COMMENTARY | Beware of biased methodology and bogus assumptions about the U.S.-Mexico-Canada Agreement
Now that President Donald Trump has backed off his threat to impose tariffs on all imports from Mexico, serious talks have begun in Washington, D.C., on the U.S.-Mexico-Canada agreement (USMCA) – Trump’s proposed revision of NAFTA.
These talks have taken on added importance given Trump’s ongoing economic war with China. With their China-based supply chains under threat, U.S. multinationals have become more reliant on their Mexican operations. Already, 67% of imported manufactured goods from Mexico are between factories owned by the same firm.
With U.S. business leaders determined to secure passage of the USMCA, it is only a matter of time before the administration and most mainstream media begin an information war designed to win majority support for the agreement’s approval. Be on your guard: The USMCA, like the original NAFTA, is about promoting corporate globalization, not defending worker rights.
The Information War: Putting projected ‘gains’ in perspective
Perhaps the opening salvo of the information war was the recently released report of the U.S. International Trade Commission on the likely economic consequences of the USMCA. The commission concluded that “if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment.” However, a careful reading of the report reveals that these gains are illusionary.
The commission used a computable general equilibrium model to simulate how the terms of the agreement would change U.S. markets and compared the “equilibrium” outcome at the end of an assumed six-year adjustment period with baseline results that assumed no significant change in U.S. economic policies or global agreements over the same period. On the basis of such modeling, the commission concluded that the U.S. economy would be $68.2 billion bigger than if the agreement were not approved. That is a one-time gain of 35/100 of 1% in real GDP. Current U.S. GDP is over $21 trillion; $68 billion is a rounding error in an economy of that size.
As for the growth in employment, the one-time projected gain of 176,000 jobs relative to the baseline forecast translates into an increase in employment after six years of 12/100 of 1%. That employment gain is roughly equal to the number of new jobs added in a month of moderate economic growth. The commission’s model produced similar minuscule gains for other variables, including U.S. wages.
In short, if we take these predictions seriously, the obvious conclusion is that the commission is wildly overstating the agreement’s likely benefits. However, given the flaws in the commission’s modeling, there is every reason to be suspicious of its findings.
Dodgy methodology
The International Trade Commission used a dodgy methodology, one biased toward globalization, to produce the minimal gains cited above. The commission organized its work as follows: It first sought to model the economic consequences of eight groups of USMCA provisions, those dealing with “agriculture, automobiles, intellectual property rights (IPRs), e-commerce, labor, international data transfer, cross-border services, and investment.” It then took the provision-specific results from each group and used them as inputs into its economy-wide computable general equilibrium model.
Since not all the provisions changed current policies, the commission divided the eight groups into two categories. The first included the “set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect.” This included provisions affecting agriculture, automobiles, IPRs, e-commerce, labor and investment decisions related to the investor-state dispute settlement mechanism.
The second category included provisions that “would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards … will not become more restrictive.” Included in this category are provisions that would affect international data transfer, cross-border services trade and investment decisions related to market access and nonconforming measures.
Significantly, the projected overall gains reported by the commission are entirely due, as a Public Citizen commentary points out, to the use of “a highly dubious new research methodology, which assigns an invented positive economic value to terms that reduce ‘policy uncertainty’ by freezing in place environmental, consumer protection, financial and other safeguards.” If the commission had not estimated gains for removing trade barriers that do not exist, it would have been forced to report that adoption of the USMCA would actually lower U.S. GDP by $22.6 billion and reduce the number of jobs by 53,900.
But there is an even more serious problem with the commission’s work. As noted above, the final economy-wide estimates were the end product of the commission’s computable general equilibrium model, which simulated the ways the changes generated by the agreement would interact, leading to a new equilibrium outcome for the economy. As one might imagine, this kind of modeling is quite complex and to ensure a unique result requires some very significant assumptions. Among them are:
• The assumption that product markets are “perfectly competitive (implying zero economic profit for the firm).”
• The assumption that there is “full capacity utilization of capital.”
• The assumption that there is no unemployment.
• The assumption that “global trade balances remain constant.”
So, while we would want the commission to investigate whether the USMCA might worsen the U.S. trade balance, or cause more unemployment or deindustrialization, or promote monopolization, the commission’s model, by assumption, asserts that these are non-problems. It is no wonder that mainstream economic studies always produce results supporting ratification of trade agreements.
The real winners
One might ask, what is really going on here? Well, the agreement enjoys strong corporate support precisely because the real action is to be found in the multiple chapters that include provisions responsive to the interests of leading U.S. multinational corporations.
For example, the agreement includes provisions that lower food safety standards and require that they be applied “only to the extent necessary to achieve the appropriate level of protection” and “not (be) more trade restrictive than required.”
The agreement also includes a number of market access provisions that “are aimed at removing quotas and other barriers that impede the entry of services suppliers into foreign markets.” The commission believes that “the broadcasting, telecommunications, and courier services sectors in the United States” will gain the most, “followed by the commercial banking sector in all three countries.”
The USMCA would be the first U.S. trade agreement with a chapter on digital trade. Among other things, it would prevent governments “from restricting cross-border flows of financial data, which would require data to be stored or processed locally” and would “forbid them to adopt restrictive data measures in the future.” This provision would be especially valuable to U.S. computer services and digital platform services firms.
In sum, we need to stop calling for progressive reform of the agreement, a call that only leads to confusion about what really drives U.S. government policy. Instead, we need to build a movement that simply says no to NAFTA in any form.
Martin Hart-Landsberg is a professor emeritus of economics at Lewis & Clark College.
Street Smart Economics is a periodic series written for Street Roots by professors emeriti in economics. Mary C. King is a professor emerita of economics, Portland State University.
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