Erin Schaff/The New York Times

August 12, 2020

Cornell Professors Discuss the Future of Labor and Implications of USMCA

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The integrity of the new U.S.-Mexico-Canada Agreement came into question Aug. 7 when  Canada pledged to retaliate against Trump after he imposed a 10 percent tariff on Canadian aluminum products.

The events reflected ongoing trade tensions between the three countries despite the decades-long trade agreements.

In July, President Donald Trump and President Andrés Manuel López Obrador commemorated the new U.S.-Mexico-Canada Agreement — a trade pact first signed in November 2018. As of July 1, the agreement went into effect in all member states.

The USMCA replaced the North American Free Trade Agreement, which went into effect almost 25 years ago.

Reflecting on the importance of free trade between these three countries, Prof. David Lee, applied economics and management, and former School of Industrial and Labor Relations Prof. Lance Compa broke down what differentiates the USMCA from NAFTA.

Lee said the agreement was merely an update — not a complete replacement of NAFTA.

“A great majority of the provisions in the USMCA are quite similar or identical to those in NAFTA … and I would call it a rebranding of NAFTA,” Lee said.

USMCA’s labor provisions distinguish it from its predecessor, Compa said. He also noted that the USMCA is almost identical to NAFTA in commercial aspects, but makes major improvements in the labor arena.

NAFTA had long been criticized for not sufficiently addressing low wages and worker advocacy.

“Ever since NAFTA was created and implemented almost a quarter century ago in 1994, there was a huge concern in this country, particularly among labor unions, that a vast number of jobs would be lost to the south — to Mexico — because of lower wages,” Lee said.

The labor provisions of the USMCA are the most notable and could be the most consequential because of the stronger enforcement of labor in comparison to NAFTA, according to Lee. He pointed out that “these labor market provisions could help level the playing field across the three countries.”

The first area of the labor provisions involved strengthening protections for workers, allowing them to form unions and bargain for higher wages. The new labor provisions also created the Rapid Response Labor Mechanism — Compa is one of the organization’s panelists.

This measure allows any member of the public to file complaints against companies for violations of workers’ rights — a change from the NAFTA labor agreement, which only authorized complaints against governments. Companies that have violated workers’ organizing and collective bargaining rights could lose the tariff benefits of the trade agreement.

Although a significant change for the future of resolving labor disputes, it’s unclear how strongly the provisions will be enforced, Compa said.

Lee noted there will be trade-offs related to these new provisions, as they will increase the cost of production in Mexico. This makes hiring labor more expensive for factories in Mexico, and the higher costs will be passed on to consumers in the form of higher prices.

Additionally, new labor provisions in the USMCA agreement will require that by 2023, 40 to 45 percent of a car’s parts should be produced by workers making $16 an hour — more than five times greater than the current average wage of autoworkers in Mexico, who make $3.14 an hour.

“Realistically, Mexican wages are not going to rise to American or Canadian levels … but I think the USMCA starts the movement [of Mexican wages] in the right direction,” Compa said.

Lee said that while some companies could raise wages to $16 an hour to avoid paying a 2.5 percent tariff on automobiles imported into the U.S. from Mexico, some companies might decide to forgo the trade benefit of no tariffs and not pay higher wages.

For the U.S. auto industry, the overall effect of these provisions is quite small. Lee pointed to the International Trade Commission’s estimate that 176,000 jobs would be created in the U.S. over six years — amounting to a 0.1 percent increase.

In agriculture, the new provisions facilitated a moderate increase in market access for U.S. exports of dairy, poultry and eggs.

Compared to NAFTA, USMCA includes provisions that offer greater trade discipline, extended intellectual property protection and increased openings in the agricultural market, according to Lee.

Compa predicted that the new agricultural provisions will have some positive effect, but not a dramatic shift that would create tens of thousands of new jobs in the U.S. agriculture sector.

The USMCA, a modest improvement from NAFTA, draws criticism on multiple issues.

“One area that was a notable failure in the USMCA negotiations were the environment and climate provisions,” Lee said.

Many Democratic leaders like House Speaker Nancy Pelosi believed that it was important to incorporate strong environmental provisions into the USMCA agreement — such as a U.S. commitment to remain in the Paris Climate Accord, binding climate standards for carbon emissions and renewable energy collaborations.

However, the agreement falls short of fundamental changes that many environmental groups wanted to see, according to Lee.

“USMCA failed to address climate change, one of the greatest challenges of the 21st century — if not the greatest — and failed to include strong commitments and disciplines on emissions,” Lee said.

Another area of concern is the enforcement of the new implemented labor provisions in the USMCA agreement. Compa said that “it was essential these new labor provisions are enforced by the three governments so that working conditions and labor standards in all three countries will improve and not go backward.”

“Mexico simply hasn’t had the enforcement capacity in many cases — nor the will — to actually enforce the existing provisions of NAFTA,” Lee said. He added that it will be impossible to determine the effectiveness of the labor provisions until the enforcement actually happens since the free trade agreement officially went into effect a little over a month ago.

Lee pointed out that non-partisan estimates conducted by the International Trade Commission showed that the USMCA provided room for the U.S., Mexico and Canada to enjoy moderately increased economic benefits in the form of investment and trade.