Silverado Policy Institute CEO Sarah Stewart, one of those making that argument, said that the new pact should write agreements for both critical minerals and foundational or legacy chips, to integrate production and shift sourcing away from China. She said the customs agencies of all three countries need to report origin, value and quantity of goods, to help expose transshipment, and all three governments need to monitor import surges and track distorting overcapacity.

Center for Strategic and International Studies scholar Diego Marroquin Bitar, who studies North American economic integration and supply chains, said trade has increased 37% among the partners since USMCA took effect.

Jason Marczak, director of the Atlantic Council's Latin America center, responded to a question about how USMCA has reduced reliance on China by noting that overall imports from China are down 8%, and that machinery, medical equipment, plastic and rubber are more often being nearshored.

Bitar said the five years since enactment have revealed some areas of fragility. He pointed to Mexican energy policies, which several other witnesses used to point to the need for continued Investor State Dispute Settlement processes in that sector. Bitar, who wasn't speaking on behalf of CSIS, also pointed to the fact that the U.S. didn't comply with the panel ruling on auto rules of origin.

He said that if USMCA is weakened or terminated, millions of U.S. jobs will be at risk.

Critics of the pact say it's the current set-up of USMCA that puts jobs at risk, as it induces job migration to Mexico.

Melinda St. Louis, Global Trade Watch director at Public Citizen, which opposed NAFTA, said the labor enforcement in USMCA, while better than NAFTA, failed to deliver promised wage growth. She said there should be a North American minimum wage in certain sectors, and the rapid response mechanism should cover all labor violations and apply to the U.S., Canada and Mexico.

She also said a vote in Congress on the revision is necessary for democratic participation.

Rethink Trade Director Lori Wallach said the review should really be a renegotiation. "We oppose extending the pact as-is for another 16 years," she said.

She said that wages in Mexico are still 40% lower than in China, and that Trade Adjustment Assistance through July 2022 certified almost 42,000 U.S. jobs were lost to competition with Mexico or Canada. She said that the trade deficit with Mexico is up 30%, and disputed Gresser's argument that the deficit is a reflection of macroeconomics, particularly the U.S. negative savings rate.

She said the rules of origin need to be tightened in key industrial sectors, that there should be wage standards for those sectors, and that the countries need to increase most-favored nation tariff rates for those products so that companies don't choose to avoid USMCA ROO and wage standards.

In response to a question from the panel, Wallach said the labor value content rule was sold as a way to raise wages and move work to the U.S., particularly to ensure that foreign brands "would have some supply chain in the U.S."

"With respect to the LVC, itself, the formula used allows for too much gaming," she said, such as allowing some professional employees to be averaged into the $16 wage. As a result, Detroit's Big Three didn't have to increase wages in Mexico for assembly line workers, she said.

That last objective "may have worked," she said, but it didn't raise wages. She said her group supports the United Autoworkers' position, which is to set industry-specific international minimum wages across North America.