USMCA Review Deadline with CSIS's Diego Marroquín Bitar

A

I'm Scott.

B

I'm Bill and we're the Trade Guys. You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.

A

This is Trade Guy Scott. Welcome and thanks for listening to the Trade Guys. This week. Bill and I will speak with a special guest, Diego Marroquan, who is a Latin America program lead at CSIS and an expert on usmca. Our conversation with Diego will provide an update on the negotiations and our forecast for the future. All that and more on today's episode of the Trade Guys.

B

Well, hello everybody. Trade Guy Bill here along with Scott and a special guest that I'll introduce in just a moment. But first, the nearly weekly refund update. Just for those of you that are following that, there was another conference before the court this week. We're recording this on July 2, at which CBP indicated that they have now accepted somewhat more than a hundred billion in refunds for processing and that 71 billion of that has been sent over to treasury for actual payment. This is, I think, about three times the amount that they indicated was accepted for processing the last time they made a report, which was a couple weeks ago. So things are moving along. Their phase two started on Monday and they've already gotten, I believe, more than a million filings under that. The remaining issue, as we've discussed before, is the entries for which liquidation has already been finalized, where customs is simultaneously making plans to process those refunds. And at the same time the administration is insisting that they cannot be processed without a court order, which has to be not via a class action, but through individual court orders. So we'll see how that plays out and we'll have more to say about that later on. Today, however, is USMCA Day, which we warned you about, have been warning you about for the last three months. And the key day was yesterday. And here to tell us all about it is Diego Marraked Batar, who is a fellow with the Americas Program at CSIS where he leads the work on the USMCA Strategic Initiative. Before that he was at the Woodard Wilson center and also co founded the North America project at the US Mexico foundation and the nonprofit North America 3.0. He has his own substack titled North America Compass. His research Centers obviously on U.S. mexico relations, but he has really taken over the USMCA portfolio at CSIS and has produced a variety of stuff That, I think, is those of you that follow USMCA would be well advised to get a hold of. I think his seminal paper on the options came out last August, which was a piece about all the different possibilities. He updated it at the end of March with just an updated view of what was likely to happen. And as of today, he's published a series of reactions to what happened yesterday. And so that's where we'll start out. Scott, do you want to begin?

A

Sure. And Diego, welcome to the program. We're delighted to have you here. And your timing is absolutely perfect. As Bill mentioned, yesterday was the day that the USMCA, as approved by Congress in the Trump administration, 45, focused on this date whether the agreement would be renegotiated, renewed, or abandoned. So where are we and what happened yesterday?

B

And.

A

And what do you make of this going forward?

C

Oh, thank you for having me. You know, it's always been a dream of mine to be here with the trade guys, and, you know, sometimes I hate to be right. And in this case, Bill and I predicted this was going to happen. We knew from December last year, when Ambassador Greer gave his testimony to Congress, that the US Was not looking to robber stamp usmca. So we knew from back then that the US Was not going to immediately extend the agreement. So a clean extension was never something that we thought was likely. And what we saw yesterday was just something very procedural. We are going to start this longer, protracted negotiation. Hopefully, we'll get an agreement to extend maybe this year, maybe the next year. The one thing we're sure of is that this is going to be a summer of drama, not just in the trade front, but also on the pitch. The three North American countries remain in contention for the World cup. And the USMC has the final whistle, too. July 1, 2036. Even if we didn't get to extend, even if the US Opted not to extend USMCA yesterday, the agreement is going to continue at least for 10 more years.

A

That's a reasonable, positive assessment, and I would note much more positive than a lot of the apocalyptic reporting that's going on, which has surprised me. But we're happy to have you here. As somebody who's following this very closely, I think you're absolutely right. My own view, as a longtime participant, first in the commercial side and then analyst on North America, is that if you took a secret ballot of every trader, every firm that uses the USMCA as it is today, and that secret ballot, you ask them whether they want change or no change vote would have Been heavily in favor of no change. So in some ways people got what they wanted. Trying to peel this onion a little deeper and find out what's going on and what to expect as time comes. Bill, turn it over to you.

B

I'm tempted to torture the World cup metaphor even more. Can we give Trump a red card, get him off field? That would at least deal with the drama anyway. I have to say that Diego was polite in saying about what the two of us predicted. He was more right than I was because he predicted correctly what's happened. I held out hope for a last minute deal. Of course, that was in April and I was more and more obvious that I was going to be wrong. But ever the optimist, let me ask Diego, now that there's going to be a negotiation, I think, what are the chances of finishing it up before our midterm election? So Trump can once again declare victory and hold this thing up. Is the greatest thing that ever happened. Is that likely, or do you think this is really going to go into next year?

C

Well, we have to understand that President Trump is, he's a permanent negotiator and he understands, I think, that the longer this process goes forward, the more chances he you'll get to extract more concessions from the smaller parties. Just one last World cup analogy. We know Mexico, the US And Canada national teams know how many games there are between now and the World cup final. What we don't know on the USMCA front is how many negotiation rounds we have until we are able to extend the agreement. And even worse. So the Canadians haven't really set any dates to negotiate with the US Or Mexico with Canada. The real danger is uncertainty as to what are the rules of the game going to be in the future and when are we going to be able to extend the agreement.

B

Let me pursue the uncertainty question for just a minute because I think that's the most important issue and there's a lot of discussion about it. It seems that I think Trump believes that uncertainty is good because it will push companies to invest in the United States. If they're uncertain about what the Mexican and Canadian trade relationship might be, particularly they're uncertain about what the tariffs might be. And I think the administration's theory might be if they don't know what's going to happen in Mexico and Canada, they'll invest here. I'm inclined to think that's wrong and that they're more inclined just to sit on their money and wait to see what happens. But what do you see happening out there? Do you think that the uncertainty is actually going to work to the administration's advantage?

C

I disagree. I see uncertainty as a tax on investment. If you don't know what the rules of the game are going to be, you perhaps are not going to expand your production, you perhaps are going to hire less people. If you're a foreign investor, you might try to set up production elsewhere where rules are more stable and more transparent. So this is impacting the three countries, perhaps Mexico more than the others because Mexico's GDP relies more on trade. But uncertainty, that's the silent risk, the silent danger. And it's something that really should push the negotiators toward like reaching an agreement that the sooner the better.

A

That's actually an encouraging outcome if it happens. The last time I heard of a 10 year negotiation was, was frankly, the agreement at the Free Trade Agreements of the Americas is back. The Miami conference hosted by President Clinton, I believe, 1994, and all the heads of government, heads of state, agreed on a 10 year negotiation to make the whole of America's, the whole hemisphere, a free trade zone. And I remember when it failed and I was friendly with one of the trade ministers from that time, Central America, and I asked him what happened? Why did this thing come unglued after all the political commitment that was clearly made and supported and repeated a number of times. And he said, when we chose a 10 year negotiating time frame, the countries took it as a eight year paid vacation and basically nobody really did anything seriously. And by the time the world had changed so completely by 2002, which was year eight of the ten year negotiation, that there wasn't really much of any agreement on anything. And as they started to get together, the deal fell apart. Is that the likely outcome of usmca and how do we prevent that from happening?

C

So this review mechanism is a double edged sword. On one side, it provided the US a tool to have permanent leverage over Mexico and Canada, also a tool to improve the agreement if the three countries wanted to. On the Mexican and the Canadian side, the negotiators thought, because again, we have to remember that USMCA was negotiated by the first Trump administration. The Canadians and the Mexicans thought, okay, we're negotiating this deal with the Trump administration. Now. Six years from now, Trump is not going to be at the White House, so we might have a less hostile negotiation, there's going to be less pressure on us. That didn't happen. And then going back to the midterm election piece, I think Mexico and Canada have a really good opportunity to get the agreement extended. Unlike the election, last time was all about immigration and the border. This election is about affordability. And the United States cannot keep prices low at the checkout without Mexican fruits and vegetables, without Canadian aluminum, without Canadian lumber. So I think they have a good chance. One thing that hasn't been talked about much is the leverage that Mexico and Canada have in this process, because they are the two countries that can really help the US Keep prices stable at the checkout.

B

That's an important point. I think that's been particularly true of Mexican agricultural produce, but also Canadian energy, oil and electricity. One of the comments that has been made recently was that Canada hasn't made enough use of its leverage in the energy sector and probably also in potash, and that they probably could squeeze us a bit more. You think that's right?

C

Yeah. Just to give you some perspective, 60% of the oil that the U.S. imports comes from Canada. Mexico's the biggest meat and grain importer from the us Their biggest exporting destination. Those are things that haven't really been leveraged to their favor, and that's something that could help them get this agreement extended. Canada was the only country, alongside China, that retaliated against the first wave of liberation, they tariffs. It didn't work out in the end, but it's a strong negotiating chip that they can use in this longer review process.

A

Can we talk a little bit more about why Canada has appeared to be absent in the negotiations? No formal meetings, those kinds of things. And I would note that this is at a moment when the U.S. canada relationship is strained on a number of fronts. And second, Canada itself is the only G7 country that's actually in technical recession at the moment. And this would be an opportunity to kind of improve commercial performance and the economic performance in Canada. Yet there seems to be very little engagement. What's your sense of that? What's going on?

C

So one of the main drivers of this technical recession is the uncertainty generated around the future of usmca. And now regarding the difference in approaches from the Mexican and the Canadian side, it was very difficult for the Canadians to have a serious constructive conversation with the US and at the same time, they had to deal with the sovereignty threats, the 51st state narrative. It took them a very long time to be able to separate those, to be compartmentalized. Again, the political narrative. With the Section 232 tariffs and the USMC extension talks. For many months, the Canadians said, why do we want to have a conversation with the US about extending USMCA if the point of USMCA is getting rid of tariffs and if we have to pay tariffs on top of usmca. So that took many, many months. They didn't want to have USMC extension talks unless the US got rid of Section 232. But now that they know that it is very likely that Section 232s are not going to go away, I think they have finally been able to separate those conversations and now they're going to start doing negotiation rounds. When, I'm not sure. For Mexico, it was a lot easier politically. The closer President Scheinbaum in Mexico appeared to be with President Trump, the more positive was that signal to Mexican markets. The Mexican private sector was really happy as well that President Scheimman had a good report and was in constant communication with President Trump. If you take that dynamic back to the northern border, the closer Prime Minister Carney appears to be with President Trump, the costlier it is politically. So for Canada, it was politically taboo to be closer to President Trump. For President Shaimon, it was an asset that could be leveraged. And that's why the Mexicans started negotiations earlier, because they said, okay, let's have a conversation about usmca. And at the same time we can have a conversation about section 232s and the Canadians wanted to get rid of 232s before having USMC extension talks.

B

Let's turn our attention to some of the specific issues that are on the table already are going to be on the table. I think the two big ones that I'd like you to comment on are, I guess one is sort of phrased as a security issue, which I think is the question of whether these countries will be a backdoor for Chinese imports into the United States. And the second, of course, is automobiles. So why don't we start with the security question? How do you see that playing out? Is this an area where you think the three countries ought to be able to reach agreement? And are we heading for kind of a fortress, North America, as some people have talked about, where we have a basically a high tariff wall, at least against China, if not everybody.

C

Yep. I've argued for this for a long time. China or the China challenge can really be this bridge that helps bring the US Position, the Mexican position and the Canadian position closer when it comes to USMCA extension. I think the three countries, I mean, but especially Mexico and Canada can agree that it is better if the three countries have harmonized standards to monitor foreign direct investment, especially for non market economies. They have closer alignment in customs they have also find consensus on what sorts of investment present a national security risks and what other investments do not. And I think having those conversations while talking about USMC extension is something that can be really positive. But the only thing that's keeping us from again making progress is the fact that Mexico and Canada don't know where the US stands with China. So one day they have a very aggressive, rigid stance on China, the next day President Trump talks to visits China and say that they'll try to accommodate and each major power is going to focus on their own spheres of influence. I think as long as Mexico and Canada have more certainty as to where the US lands on China, I think that would help them start developing these joint economic security measures that will start building out this fortress North America. And I think that's the way we get USMC extended. If USMC gets extended, it will be a more restricted agreement with higher rules of origin, with higher regional value content requirements, but also with economic security measures. USMC is going to be something a lot more ambitious. It's going to be an economic security platform.

A

Now you're describing something beyond circumvention rules here, and that's quite interesting. But it's not in the agreement now. So it really would be another chapter or an amendment. How would you see this happening given that right now there's a National Security Investment screen in the US Law with cfius, there's a more general screening process for foreign investment in Canada and then Mexico is sort of sector by sector, it's a little bit of a patchwork. So what would you imagine there? And is this work going on? It's an interesting idea.

C

The work is ongoing. The Mexican government has been in talks with the U.S. treasury since December in 2023, where they signed an MOU. Basically the Mexicans committed to building out their own Mexican cfius and also talking to the Canadians and learning from their Canada Investment Act. And that's the missing piece, at least when it comes to foreign direct investment screening to get the standards from the three countries on the same level. The issue is, I think for the Mexican government is the. I think that mechanism is ready to go, ready to be put to a vote and to be implemented. But we have to go back into the past. I think the Mexicans are wary. They don't want to implement that now because one, they would get rid of one of their biggest negotiating cards. And also they learned from the Canadian experience. For example, Canada had this digital services tax that you've mentioned in the podcast before they dropped the DST hoping that they would get tariff relief, and that didn't happen. I think a similar thing could happen to the Mexican negotiators if they were to implement the Mexican cfius tomorrow. They just would ask for something else the next day. I think the best way to get those economic security measures is to get those together into a larger package that then the US can accept or say no, and then get USMC extended. So it's going to take some time for them to implement those measures. But I think that's where the conversation should be heading if we want to get this agreement extended. And that's not factoring in all the other things that may contaminate and derail the negotiations. One of the things that makes this review process different, I mean, despite being the first time that a review mechanism is used in a trade agreement, is that this is not just about trade. Everything will be on the table for Mexico and Canada. For Canada is defense spending, for example. For Mexico is security cooperation. If Mexico's not delivering results in security, the US Is not going to entertain having a conversation about USMC extension. Security cooperation is a price of admission at the trade table. The same thing as defense spending is the price of admission at the trade table for the Canadians.

B

Let's turn now to what I think is the other difficult issue, which is automobiles. It appears that the Trump position so far has been to insert a new requirement of U.S. content into the rules of origin, which is not there now at 50%, and also to bump up the requirement of North American content from 75% to, I've heard 82 or more than 80, let's say, percent. There's been pushback on that, I think, from the automobile industry. And maybe you can help clarify the situation. I think the pushback has come in several directions. One basically pointing out there's a compliance problem that probably nobody can meet that standard right now, which means the real negotiating issue will be a phase in period and how long it will be. The industry will say we need 10 years and the government will say we need two. But my experience has been when the negotiation comes down to a number, you can usually reach an agreement. Eventually it won't be 2 and it won't be 10, but it'll be somewhere. But the other new element that I've been reading about that I hope you can elaborate on, is that domestic producers have been arguing that they're currently at a disadvantage for the tariff standpoint because the tariff on finished autos from the EU, Japan and Korea are fixed to 15%. As part of those trade agreements, we will see how long that lasts. But that's where they are right now. Whereas I guess thanks to the two 32s, domestic parties may actually be paying more, at least on steel and aluminum. Can you clarify what's going on here? And why are the US producers, why do they believe they're worse off in the status quo than they used to be?

C

Yes, exactly. Because in general Mexican and Canadian goods pay less tariffs than other countries because of all the USMCA carve outs for Section 232s. In the case of cars, it's a little different. They don't get exempted as long as they comply with the agreement. In the case of light vehicles, even if you comply with the agreement, you have to pay 25% tariff on the non US content. In the case of Mexico, roughly 40% of Mexican assembled carbon car comes from the US so that 40% is not going to pay the tariff, but the other 60% needs to pay the tariffs. If you run the math, that gets Mexico Approximately around a 10 to 15% effective tariff rate, which is sometimes more than what the Japanese or the Koreans or the Europeans are paying. So that's where they're coming from. And the other issue is that many of those auto parts and vehicles cross the border many times. So they would have to pay that same tariff many times. So the pain compounds. And that's why they're arguing that they're getting mistreated relative to the Japanese, to the Koreans.

B

What's going to be the Mexican reaction to the 50% US content demand?

C

Well again, if roughly 40% of a Mexican symbol vehicle comes from the US, that means that they're currently below that 50% threshold. And even if you were to introduce graduality to it, even if that decision to reach the 50% threshold is only applied, I don't know, after five or 10 years. I think the real issue here is that you're trying to raise US content in vehicles, but you're also not looking into how that impacts prices and how competitive the industry is. If you're raising the price of your own inputs, that means that other economic blocs, think China, think the eu, they will be able to out compete you because you're basically doing self inflicting damage in your own industries.

B

Well, to our great credit, that is exactly what we predicted in 2019 when we did a study on this and said that we thought the requirements that were put in then for the rules of origin would have the result of shifting cell manufacturing from Mexico to the United States whether the cost would be a less competitive industry globally. And I think that's probably what's happened. Scott, I've been monopolizing. Your turn.

A

Not at all. I mean, this is a classic example of somebody's killing this industry with kindness. I don't know if Tariffman's responsible for this, but it's a good time to listen to the industry.

C

Yeah. Just to give you an example, I think the average price of what considered an affordable vehicle in the US is $57,000. If you were to include a minimum US threshold in order to get tariff free access, I think that number would have to go up. Even if it increases manufacturing production in the US that would ultimately mean that cars of what's considered affordable cars here will be more expensive.

B

For the record, I don't think that's an affordable amount, but that's just me.

A

The median vehicle, new vehicles sells for something over $50,000 today. That's the median of current US auto sales, so.

C

And compared to a Chinese vehicle, which could be 20 to 30 thousand dollars.

A

Yeah. So in any case, let me ask about the politics we haven't talked about, which is the ones on Capitol Hill last time with usmaca. And there was a great interest. Well, part of it was there was a trade promotion authority was in place and there was a set of rules that governed the consideration of the agreement. The House of Representatives, the Senate took that very seriously and engaged. And in fact, the first conclusion of usmca, Speaker Pelosi said not good enough. And the administration at that point, particularly Nasser Lighthizer, worked very diligently with the Congress to figure out what was good enough and to get an overwhelming support for the implementing bill when it finally passed. We don't hear anything from the Congress on this particular renegotiation. Why is that and what do you expect to happen?

B

I'll say something about it because I just wrote about it.

A

Sure.

B

Those of you that are running to the CSIS website to get Diego's piece that came out today, scroll down to the bottom where you'll see my 450 words that deal directly with that. The first point is that there's been some Hill reaction yesterday and today, most of it in support of what the administration has done in both parties, although they have different arguments. But both Democrats and Republicans believe there are deficiencies in the current agreement and that it's good that we're going to have a negotiation to talk about repairing the deficiencies. The Republican list of deficiencies and the Democratic list of deficiencies are not the same. The Democrats are labor and environment. The Republicans are mostly focused on sectoral issues like autos, dairy, winter vegetables, things like that. There have been some modest dissent from some Democrats, but that this was holding it up as a mistake, that it creates more uncertainty, it's going to retard growth and all the arguments that everyone knows about. To me, the interesting question going forward is everything Scott described was undertaken under the provisions of trade Promotion Authority, which set up rules for considering this kind of agreement. And the administration at the time, to its credit, followed the rules and so did Congress, and it produced an overwhelming vote of support. That procedure has expired. It expired in 2021. So now if the agreement has to be returned to Congress for approval a second time, which I think will depend on what's in it, there are no procedural limitations. That means that it can be delayed, it could be amended, it could be filibustered. All those things that couldn't happen in 2018 are eligible this time around. And I think Scott's right. This is something that nobody has been thinking about. The business community made a serious effort at the beginning of the Biden administration to tell him ought to get this stuff renewed, TPA renewed, because he had six months before it expired in 2021. And, you know, even if you don't have any plans to use it, you will, and you'll regret it if you don't renew it. Well, they paid no attention. It expired and they probably never regretted it because they didn't have any trade agreements to propose. But now Trump, unfortunately, may suffer the consequences. Although that then raises a question, Diego, you may have a thought on what are the odds that they can negotiate an agreement that won't have to go to Congress. I mean, the administration standard has, for two administrations has been, if it doesn't require any change in US Law, we're not sending it up. Do you think they can get away with that this time, or do you think there's going to be some, ultimately some changes to US Law that will be required?

C

I think that's what they're aiming for, try to change some of the core commitments of the agreement by. But at the same time not getting Congress involved. And you could do that. I mean, you could get creative. You can do side letters or side agreements with Mexico and Canada. You could either get them to either restrict their exports or do some changes to the Mexican. The Canadian law in the Mexican case. I mean, that could be done relatively easier because the president, chairman controls both chambers in Canada. I think that would be a very different conversation. We will have to wait and see what happens after the midterm and if there's some changes in Congress, whether they want to play the role that the Constitution gives them authority to. And right now I don't think that even if one of the chambers in the House flip, the situation would be any different for this negotiation. Ultimately, not having TPA means that there's going to be more stakeholders involved. I think some members of Congress are going to try to get push for their own interests and that will make this a lot more complicated and will likely go on for longer because we know exactly who the Mexican negotiators are, we know exactly who the Canadians are. But right now I have no clue who's going to be part of this negotiation if the US doesn't renew their own trade promotion authority.

B

Well, you've been very tactful about Congress. It would be nice if they exercise their constitutional responsibilities, which I think they've been derelict in. But we'll see about that. I think that the little bit of research I've done so far suggests that he can probably change the rules of origin without congressional approval. I think the implementing bill the last time around gave him the authority to do that. The one looming issue that would require a change in U.S. law has been the demand. Several demands, but the main one coming from the Florida and Georgia tomato growers for a change in the countervailing duty and anti dumping laws that would give them a more favorable opportunity to complain about Mexican tomatoes which they claimed are being dumped. And that would require a change of law. If you're going to do that, I think the administration may try to persuade them that they can solve the problem a different way. But at the same time that's very much a regional issue. And my experience has been that the agriculture producers in the southwestern part of the country don't support that because they're concerned about Mexican retaliation against their products. And they're right to be concerned about that. But that would trigger, I think, congressional review and I'm not sure if tariff changes would trigger congressional review or not. In the wake of the Supreme Court decision about ipa, you know, there's now a question about what the President's authority is to impose tariffs. And you know, he's going to use 301 and 232. I'm not sure that he can cover everything that way within usmca. So that is going to require a little bit more research to figure out

A

the answer to that is, well, another fine mess we've gotten ourselves into here. And, and I wish, I say that flippantly, but I wish that we were taking this more seriously, given that Canada and Mexico are very large trading partners, two of the top three, and those preferential terms are used and have great value to every American trader, every American company that has customers in Canada, Mexico, and we need to treat this as if it's actually important, which it is. So, Diego, thank you for coming on the program. It's been great to hear from you. You've had a terrific insight into the process, and I know our listeners will appreciate that.

C

Thank you. And if I can say something, just one last comment. This, this is going to be a summer of drama. We expect some threats to withdraw from usmca, some tariff threats as well. Plenty of unknowns this summer. But the only thing that we're certain of is that we don't have to choose between economic security and competitiveness. North America can do both. And we have a really good tool that has delivered remarkable results. And I think the best course of action, even if it takes some time for us to get there, is to extend the agreement. We can improve it, we can make it stronger, we can make it more secure, but we don't have to get rid of it.

A

Well said.

B

I think we agree with you on that. I've been predicting lots of drama for four months, and there's not been as much as I thought. I think Trump's been distracted by Iran. But to the extent that settles down, I think you're right. And we will be back to Mexico and Canadian drama, particularly Canadian drama. And I particularly welcomed your comment about the politics of this in Mexico and Canada. And I hadn't thought about this, but you're exactly right. The closer Carney comes to the United States, the more problems he has domestically, whereas the closer Sheinbaum comes to the United States, the better off she may be, at least from the standpoint of the Mexican business community. And that was an interesting observation. So thank you. Delight to have you on. If they ever produce agreement, maybe we'll have you back and we can analyze the agreement at that point.

A

That would be terrific if you'd be so kind as to join us again. But thanks for your time today, Diego.

C

Thank you.

B

You've been listening to the Tray Guys, a CSIS podcast. For more audio content, visit csis.org thanks for tuning in.