Most Favoured Nation: USMCA Is A Bad Deal (For The UK)
Could we? Maybe. Should we? No.
If you are a trade bloc, and, importantly, the word ‘European’ does not appear in your name, the UK probably wants to join you. As well as applying to join the CPTPP, a trade agreement that includes countries such as Mexico and Canada, the UK is also considering joining the USMCA [or rather it was considering, for a few seconds at least)] a trade agreement between the US … Mexico and Canada. Which came as news to the US, and existing UK FTA partners, Mexico and Canada.
[For those who don’t know: the UK already has temporary FTAs with Mexico and Canada, and is about to start negotiating permanent ones.]
Anyway, there are a lot of reasons the UK probably won’t join USMCA. The main ones being that the US is uninterested in trade deals at the moment and all of the things that make a UK-US bilateral trade agreement difficult still exist even if you try and hide the fact you are negotiating a trade agreement with the US by hiding in the shadow of a new acronym (chlorinated chicken, hormone beef, made up things about the NHS, disagreement over Northern Ireland etc.).
But I think the more interesting question is whether joining USMCA would result in a better deal for the UK than were it to negotiate a trade deal with the US bilaterally?
The tl;dr answer is I don’t think so. While USMCA does have some cool things (particularly in the digital trade space), for the most part it is a naff FTA.
To get all rules of origin about it, the USMCA was negotiated by Trump’s trade team with the explicit intention of forcing manufacturing supply chains back into the US, or at the very least into North America. One of the ways they did this was to include incredibly stringent rules of origin requirements, particularly for cars. [Rules of origin requirements are the provisions which determine whether a product is local enough to qualify for tariff-free trade under any given trade agreement.]
Usually trade deals require that 50-60 per cent of the value of a car be created in the countries party to the deal for it to qualify for tariff-free trade. The UK already struggles with these conditions because (on average) only around 40 per cent of the value of British cars is actually created in the UK. (To get around this problem, the UK, quite ingeniously, convinced its existing trade deal partners to continue treating EU-originating-content as British for rules of origin purposes when negotiating the post-Brexit roll over deals.)
But the USMCA rules of origin are just weird. And not in a good way.
As well as requiring up to 75 per cent of the value of a car to have been created in USMCA countries to qualify for tariff-free trade, USMCA’s rules of origin also attach specific conditions on the wages of workers and steel and aluminium sourcing. This means that in addition to the ridiculously high local content requirement, for a car to qualify for tariff-free trade the manufacturer must prove that at least 40 per cent of the value of the car was created by workers earning at least $16 per hour and (more importantly, from a UK perspective) 70 per cent of the steel and aluminium used to make the car was sourced from either the US, UK [presumably], Canada or Mexico.
Fun.
All of this hassle, just to avoid being hit by the US’s 2.5 per cent tariff on cars … it doesn’t really feel worth it does it? [note: the US applies a much higher tariff of 25 per cent on light trucks.] All of which is to say that in practice USMCA would be pretty much useless for the UK car industry.
None of this means that the US wouldn’t try and negotiate similarly mad rules in a US-UK bilateral, but you have to hope that a bespoke deal would at least try to take into account the UK’s needs. Maybe.
Anyway, no deal is better than a bad deal and the USMCA would be a pretty bad deal (for the UK).
---
I enjoy putting Most Favoured Nation together, but assembling all of the content usually takes up one of my evenings each week, when I could otherwise be watching Netflix, wasting time on Twitter, or something. So if you appreciate MFN, and would like to receive MFN in your inbox every week, please consider signing up to be a paid subscriber.
There are three options:
The free subscription: £0 – which gives you a newsletter (pretty much) every fortnight
The monthly subscription: £4 monthly - which gives you a newsletter (pretty much) every week and a bit more flexibility.
The annual subscription: £40 annually – which gives you a newsletter (pretty much) every week at a bit of a discount
---
Combat Climate Change, Or Else!
What with everything going on, you probably missed that the EU is proposing to change its GSP scheme – which unilaterally allows some products from low-income countries to enter either duty free, or at a reduced rate. There’s quite a few tweaks and changes which will impact developing country exporters but the big change relates to climate change.
From the press release:
“To reinforce the importance of meeting climate change and environmental protection standards, the new GSP proposal:
Introduces the possibility to withdraw GSP benefits for serious and systematic violations of the principles of the conventions on climate change and environmental protection;
Extends the list of international conventions that GSP+ countries must ratify beyond the current seven environmental and climate instruments, now including the Paris Agreement.”
Environmentalists, rejoice!
Tariff Engineering
With thanks to Jennifer Hillman for sharing, some crazy kids from a youtube channel called ‘Cheddar’ (me neither) have created a video on one of my favourite subjects: tariff engineering.
Tariff engineering is when manufacturers design their products in specific ways so as to gain a specific tariff classification so as to avoid a tariff that would have otherwise applied if the product was classified as something else. This can all get a bit farcical, and has also previously led to the US’s Court of International Trade ruling on whether a X-men toy was representative of a human (so therefore actually a doll, meaning a higher tariff) or not (so therefore just a toy, meaning a lower tariff). (The judge went with human, ultimately … and in doing so probably trampled all over decades of comic book world building and brought mutants firmly into mainstream humanity.)
Anyway, watch the video to find out how clever companies behave in clever ways to avoid being hit with tariffs … and why Converse trainers are actually Converse slippers:
When open plurilateralism goes wrong/too right
One of the ways like minded smaller countries can influence the global trade agenda is to bunch together and strike a deal agreeing to some innovative or ambitious provisions, and then leave the deal open for others to join. You then wait for others to (hopefully) join. If you hook a big player like the US or EU: victory! You, despite being a small country, have successfully shaped global trade policy.
New Zealand is particularly good at this, with the CPTPP being an example of what can be achieved (admittedly it was a bigger achievement when the US was still a member).
But what if your open plurilateral becomes a stage for scary geopolitics and, for example, China asks to join, and then a week later Taiwan asks to join, and the UK has already asked to join, and you’re left working out a way to let some of them join without massively pissing off the ones you don’t want to join and AGHHHHH!?!?!?
Nightmare.
--
As ever, do let me know if you have any questions or comments.
Best,
Sam