Some people in the Trump administration think the stock
market is the whole economy. Some people on Wall Street think the stock market
is the whole country. For the rest of us, the likely ratification of the United
States-Mexico-Canada agreement (USMCA) means we should discard a wildly
overhyped deal with China in favor of the long process of expanding USMCA.

It’s true that USMCA is flawed. All trade agreements have high-sounding chapters followed by annexes stuffed with exceptions, known as non-conforming measures. Mexico is the “leader” in this case, but there are also dubious American and Canadian contributions. It would be a considerable improvement if most of these exceptions were phased out over time. 

Even without such phase-outs, though, USMCA’s terms are superior to those in the Trans-Pacific Partnership (TPP), primarily because fewer parties mean fewer non-conforming measures and effectively better implementation. Rules on digital trade alone make USMCA better than the 26-year old NAFTA (which lacked any, for the obvious reason).

USMCA is also far better than nothing at all, where NAFTA being abandoned in 2020 or 2021 is otherwise a live possibility. Critics are performing a service in pointing out USMCA’s original weaknesses, as well as flaws in the labor provisions just added by House Democrats. But right now there is no politically realistic path forward to much freer trade.

Ratifying USMCA will show Washington can reach binding
agreements even in the shadow of a Presidential election, making negotiating
with the US more attractive. A USMCA expansion to certain TPP members could be
beneficial, if non-conforming measures are severely limited. Britain and Taiwan
are also candidates, when their governments can act. It could be valuable on
non-economic grounds to solicit small countries, if they do not dilute the
terms.

A key contribution of USMCA is Article 32.10, which provides the option of locking out non-market economies. It discourages any party from signing false “free trade” agreements with countries that do not allow open competition or full property rights and therefore cannot trade freely. This is obviously and correctly aimed at China.

At the same time the Trump administration correctly pushed for a USMCA clause targeting China, it has sought a supposedly important trade deal with Beijing. The seeming inconsistency is explained by the fact that the “phase 1” agreement with China is largely meaningless, unless you’re a stock market investor worried about triggering a sell-off.

USMCA is bigger — our top two trading partners versus number three. USMCA improves intellectual property protection while the protection in phase 1 doesn’t cover the Chinese government’s theft and coercion, because Beijing denies those occur. USMCA improves agriculture market access for American farmers indefinitely while Chinese agriculture purchases in 2021 and beyond can’t be reliably guaranteed in phase 1.

And a China deal leads nowhere. Because it’s not ratified by Congress, phase 1 can be reversed at any time. Illustration: the pledged increase in market access in financial services helps money head to China, a goal unlikely to be shared by any Democrat. The expected rollback of American tariffs reduces Beijing’s incentives to go any further — there won’t be a substantial phase 2. 

The deal is primarily to reassure a stock market which has soared over the past decade. It has no long-term value to the American economy – that can only come with meaningful Chinese reform. USMCA might bring such reform a bit closer, by limiting today’s China in lucrative markets. Phase 1 just clears the path for more of the same from Beijing. Time to move on to better trade partners.

The post USMCA “trumps” China appeared first on American Enterprise Institute – AEI.