In the USMCA Ratification Battle, A Big Tariff Fight Is Brewing

For those of us who support the North American Free Trade Agreement (NAFTA), the renegotiation process had us at the edge of our seats each day.  Would the three parties be able to reach agreement? If not, would the Trump administration try to withdraw from NAFTA? And if so, would Congress act to stop the withdrawal? When the newly minted U.S.-Mexico-Canada Agreement (USMCA) was signed last November, there was a brief reprieve from the stressful, high-stakes negotiations.

That break is now over. The U.S. International Trade Commission (USITC) released its independent assessment of the economic impact of the USMCA, a procedural step that clears the way for Congress to take up debate on ratification of the deal. That debate looks like it will be acrimonious, as leaders of both parties have been pushing the Trump administration with specific demands in exchange for supporting USMCA.

Democrats have already aired a number of concerns over the new agreement, particularly with regard to labor enforcement, but their specific demands are a bit vague, and vary a bit depending on which Democrat you talk to.

But now the Republicans are weighing in, and the biggest battle over the ratification of USMCA may come from the president’s own party. And in terms of trade liberalization, it is a particularly important one, because it involves removing tariffs (the USMCA itself does not have much impact on tariffs, as NAFTA has removed virtually all of them on trade between the three parties). Writing in the Wall Street Journal, Senator Chuck Grassley (R-IA) called on President Trump to lift the Section 232 steel and aluminum tariffs on Canada and Mexico, declaring, “If these tariffs aren’t lifted, USMCA is dead. There is no appetite in Congress to debate USMCA with these tariffs in place.” In essence, Grassley is making his support for USMCA conditional on the removal of these tariffs. Grassley’s threat should be taken seriously, not least because he serves as Chairman of the Senate Finance Committee, which gives him the power to indefinitely delay putting USMCA up for a vote in the Senate.

Beyond the politics, his proposal just makes a lot of sense. A report from the Peterson Institute describes the impact of steel tariffs in this way:

Calculations show that Trump’s tariffs raise the price of steel products by nearly 9 percent. Higher steel prices will raise the pre-tax earnings of steel firms by $2.4 billion in 2018. But they will also push up costs for steel users by $5.6 billion. Yes, these actions create 8,700 jobs in the US steel industry. Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created.

Essentially, while a few steel producers have benefitted from the tariffs, the tab is being picked up by everybody else who has to buy steel. A part of that cost is ultimately paid by the consumer. As a result, the overall impact of the tariffs on the U.S. economy is negative.

Furthermore, it makes little sense that these tariffs are being maintained on our closest trading partners, especially after they negotiated in good faith to address many U.S. concerns with NAFTA. During the NAFTA negotiations, the issue of steel and aluminum tariffs lingered like a dark cloud overhead. Both the Canadian and Mexican delegations were under the impression that the 232 tariffs would be lifted once the agreement was signed. That, however, did not end up being the case. These tariffs are still in place, and as a result, Canada and Mexico have placed retaliatory tariffs on the United States. These retaliatory tariffs have resulted in a decrease in U.S. exports to Canada by 25% and to Mexico by 10% since they have been in effect. Lifting the 232 tariffs on Canada and Mexico will minimize any further harm on both sides of our borders.

One important point to keep in mind, however, is that tariffs could be replaced by quotas, as was the case for the Section 232 tariffs on South Korea and a couple of other countries. Quotas can actually be worse than tariffs in terms of their impact. Thus, Senator Grassley and his colleagues should demand that the removal of the Section 232 import restrictions be complete and total: No tariffs, no quotas, no nothin’.

The ball is now in President Trump’s court. In the past, he has called himself a “Tariff Man,” but the negative impact of the tariffs imposed so far should illuminate the benefits of open markets. By firing this shot in the USMCA ratification battle, Grassley has made the choice before Trump abundantly clear: support the passage of the deal by delivering on his promise of being a great dealmaker, or stay the Tariff Man. The path he chooses will be an important signal for ongoing and future trade negotiations the administration undertakes. Most importantly, it will provide clarity as to whether the administration simply sees tariffs as a tool to negotiate better deals, or whether tariffs are an end in themselves. We await the response.