The U.S.-Mexico-Canada Trade Agreement

MCMAHON: Hello. And welcome, everyone, to this Council on Foreign Relations Media Call on “The United States-Mexico-Canada Trade Agreement.” I’m Robert McMahon, managing editor of CFR.org, and I’ll be presiding over this call, which is on the record.

We are in great hands today with our two experts on the call. And they would be CFR Senior Fellows Ted Alden and Shannon O’Neil. I’m going to speak with them for about ten to fifteen minutes before opening up the call to your questions. And the call will last up to an hour, and we’ll be posting a transcript afterwards if you want to go back and look through it for anything usable for your reporting.

I want to start off with Ted, actually, because, Ted, you have—you have a post up this morning on CFR.org taking stock of the deal. Now, there’s been a lot of hyperbole thrown around already about the importance of the USMCA, as it’s called, but you call it a genuine milestone that will lead to a new trade architecture for North America. Can you walk us through what makes this deal different from NAFTA and then how meaningful, maybe, those differences are?

ALDEN: I mean, I think—thanks, Bob, for hosting the call, and it’s great to be here with Shannon.

I think the biggest difference is actually in the domestic politics of the United States. I mean, you know, looked at big picture, this is an update of the NAFTA. Most of the provisions remain intact. There are some new things in digital trade and elsewhere. So this is not a transformational deal if you look at the International Trade Commission numbers on it.

What’s transformational in what was done this week is in the politics of trade, because what we have seen here in Washington since the NAFTA agreement was originally voted on in the House back in 1994 is a steady erosion of Democratic support for trade liberalization. I mean, President Clinton could not get a majority of his own party to vote for the original NAFTA. And you know, you look at the Central American Free Trade Agreement that was passed in the mid-2000s, it only got fifteen Democratic votes. The Democratic Party has been consistently critical for about twenty-five years now of the direction of U.S. trade policy. And they had come up with what they saw as an alternative agenda built primarily around tougher enforcement of environmental rules and labor rights, but had never been able to get an administration, whether Democratic or Republican, to take those onboard.

What’s happened in this—in this re-renegotiation of NAFTA—because you had the initial renegotiation with the Trump administration and then a brand-new negotiation involving Mexico and Canada and the—and the House Democrats—is the Democrats won a lot of those battles. This is the closest we’ve seen to what the Democrats have wanted on enforcement of labor rights. It’s the closest we’ve seen to what they wanted on enforcement of environmental obligations. They managed to get rid of provisions that were in there in the Trans-Pacific Partnership and in the original USMCA having to do with data protection for biologic drugs. And then in the, you know, original, first revision of NAFTA, before this new set of negotiations, you know, you see the elimination by and large of investor-state dispute settlement, tougher rules of origin, this—in the latest round here we’ve included extra protection for the steel industry. These things are all longstanding wish-list items for the Democrats that have never been addressed this seriously in a trade agreement.

So I think Speaker Pelosi is right in touting this as a pretty significant victory for her party. And I think we’re going to see a lot of Democratic votes for this deal, which we have not seen in a long time on trade agreements.

MCMAHON: So, Ted, just taking one of those that you mentioned in that rundown, let’s say the tighter rules of origin for car manufacturing, is this something where we should be looking, say, within a couple years down the road of a(n) increase—we could sort of look for a measurable increase in manufacturing of—in auto manufacturing coming from the United States, manufacturing jobs in the United States?

ALDEN: I think it’s really hard to predict that with any confidence. You know, there—and that’s—you know, that’s why, you know, you get in these deals, there are things that are symbolically tremendously important. And I think, you know, the rules of origin has a lot of symbolic impact. But whether we will see it play out in terms of investment patterns, hard to tell. I mean, generally, auto manufacturing is getting more and more automated, so we’re seeing a reduction of employment with equivalent output. There are certainly things in this agreement that ought to nudge some production towards the United States and Canada.

But remember, what we’re talking about here is the North American content that a vehicle has to have to qualify for tariff-free treatment. And in the case of passenger cars as opposed to light trucks, we’re only talking about a 2 ½ percent tariff. So I think there will be companies, even if they can’t meet the new rules of origin threshold, they may just choose to pay that 2 ½ percent tariff. So I don’t think we’re going to see any dramatic reconfigurations of the supply chains. At the margins maybe a bit of movement, but not wholesale.

MCMAHON: OK. And so it’s three countries. I want to ask you first about Canada, then look to Shannon and focus a bit on Mexico. But I want to talk to you—the point’s been raised that Canada and Mexico really needed this deal to work. Obviously, more—U.S. is a much bigger economy. Could you talk a little bit about, on the Canadian side, how important this deal was, Ted?

ALDEN: Sorry, is that—did you want me to talk about Canada, or are we going to go to Shannon to talk about Mexico?

MCMAHON: Yeah, on the—yeah, I wanted—I wanted you, Ted, to talk about Canada. I’m going to—then I’m going to segue and talk to Shannon afterwards.

ALDEN: Well, I mean, I think, you know, for Canada—and I think this is true for Mexico as well—I mean, nailing down USMCA was absolutely their top foreign economic policy priority. And Prime Minister Trudeau put his best people on it, and they were determined to get this over the finish line.

I think for Canada the first round was tougher. I mean, the last issue resolved was dairy market access in Canada, and there were issues surrounding dispute settlement. Most of this second round of negotiation involving the House Democrats was more focused on Mexico, and Shannon can talk about that. But you know, I think at the end of the day the Canadians were going to do what they needed to do to get this deal over the finish line. They still send roughly three-quarters of their exports to the United States. This is a market that the Canadians absolutely cannot afford to lose. So they were going to find a way to get this deal nailed down, and it looks like that has happened now.

MCMAHON: Great. And so, Shannon, the deal was signed in Mexico City, some pretty strong positive statements coming out of Lopez Obrador’s office. But can you talk a bit about what Mexico, say, gave as well as what it got in this deal?

O’NEIL: Sure. And a pleasure to be with you all.

So there definitely is a sense in Mexico City today of relief that they finally got through this, but they definitely did give things in the second round. They’d already done it—done once, right, and they had given several different things. Ted had mentioned sort of investment guarantees that U.S. and Canadian companies used to have if they were going into Mexico; those had disappeared, or mostly disappeared. There were a couple sectors that they kept those. They gave some things on the—in the auto industry. And so some of the elements of the tightening of the rules of origin and the like were going to affect Mexico likely as much, if not more, than the United States and Canada, so they gave up some of those things the first round.

But the second round was really about Mexico. And here we saw some of the biggest issues were labor and environment. And the big concern of the Democrats has been since NAFTA that you have labor and environmental agreements and rules and the like, but that these are not enforced within Mexico. And so this has been a longer process.

Actually, when Mexico was negotiating the TPP, the Trans-Pacific Partnership, they changed many of their laws. They changed their constitution to create more legal protections on the labor side that had not been there before. So some of this stuff had been done before. But the real question was how were you going to enforce that.

So this new agreement, it looks like, though—still, when I was talking to people this morning down there, it’s a little bit unclear. It looks like—what the Democrats had wanted were inspectors; labor inspectors could go down and go to plants and see if things—collective bargaining and other things were not being supported. What it looks like they will have are, quote/unquote, “labor attachés.” So that would be someone who is a representative of the United States—would not actually be in the embassy is what I’m hearing, but would be down there, could see if there was an issue, and then could bring a complaint to Mexico’s Labor Ministry. That ministry would have about three months to resolve the complaint. And if they did not, then the complaint would go to an international panel, sort of an arbitration panel. And the other thing that came out—and there’s a similar process for environmental issues.

The other thing that came out is it looks like you’re guilty until proven innocent. So the assumption is that these things actually did happen unless the government or the company or the labor union or the like can prove that that, in fact, is not the case.

So this was, I think, a big give by the Mexican government. There is some quiet grumbling I’ve heard on the business sector side about this, that they weren’t included and that it will lead to some challenges for them. But overall you’ve seen both the private sector and the government there close ranks and just glad for the uncertainty of the last, you know, many months/years to end.

MCMAHON: Could you talk—taking a step back, then, with the arc of NAFTA—and this is, obviously, known as USMCA now, or NAFTA 2.0—but NAFTA itself, a quarter-century old. Could you talk about what NAFTA has meant to Mexico’s development, Shannon, to give us a sense of what kind of change it has brought to that country?

O’NEIL: I mean, Mexico in the last twenty-five-plus years has really transformed. And there have been many reasons for that, but NAFTA is one of the big reasons.

So this was an economy that before NAFTA was very commodity-driven, especially heavy on oil. It was one that was much more agricultural. And it was very closed; it was not a big trader. And you fast forward, some of that started with sort of unilateral opening in the 1980s by the Mexican government and the like, but NAFTA really locked in those changes and pushed them further. And so you fast forward today and oil is far less than 10 percent of the overall economy there, so it’s no longer the big driver. Mexico is one of the most open economies in the world; it’s trade-to-GDP numbers are 60-plus percent. So it’s much more—it’s more open than China. It’s much more open than the United States, but up there with some of—you know, Germany and other big, big exporters and importers.

And it’s also—you see when you look at Mexico one of the challenges of Mexico that governments struggle with there is that it hasn’t grown very fast. So you look at the last twenty-five years and it’s only grown about 2 percent give or take, on average, every year. But if you divided up the country—if you don’t look just at national numbers, but you disaggregate them—the northern states of Mexico, the states that are involved in trade and exporting much more than the south, they have been growing at 6, 7, 8, sometimes 12, 14 percent a year. They are on par with China or some of the Asian tigers that people talk about in terms of growth, and a lot of that has been due to NAFTA. So it really has been transformative in the places in Mexico that it has touched, which is not all of Mexico.

MCMAHON: That’s really interesting.

Also, a reminder to those now on the call or those who might be joining late. This is a Council on Foreign Relations Media Call, on the record, with Senior Fellows Ted Alden and Shannon O’Neil talking about the U.S.-Mexico-Canada trade deal and implications for it. I am going to ask one more question for them both to take on, and then I’m going to be turning to open the call. So please think about questions at this point.

I wanted to ask both of you, one of the points that was made about NAFTA through all the debate over it—and it’s obviously—it became a touchstone for some Democrats, and then also Trump-like Republicans in the U.S.—was it’s—you know, what the U.S. lost by it. But one of the points that’s been made by people beyond the economics is that this was a deal that has bound together these three countries—the U.S., Mexico, and Canada—and that also has merit for any number of reasons, and trade deals in general have that sort of national security role they play in terms of binding together U.S. alliances. Could you talk a little bit about this process now that created USMCA, what it means for the relations between these three countries? Are they—are they in a better place? Are they a little bit fraught? I guess starting with you, Shannon, and then—and then Ted, how would you describe the relationship between these three countries now?

O’NEIL: Sure. Well, this was one of many tensions between—I’ll start with Mexico and the United States. So this had been one, this insecurity around it, and where NAFTA would go, and what the Trump administration or Trump himself would do with old NAFTA or new—or if new NAFTA would pass has been something that has been quite worrisome for the government down there. But there are other issues that are still very difficult between the two countries.

One of them is, obviously, migration. The Trump administration has pushed Mexico to keep the many Central Americans who have been coming up through Mexico to the border seeking asylum. So you’ve seen tensions there, and that has—the Mexican government, Lopez Obrador, who’s the president—he’s called AMLO—he has been very willing to accommodate the Trump administration on this, but it has caused tensions and it is causing tensions in various parts of Mexico where many of these Central Americans have been trapped or are waiting for their immigration cases to go forward. So very tense, I would say, immigration issues there.

And then increasingly we are seeing very tense security issues between Mexico and the United States. In part it is rising levels of violence in that country. We’re now hitting some of the highest recorded levels of homicides and others that Mexico has. And then we’ve seen in the last couple of months two very high-profile cases, one where the son of El Chapo, who’s the famous gangster who ran the Sinaloa cartel who was just put away here in the United States this fall here in Brooklyn, his son was captured and then let go, and there was some—the DA was involved a little bit in that in asking for his extradition. And then there was a very tragic case where a group of binational citizens, Mormons, that were near the border were massacred, women and children and the like. And so Trump himself, as well as several senators and Republicans, had commented on those, and in fact Trump had talked about labeling Mexican cartels terrorist organizations. Right now they’re trans-criminal organizations, but they are not considered terrorist organizations, and that has lots of legal ramifications that would get very complicated for Mexico and U.S. relations if it was designated. So there are other pretty tense issues on the agenda.

One thing you have seen, I would say—the Mexican government is now one year into a six-year term—is that this is a very accommodating government to the United States and particularly to Trump. So they are trying to do whatever they can, whether it’s the USMCA or security or migration and the like, to appease the northern neighbor. So they don’t want the U.S. government to come into Mexico. And I think the solution on the trade, you found a way that you can kind of find a balance or they’ve been—they’ve been willing to give a lot of what the Democrats wanted. You think on those other issues—they’ve done that often on migration; they’re willing to keep Central Americans and the like. I think the big one, if we look forward on this relationship, is what happens on security, because undoubtedly and unfortunately the violence there is going to continue and probably just rise.

MCMAHON: Thanks, Shannon. That’s really helpful.

Ted, how about you on the—on the—let’s say the Canadian side of the relationship? It’s been—it’s gone through its problems at the—at the leadership level, but could you talk a bit about at this—the level of—the intensity of these negotiations, maybe that—spillover that might have in the relationship?

ALDEN: Yeah. I mean, I think if you look broadly at North America, it had moved much more from a kind of relationship of choice to a relationship of necessity. From NAFTA on, there were serious discussions—they never made it very far, but there were serious discussions about deeper levels of economic integration among Canada, Mexico, and the United States; deeper levels of cooperation on border and other issues; and just this sense of sort of North America as an economic and political space that would rise or fall together.

I think most of that is off the table now. Obviously, Mexico and Canada know the U.S. is a vital trading partner. Mexico and Canada are our, you know, first- and third-largest trading partners, so they matter a lot for the United States. But I think there’s much more at this point each country kind of looking out for its own narrow economic interest, trying to get the best deal it can out of difficult negotiations. Most of the sort of larger visions of a North American economic future, I’m afraid, are off the table for the moment.

The best example of that to me in the—in the NAFTA renegotiation was the lack of any discussion at all about labor mobility. I mean, NAFTA has some provisions for professionals in the U.S., Canada, and Mexico to go live and work temporarily in the other country. The provisions are woefully outdated. They never worked all that well to begin with. If you were really talking about building stronger economic integration, you’d want to deal with that labor mobility piece. But it as just so toxic, particularly here in the United States, that it was never ever put on the table.

So I think, you know, obviously, the rules mean that I think the trading relationships will remain quite strong. But the conversations that were had for many years about a vision of a North American economic future, I think those are very far on the backburner for some time now.

MCMAHON: All right. Thanks, Ted.

I want to now open up the call to those taking part. And for those of you who have questions, if you could please read them in the queue. Operator, could you see—could you let me know if there’s any questions?

OPERATOR: At this time we will open the floor for questions.

(Gives queuing instructions.)

Our first question comes from Josh Zumbrun of the Wall Street Journal.

MCMAHON: Yes, please go ahead.

Q: Hi. Thank you so much for doing this call. Can you guys hear me?

MCMAHON: Yes, clearly.

O’NEIL: Yes.

Q: I wanted to ask, you know, the administration has claimed that they think this trade deal will serve as a template for future trade deals. And I was curious if you could discuss to what extent that is true, and if so what chapters would we expect to kind of start seeing showing up—you know, what chapters in this new USMCA would we start—would we expect to start seeing in other trade deals kind of popping up, you know, with the U.S. in the future or other countries just adopting it because it’s such a good way to do it.

ALDEN: Do you want to me to start with that, Bob?

MCMAHON: Ted, do you want—yeah, why don’t you start off, Ted, please?

ALDEN: Yeah, I am—I am skeptical that this can serve as the template that Lighthizer and, you know, Richard Neal, the chair of the Ways and Means Committee, are talking about. It served—it was renegotiated to serve the domestic political situation in the United States. And you had two countries, Mexico and Canada, that needed this deal so badly that they were willing to go along with most, if not everything that the United States was asking for. I think that’s a model that’s tough to replicate. You may be able to do it in some future trade negotiations with smaller countries, but you know, if you look at U.S.-EU, I think the Europeans like the progressive elements in this—the environment and labor provisions, getting rid of investor-state dispute settlement—but the sort of narrow economic nationalism that’s at the heart of the Trump administration’s approach, the Europeans can’t live with that. You’ve seen in the negotiations with China I don’t think any of this would be acceptable in any form to the—to the Chinese. I can’t imagine a negotiation with India where this would get very far. You know, a post-U.K. Brexit I think there’s going to be resistance both to some of the Democratic elements and to the Trump economic nationalist elements.

So I know that both the Republicans and Democrats are saying that, and I think from the perspective of domestic politics in the United States this is a big breakthrough. We have, it seems, the making of a consensus that we haven’t had on trade here in this country for a long time. But it’s not clear that there are any other countries in the world that really want to play along with this consensus. So I am skeptical that this is going to become the template that its architects hope it will become.

MCMAHON: Shannon, could you—

O’NEIL: I agree with that. I’d just add I think the only things that are portable are the things that were already really negotiated in TPP and lifted from that and taken to this agreement. So you have things like, you know, e-commerce and stronger IP. You have sort of data-freedom issues. Some of those things were already negotiated with this larger bloc and then brought into the USMCA. Currency manipulation, that could be something that perhaps is portable in some places. Neither Canada or Mexico do that, so they were—they were happy to sign onto that since it’s not really part of the way that they manage their finances. But those are the only things that I see portable. And as Ted said, some of this stuff is very specific to the politics of North America and also the pressure the U.S. could bring to bear on its neighbors.

Q: Thank you.

MCMAHON: Great. Thanks for that question.

Operator, do we have another question, please?

OPERATOR: Yes. Our next question comes from Kevin Freking of Associated Press.

Q: Hello. Thank you for taking my question.

I wanted to ask about eliminating the ten years of data protection for biologics. Is this a sign that pharma is losing its clout in Washington? How did they not get their way on this one? And what credit would you give the Trump administration on this particular topic?

MCMAHON: Ted, do you want to jump in first?

ALDEN: Yeah, sure. I mean, yeah, I think it’s a very clear sign that pharma is losing its clout. And it’s quite interesting, because if you go back to the original NAFTA and even the Uruguay Round negotiations, most importantly, pharma had a lot of clout. I mean, it’s had the ear of the—of successive administrations, Republican and Democrat, on trade for about thirty years. And you may recall after Obama negotiated the TPP that the Senate Republicans, led by Senator Orrin Hatch, were willing to hold up the deal because they thought the protections on biologics were too weak. So for the Trump administration to throw this issue overboard I think is a fairly compelling sign that the pharmaceutical lobby doesn’t carry the clout on these issues that it once did.

I mean, I think it fits with the president saying he wants to do something about the high cost of drugs, and so I think it fits within his narrative. Certainly, it was something that Democrats had wanted for a long time. And I think Canada and Mexico were perfectly happy to go down this road. And I think what’s striking, of course, is that if a Democratic president had tried to do this there would be weeping and gnashing of teeth among the Republicans in Congress and they’d be moving to block it, but I think they will clearly vote in favor of USMCA because it’s—it was endorsed—or, excuse me, it was negotiated by President Trump. So I think this is a very significant change. For many, many years the pharmaceutical lobby was among the most powerful lobbies in trade negotiations. And for them to lose on something that they see as so critical to their future is pretty striking.

MCMAHON: Shannon, anything to add on big pharma?

O’NEIL: No. Agree on all that.

MCMAHON: OK.

Operator, please, another question.

OPERATOR: Thank you. Our next question comes from Ana Swanson of the New York Times.

Q: Hi. Thanks for taking the call.

Ted, you had just said that it was a breakthrough in terms of domestic politics, we have the makings of a consensus on trade we haven’t seen for a long time. I apologize if you talked about this earlier on the call—I joined a bit late—but I saw you also had a blog on this issue. Can you just talk about, you know, the coming together here of the Trump administration and Democrats and sort of, you know, issues that they have in common, and whether or not you think that’s a consensus that is going to hold here on trade for some time to come?

ALDEN: I mean, I think it’s pretty extraordinary. I mean, I would—I would not have bet that the Trump administration would have moved this far to accommodate the Democratic wish list. And so we have had a very interesting coming together, because if you look at what the administration cares about most, it’s, you know, the trade deficit, it’s protecting American manufacturing, it’s expanding American exports wherever possible. The Democrats by and large are onboard with that and always have been. The reason it’s been so hard to get a consensus for a long time is that the Democrats wanted to throw all of these, you know, what they call progressive elements into the trade agreements that the Republicans were just lockstep opposed to. So there’s significant expansion of labor rights, environmental protections. Republicans were, obviously, heavy protectors of the investor-state dispute settlement procedure that allowed companies to sue governments. And so this whole set of issues the Democrats were never able to make any progress with. But the Trump administration, because it looks at these issues differently—much more from a, you know, what’s in it for the United States as opposed to what’s good for our multinationals, which was the typical Republican position—I think was willing to be tremendously accommodating on these issues.

And as I’ve said, I think it kind of works domestically. I mean, I think—you know, I think both Trump administration officials and their Republican supporters on the Hill and the Democrats can say they made some significant gains in this deal. The problem is whether you can translate that into any other trade negotiations, and we were talking about that earlier. Shannon was saying the same thing. I think there’s a lot of reasons to believe that while that formula might work domestically, it’s going to be very hard to get other countries to go along with the sort of things that Canada and Mexico did to make this deal happen.

MCMAHON: Thanks for that question, Ana.

Operator, another question, please.

OPERATOR: Our next question comes from Howard LaFranchi of Christian Science Monitor.

Q: Yeah, hi. Thanks for doing this.

I’m wondering if you think back to, you know, what a—what a punching bag NAFTA was for candidate Trump, and now—so with this agreement, does that—does that remove North American trade issues from the—you know, from 2020 campaign?

And secondly, I think Shannon—it was Shannon who mentioned earlier that there were some similarities or some provisions taken from TPP that were folded into this or used to write up this agreement. And I’m just wondering if you see any possibility that, especially given the number of people out there who still say that, you know, we need some sort of a—the U.S. needs some sort of a trade deal with Asia, you know, if you see this any kind of a starting point for getting back into TPP, or if you expect the administration to stick to sort of its more bilateral approach to trade agreements.

MCMAHON: So there are two questions there. I maybe would split it up, the second one regarding, you know, does this have implications for getting back into sort of a Pac Rim type of trade discussion. Maybe Shannon, you want to kick off that first and then we’ll get to the campaign one?

O’NEIL: Sure. So I’ll say a couple things and then—and then Ted.

So because there are similarities with the TPP and the CPTPP, the renamed TPP once the U.S. left, definitely left a space open for the United States to rejoin if and when they might so choose. They took a couple things the U.S. really wanted and put them sort of on hold or hiatus, but they—but they didn’t abolish them. So there’s a space for the U.S. to come back.

Do I think the Trump administration is going to be the one to walk through that door? No, I don’t. I think Trump and his administration feels that bilateral deals are the way to go, or in this case a trilateral deal, though really it was negotiated one-on-one with each of the countries in many of the more important respects. So if there’s a future administration that is looking more towards Asia and a broader deal there, I think there’s space for that. And this deal, the USMCA, doesn’t limit that, but it would just make the agreement with Mexico and Canada a bit stronger in these various elements, labor and environment, than the bigger TPP deal. But I don’t see them walking through.

And then, you know, on the elections I’ll just say one thing and then—and then Ted, I’m sure, has some ideas. I do think that this takes NAFTA and the trade agreement off the agenda or lessens its influence in the 2020, you know, stump speech. But it doesn’t take tariffs out of that speech. And what we have seen vis-à-vis Mexico especially is that even as this USMCA negotiation’s going along Trump repeatedly threatens Mexico with tariffs if they did not stop migrants; has threatened Mexico with tariffs if they don’t bring down violence, if American citizens get hurt down there, or if violence spreads over the border. So I don’t think—even though you’ve got this agreement signed and it brings some certainty on a lot of these other issues, I don’t think it has changed that very blunt instrument and sort of easy-to-grasp, you know, thing that will be out on the campaign speech. I think we will still see Mexico, unfortunately, be the brunt of many of the issues out there on the campaign, whether it’s violence or migrants or other things. I think we’ll still see that in the—though NAFTA I don’t think will play as much of a role. Though he may tout that I fixed NAFTA and then move on to these other issues.

MCMAHON: Got it. Thanks, Shannon.

Ted, would you like to add on either of those questions?

ALDEN: Yeah. Just on the campaign, I actually think NAFTA may be a bit more prominent than that because clearly Trump wants to run—I mean, trade was a big issue for him in 2016. It matters particularly in the states that brought him to the White House: Ohio, Pennsylvania, Wisconsin, Michigan. So it’s going to be a topic there. He was talking about it even—

MCMAHON: Where manufacturing jobs went overseas and they’re tunneled out, basically.

ALDEN: Yeah, exactly. Yeah, exactly. So I think it’ll be a big issue in those states.

I think very clearly in 2020 he wants to be able to say two things on trade: that he took the horrible NAFTA and made it into the great USMCA; and I think there’s probably going to be a China deal of some sort, and he’s going to want to be able to say, you know, I got a good start out of China and you should reelect me because if the Democrats come in we’ll never get anything else out of China.

But what’s really interesting here is the Democrats have made a strategic calculation. I had actually thought that they would block USMCA and then say Trump brought back a weak deal and we wouldn’t approve it, because the Democrats were clearly very upset at the way Trump was able to take this issue away from them in 2016. Remember, Democrats have been the trade skeptic party, and Trump stole all their thunder. Now there’s going to be a different debate, and the Democrats are going to have to go out there and say Trump brought us back this weak deal but we out-negotiated him, we’ve now got this much better deal because the Democrats fixed it, and we should get credit for it. We’re the party that’s taking these lousy trade deals and making them into good ones. I can’t predict exactly how all that’s going to play out in the stump speeches, but I think it’s going to be pretty interesting to watch who tries to take credit for this politically.

MCMAHON: So you’re talking about both, like, the presidential level, Ted, but also maybe some of the congressional races in Trump districts and things like that?

ALDEN: Yeah, absolutely. Absolutely. I think—yeah, I mean, presidential we’ll have to see who the Democratic candidate is. They’re going to have to decide how they want to run on this. But you know, Pelosi really has made it clear she’s willing to own this, right? This is her deal. She was pretty explicit to reporters that she rolled the administration on it. So I’m looking for Democrats to be out there defending what they’ve done in the—in the discussions leading up to the 2020 vote.

MCMAHON: All right. Thanks for that question or set of questions.

Q: Thank you.

MCMAHON: Another question, please, Operator.

OPERATOR: Our next question comes from Arshu Sirapovlu (sp) of Inside U.S. Trade.

Q: (Off mic)—this call and for taking my question.

So my question is, the labor provisions in this are pretty remarkable, I think, with regard to Mexico. I mean, it appears that with Mexico, if there is kind of repeated labor violations found at a facility, that goods could actually be blocked from that facility after, I think, three violations. And that—I mean, that would kind of appear to put Mexico at a worse position than a country that didn’t have a free trade agreement with the U.S., right, because I mean, like a Vietnam or a Malaysia could have labor violations, as many as they want, and they can just send their goods as long as they’re willing to pay the tariffs. You know, there wouldn’t be such a way for their goods to be blocked. So I’m curious, you know, why Mexico would agree to something like this stringent. Is it just because they’re—because of the importance of the deal to their economy?

And then, secondly, you know, if this language becomes kind of the standard that Democrats and, you know, unions are looking for in trade deals, what does that mean for future negotiations? Because, Ted, you know, you mentioned that it will be—I don’t know if any country other than Mexico would agree to language like this. So what does that mean for future negotiations? Is this just going to be the last—the last one negotiated by the U.S.?

Maybe, Shannon, you could answer the first part about Mexico agreeing and, Ted, you could take the second. I don’t know. Thanks.

O’NEIL: Sure. Happy to do that.

So in part it is Mexico was desperate for a deal, and so this seemed to be the price. And if you, you know, read some of these stories that have come out, it was close to falling apart many times over this precise issue, and then—and then they finally caved in.

But there are also some Mexican domestic politics that made that more likely. And part of it is that AMLO—the main labor unions, the four big labor unions in Mexico, and especially the two big ones, are not—are part of the opposition to AMLO. So they were traditionally, for a union, a different political party. So AMLO has an incentive to try to break many of these what they call protection contracts and the like because these are unions that are not their party. I mean, it’s not a great mapping, but you know, imagine AMLO being kind of a Republican—(laughs)—president who has an opportunity to kind of go after the established Democratic unions. It’s not the right, you know, comparison, but there is a reason AMLO would want some of these labor issues to be enforced, because it would give labor unions affiliated with his political party more of a chance to come in and gain ground across the factories within Mexico. So I think that’s one thing here.

And then, you know, the second thing here is AMLO’s worldview, and particularly his economic worldview, really doesn’t think a lot about NAFTA, I have to say. He’s not anti-NAFTA anymore. There were moments in his past when he was quite suspicious of NAFTA, but he’s no longer anti-NAFTA. But he doesn’t think a whole lot about it. And I don’t think he really sees this bigger picture of what NAFTA has done to transform Mexico.

And just, you know, an anecdote on that side is since he’s been president this is definitely true, but I’ve also heard from other people this is true in the decades before, AMLO’s never visited a modern factory in Mexico. He has—at least as president, he’s never gone to a car factory or an aerospace factory or any of these factories. He travels every weekend to different municipalities and does all sorts of things, but he doesn’t go to the kinds of operations that NAFTA has affected and affected for the better.

So I think one of the reasons that his administration was willing to sign on is there is political benefits to shaking up the labor system down there for them and to allow them to kind of get in; and two, I don’t think he sees the disruptions that the business community has been talking about with more stringent labor laws. I don’t think he sees them because it’s just not part of the way he thinks about Mexico’s economy, nor has he exposed himself to it visiting this part of the economy.

MCMAHON: Thanks, Shannon.

Ted, do you want to add anything on that or on the—

ALDEN: Yeah, I mean, just quickly. Yeah. I mean, we’ve talked about this issue a bit. I think that—I think that what we may discover from this is that a domestic consensus on trade in the United States is incompatible with further trade negotiations because there are very few other countries that would be willing to make these kind of concessions.

But Vietnam—you know, Vietnam could well emerge as the test case of this. I wouldn’t be at all surprised if the Trump administration turns its attention to Vietnam, given the surge in Vietnam’s trade surplus with the United States. You’re seeing a lot of companies move sourcing from China to Vietnam. Vietnam, of course, in the TPP went a long way on the labor rights issue. There were snapback provisions in the TPP that would have allowed for the reimposition of some tariffs in the case of labor rights violations. So it’s possible, actually, that that could become the next test case in whether this approach can be used in negotiations with another country. But I would think that the number of instances where you would have U.S. trade partners willing to allow these sorts of intrusive provisions regarding labor rights, it has to be a fairly small number of countries that would even consider that.

MCMAHON: Great. Thanks for that question or that combo of questions.

Just a reminder to those on the call, those who might have joined late, this is a Council on Foreign Relations on-the-record media call on the U.S.-Mexico-Canada trade deal, and we’re talking with Senior Fellows Ted Alden and Shannon O’Neil about the implications of the deal.

I wanted to give anybody else on the line with questions a chance to ask at this point. So, Operator, is there another question on the line?

OPERATOR: Yes, sir.

(Gives queuing instructions.)

Our next question is Matt Picht of Newsy.

Q: Hi there. Thanks for doing this call.

I just had a question about—Shannon, you talked a little bit about some of the labor enforcement provisions, particularly the sort of trade attachés that might be sort of replacing the idea of inspectors going down to kind of examine these issues. Can you kind of go into a bit about what those provisions mean, what their kind of enforcement ability is like, and whether or not the Mexican government can refuse that, as intrusive as it has with the idea of U.S.-based inspectors? Thanks.

O’NEIL: Well, that’s a good question, and I don’t have a—I don’t have a concrete, 100 percent answer for you—(laughs)—because it’s a little unclear and I’ve heard different things from different people.

But as you know, one of the big sticking points is Mexico was—refused to have labor inspectors come down, and that was their—and there was lots of pushback that it was violating Mexican sovereignty, and that having outsiders enforce Mexican law was a no go. So it seems that they’ve finessed that issue with this idea of labor attachés. And so this would be representatives from the United States, presumably from the labor unions but from some—someone representing those issues, who would come down. What I have heard is they will not be stationed within the U.S. embassy. So they will be there in somewhat official capacity, but not as part of the U.S. government’s—not within the embassy. And what they would be able to do is to hear or discover or look into complaints that, you know, labor unions or companies or both were breaking some of Mexico’s rules, whether they were not allowing collective bargaining to happen or freedom of association or other sorts of things happening, and that they could then present a complaint.

And the way I understand it, though I haven’t seen the exact details, is that this complaint would then go to the Ministry of Labor in Mexico. They would have eighty-five days, so about three months, to respond and deal with the complaint, and rectify it or something along the way. And then if that was not done, then you would go to these international panels, and that would have someone from both countries—let’s say the United States and Mexico in that case—plus a technical person, and there would be some sort of adjudication.

The other thing that is in this protocol is that there’s sort of this guilty until proven innocent. So it would—it would be on the Mexican government, and then by extension the company and/or the existing labor union, if there’s a complaint filed against the labor union it would be on them to prove that the complaint was not right, not the other way around.

So it is not in sectors, but it is someone down there doing it. So I think this was a way that the countries could finesse this issue of sovereignty, is that it still goes through Mexican law initially. It goes to the Ministry of Labor, so that’s the first stop, which would then mean Mexico’s enforcing its own laws. But then there is this added international panel that would—

Q: Thank you.

ALDEN: Bob, can I just add one thing here?

MCMAHON: Yeah, sure.

ALDEN: Yeah, sorry. I’m just—I’m just working my way through the text of the amendments. If I’m reading correctly, the timeline is just a little faster than Shannon suggests, that Mexico will have forty-five days to try to deal with—I mean, this is specifically with respect to collective bargaining, so blocking the formation of independent unions. Mexico will have forty-five days to try to remedy the situation to the satisfaction of the complaining party. It would be either the United States or Canada because there are both U.S.-Mexico agreements and Canada-Mexico agreements on this. And if that is not satisfactory, then there’s a provision for the rapid formation of a panel that would reach a conclusion on the issues.

The basic concern here from the U.S. side is that, you know, if you look at how labor rights have been enforced under existing agreements, either NAFTA or the Central American Free Trade Agreement, the panels have dragged out often for years in many cases. And so the Democrats were insisting on some procedure that would allow for a resolution pretty quickly, and if the finding of the panel was that Mexico had not complied with its obligations that the U.S. could then move to block imports from the facility that was targeted in this case.

So I think the accelerated timeline and the quick formation resolution by the panels seems to be the way the U.S. and Mexican governments have finessed this. As I read the text, there’s no provision for U.S. labor inspectors showing up in Mexican factories. I think the Mexicans made it very clear that was a redline that they weren’t willing to cross.

MCMAHON: Got it. And just to note, Shannon’s back with us. She had to jump off for a moment. But, Shannon, Ted was just adding to your understanding of what the mechanism for these sort of dispute settlements. Which also makes me—which triggers me a question regarding another big development this week, which was the expiration of the functioning, let’s say, of the appellate body of the World Trade Organization because of a U.S. move to block the appointment of judges to sit on that body. Is this—is the way that dispute settlements are sort of arranged in this USMCA in any way an indication of the way forward the U.S. might want to take in that regard? Or is that over-reading that?

ALDEN: Yeah, I mean, just quickly, I don’t know what to conclude on this, but there is a tremendous irony here, which is that NAFTA had a feckless dispute settlement process. And the result was that almost all trade complaints when to the WTO. They weren’t resolved under the NAFTA dispute provisions because the WTO provisions were considerably better. I think now we’ve ended up in a situation where the WTO dispute settlement system has effectively been neutered by the disappearance of the appellate body because of the U.S. refusal to allow new judges to be appointed. And we’ve seen a real beefing up of the dispute settlement system under NAFTA, not just for labor and environmental disputes, but across the board there has been a strengthening of the—of the panel system. And you’re going to see panels form. So I think quite interestingly you’re going to see—I am anticipating you will see a lot more disputes filed and adjudicated now under USMCA than you will through the WTO when it involves any of these three countries. Because you actually I think are going to have now an effective dispute settlement process under NAFTA and you no longer have an effective one under the WTO.

MCMAHON: That’s very interesting. Well, thank you.

Operator, do we have another question on the line, please?

OPERATOR: Yes. Our next question comes from Kat Lucero of MLex.

Q: Hi. Thanks for—hi. Thanks for this call. Can you hear me?

MCMAHON: Yes.

Q: OK. OK, great.

Just really quickly, how do you think this progress in—this latest progress in USMCA reflects on Trump in the U.S.-China talks, especially ahead of the December 15 tariffs?

MCMAHON: Ted, do you want to take a crack?

ALDEN: Sure. I doubt it changes the Chinese calculation very much. And Shannon can probably comment on this a bit too with respect to the president’s tariff threat of some months back over Mexico and migration. I think from the Chinese perspective, they are not persuaded that Trump is going to abide by any agreement that is reached. And I think, you know, looking at this process here, how difficult it was to come to an agreement, how much the Mexicans in particular had to give, I don’t think the Chinese perspective is going to change on that. I think they’re going to continue to be willing to make only pretty small concessions, having mostly to do with purchasing of agricultural products to the United States. I don’t think that China’s prepared to do anything like the sweeping economic reform that the Trump administration is demanding, in part for their own internal reasons but in part because I just don’t think they trust this administration to live by whatever deal is reached.

O’NEIL: Yeah, I would second that. I also—you know, I think the politics within the Democratic Party—much of the timetable here—yes, it was driven by Trump and Lighthizer. But it was driven by Pelosi. It was driven by the Democrats wanting to find some solution to USMCA that they could then sign onto. And keeping the Democratic Caucus together with many different elements within there, many new House members in moderate districts that were quite pro-NAFTA.

And when I look at the politics around China in Washington, it is, you know, NAFTA has gotten a bad rap for many, many years. But the politics in China have gone decidedly negative. And I don’t see Pelosi pushing to take ownership of that one—(laughs)—the way I think you have seen with USMCA, because the things that would have to go into fuller a U.S.-China agreement that would get Democrats to sign on are things that I cannot imagine China, with its, you know, Made in China 2025 plans and other things, would agree to. And, you know, as Ted said, I think the mistrust between Trump and the Chinese leadership, Xi and others, is so great that you might get a small thing, but you’re not going to get this bigger more comprehensive discussion happening. So I think these two are on—are on somewhat different tracks at this point.

Q: Thank you.

MCMAHON: Thank you for that good question.

Operator, do we have another question on the line, please?

OPERATOR: Yes. Our next question comes from Lyric Hale of Econvue.

Q: Yes. Hello. Thank you. This has been a great discussion.

But I have a question which is: Perversely, could this mean that the China deal doesn’t get done? You talked about consensus. There is consensus in Washington, as the Hong Kong declaration proves, against China—between the Trump administration and also the Democrats. So I’m thinking that actually this might prove to be a negative indicator because here in the Midwest Trump could say, well, you know, when it comes to people who are reasonable, the Canadian and the Mexicans, then we can do a deal. But when they’re unreasonable, we won’t. And that would appeal to his base here. So I’m wondering if you’re, you know, underestimating the potential for a negative effect—a perverse negative effect, and that the consensus—there is a transferable consensus to the most important other deal going on, which is the China deal, but it’s negative not positive.

MCMAHON: So spillover. Ted, you want to try that?

ALDEN: Yeah. I mean, I would—I would by and large agree with that. I do think there is a pretty strong consensus here in Washington between the Republicans and Democrats on a harder line approach to China. If you heard any criticism from the Democrats it’s that Trump isn’t being tough enough on China. I still think—if I had to bet, I think it’s more likely than not that we get a phase one deal, in part because I think Trump really doesn’t want to go forward with the last line of tariffs because that hits all the consumer products—the Apple smartphones and everything else that are going to affect people very directly in their pocketbooks.

And I think he’d prefer to have a way out of that. But big picture I agree very much with the caller’s point. I think if you look at the restrictions that are being put in place on the technology side, I think we’re moving quickly towards essentially an economic cold war between the United States and China. And I think even if you get a sort of modest phase one purchase deal, I don’t see that dynamic changing next year. And I don’t see any political voices—or any significant political voices in Washington—calling for trying to, you know, reengage economically with the Chinese. And so, yeah, I accept your premise.

Q: Thank you.

MCMAHON: We’re getting a little bit late in the—in the hour here. I wanted to see if we had another question on the line now, operator.

OPERATOR: Yes, we have one more question from Eric Fennon (sp) of Ernst and Young.

Q: Hi, there. This has been a really good call. Thank you for doing this. This is always really informative.

So my question is really around the digital aspect of the reforms—the reformed trade agreement. So I was just wondering if you could talk literally about kind of the intrinsic—what this is going to look like. And then have you seen these sort of spillover effects and the potential cooperation between the Canadians and the Mexicans on cyber defense or other sorts of areas?

MCMAHON: I’m sorry, I didn’t hear the first part of that question. Was it about cooperation between the three parties, or for Mexico and Canada in particular?

Q: Between the three parties—three parties, yeah.

MCMAHON: Three parties, yeah. OK.

ALDEN: Shannon, do you want to talk a little bit more about digital trade stuff? You had raised that, yeah.

O’NEIL: Sure. I can. Yeah. So there is, you know, a digital aspect, and this idea that data localization, that you don’t do that, which we’ve seen in other parts of the world. That’s more of that chapter or that aspect. But I think there’s overall agreement. I mean, we have seen Mexico, Canada, and the United States working together on general defense, but some cyber defense. And so back at, you know, right after 9/11 happened you had the creation of a new combatant command, the NORTHCOM that was set up. And both Mexico and Canada were invited in as observers and have elements of their armed forces there.

And over time that command and others have migrated to look more and more at cyber defense issues, along with lots of other kinds of issues. It started off with more sharing of intel and other sorts of things, and now they’ve started to look at vulnerable infrastructure and the like in terms of cyber defense of the three countries. And there is a lot of cross-border infrastructure. Of course, there’s the border itself, but you have some cross-border electricity grids, and pipelines, and other kinds of things that are—that are pretty significant.

I don’t see the USMCA changing much, for good or bad, that aspect. And the cooperation tends to be more on that sort of mil-to-mil level, or various ministries to ministries level. I would say, and Ted may know more about the Canadian side of this which I think continues pretty much unabated, but Mexico—you know, there is often in Mexico when there’s a transition to a new administration, especially if that new administration is a different political party and a different set of people, sometimes there is sort of a quiet time for several months while the new players come into the various ministries and you sort of get the U.S.-Mexico relationship and cooperation back up and running, and people get to know each other.

I will say that that process has been, this time around, much longer. And when I talk to people in the U.S. government in many areas, including the defense area and the like, that they have not yet really found counterparts—many of them have not found counterparts that they feel that they have established a strong working relationship with. And I think that carries over to lots of areas, including this one that you bring up. So we have had a history of working pretty closely on these things, but I think with this government—and there’s many reasons for that. In part, one of the central tenets of AMLO’s administration is austerity. So you’ve seen cutback in the number of staff within the government, the bureaucracy, and particularly the more technically inclined members of the government and bureaucracy, the people who were cyber experts and other things. Many of those people have left and not been replaced. So I think this is an area not covered in the USMCA but one that is going to be a challenge for U.S. Mexico to really revise and continue working on.

MCMAHON: Thanks, Shannon. Ted, did you want to add anything to that?

ALDEN: Bob, can I just add—yeah, I was just going to add a little footnote to this, because there was the earlier question about what this deal says about the power of the pharmaceutical lobby. It also says something about the power of the tech lobby. The tech lobby really likes this agreement. And one of the discussions very late in the negotiations involving the House Democrats, there was some pressure from the Democrats to eliminate a provision in USMCA that essentially protects the tech platforms against liability for content. So Amazon or Facebook could not be held legally liable for, you know, say a product on Amazon that proved to be unsafe, you know, because they had been the platform advertising it.

There was some last-minute pressure to pull that provision out in the same way that the biologics provision was pulled out. And that did not happen. I mean, Speaker Pelosi said the demand came too late. That was the official excuse. But I think it’s quite likely that there was massive political pressure from the technology companies to keep that provision in. So I think they come away from this deal as big winners.

MCMAHON: That’s really interesting.

And on that cyber note, we’re going to conclude this CFR media call. This is an on-the-record call. We’ll be posting at transcript shortly. So look out for that. And I really want to thank our listeners for some great questions, and especially our two expert guests, CFR Senior Fellows Ted Alden and Shannon O’Neil, for helping us navigate what to look for in the USMCA now.