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WHAT TODAY’S USMCA DEBATE HAS TO DO WITH THE DRUGS OF TOMORROW

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WHAT TODAY’S USMCA DEBATE HAS TO DO WITH THE DRUGS OF TOMORROW

The political winds seem to be blowing in favor of a Congressional vote on the U.S.-Mexico-Canada Free Trade Agreement (USMCA) yet this fall. But before they vote, some Members of Congress want to talk over a few issues with the Trump administration’s negotiators. They are pressing the administration to lower intellectual property protections for the U.S. biopharmaceutical industry because they say the agreement’s provisions protecting original data generated by pharmaceutical inventors will drive up the price of prescription drugs.

Their arguments strike a political nerve but don’t offer a complete picture of this complex and evolving industry. The USMCA debate reflects a domestic difference in views. While the United States works to develop its regulatory framework for newer drugs, many other markets are further behind. As important as it is, the issue of data protection for biologic drugs is not well understood. We’ll try to cover the top lines.

Pieces of the Intellectual Property Puzzle

For American innovators of biopharmaceuticals, gaining access to overseas markets requires not only securing regulatory approvals; the policy environment must also be conducive to marketing their products, which includes a value-based approach to pricing, procurement, reimbursement policies – and intellectual property protections.

There are various facets to the intellectual property (IP) protections needed to incentivize massive investments in pharmaceutical innovation and to enable the recovery of those costs once a drug is commercialized. Patents are part of the package and so is the protection of proprietary data, the issue at the fore in discussions about USMCA.

These protections are particularly important to American companies. The intellectual property attached to 57 percent of the world’s new medicines was created in the United States. That’s no accident. Research and development activities flourish in countries where IP frameworks are well developed and enforced.

70% drug dev

What is Data Protection?

To achieve marketing approval from a regulatory oversight agency such as the U.S. Food and Drug Administration and its counterparts in other countries, innovator pharmaceutical companies submit data on the outcomes of their research and years of clinical trials demonstrating the drug is effective and safe. The cost and risks of developing the original data and product fall to the inventor.

When a generic producer or producer of a “biosimilar” seeks approval, they are often afforded the short cut of relying on the inventor’s data. To ensure a balance between incentivizing drug discovery and development while also providing opportunities for lower-cost copies to become available, the inventor’s data may be protected for a period of time against disclosure to generic or biosimilar producer. During this time, any competitor is free to undertake their own data and seek marketing approvals on that basis.

For How Long?

Provisions on data protection are not new in domestic regulations or in trade agreements. Since the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) in 1995, World Trade Organization (WTO) members have agreed not to disclose clinical data submitted to regulatory authorities to obtain marketing approval for pharmaceutical products, thereby protecting such data “against unfair commercial use”.

Negotiators of the TRIPS Agreement contemplated specifying that data protection should be no less than five years, but ultimately refrained from including a specific timeframe, leaving it to the discretion of WTO members in their national regulations. NAFTA, which took effect in 1994, provides a minimum of five years.

Enter a New Type of Drug

The timing of these provisions is relevant to the debate today. The TRIPs and NAFTA provisions apply to new “chemical entities,” meaning small molecule drugs – that is, most drugs on the market to date. These types of drugs are capable of being replicated through chemical synthesis to make generic drugs. For this reason, regulators tend to agree that requiring duplicate data from generics would be an inefficient use of resources and unnecessary testing of patients, as long as the generic product is proven “bioequivalent” to its reference product.

Biologics are newer medicines. They are large, complex molecules that are made from living cells to produce the required proteins. This manufacturing process is vastly more complex. A follow-on product is not identical, but rather structurally similar and thus called a “biosimilar”. An exact replica is not possible, and patients cannot automatically be switched from a biologic to its biosimilar without risk of adverse effects.

Given the differences between biologics and small molecule drugs, they are regulated differently, and the IP protections have been applied differently. Biologics are largely defined by their manufacturing processes and regulatory approval of biosimilars does not require identity with the reference product, so biologics must often rely only on process patents versus a product patent. Innovator companies argue a longer term of data protection is needed to bridge the differences in patent protection or to offset the lack of patent protections in some countries, while allowing them to recover the increased cost of generating the original data.

New Trade Provisions for Biologics

Given the longer innovation cycle and the increased cost and complexity of biologics, many governments have provided longer periods of data protection for biologics than for small molecule drugs.

In the United States, the Biologics Price Competition and Innovation Act signed into law by President Obama in 2016, provides for a 12-year period of regulatory data protection for biologics. American companies have sought the same standards from trading partners.

With new agreements in the WTO largely stalled, the focus of trade negotiations over the last decade has shifted to bilateral and regional trade agreements where provisions are often more detailed and tailored. In negotiations toward the Transpacific Partnership Agreement (TPP), the United States pushed for 12 years, but agreed to eight years for biologics from the date of first marketing approval and allowed flexibility in how data protections could be administered. When the United States withdrew from the TPP, the remaining members suspended the relevant provisions.

In the USMCA, American biopharmaceuticals again did not get everything they wanted. Canada and Mexico do not have to match the United States in providing 12 years but agreed to increase the duration of data protection to 10 years from the current standard of five years in Mexico and eight years in Canada.

10 years in USMCA

Why Push Trading Partners to Increase Data Protections?

Beyond North America, the so-called “pharmerging” markets (generally the large developing countries) are growing faster than the stable developed markets. China is by far the largest emerging market for pharmaceuticals. In many developing countries, patent systems are weak or poorly enforced. Regulatory data protection provides some buffer against IP exposure, making it viable and more attractive for companies to introduce their products in that market.

Less data protection and lack of enforcement diminish the potential for U.S. exports. It also leaves the door open for competitors to access unprotected U.S. data without the originator’s authorization. Trade agreement obligations help guard against the unfair commercial use of proprietary data and expand the degree of IP protections in global markets, which is a precursor to greater diffusion of innovative drugs to patients worldwide.

Back to the Core Concerns – Availability and Costs to Patients

Critics of USMCA’s provisions argue data protections keep the prices of biologics high by delaying the introduction of biosimilars. The first biosimilar product was approved in the U.S. market in March 2015. By March 2019, 18 had been approved. Many experts suggest biosimilars have lagged in the U.S. market due to slower changes to the U.S. regulatory system and patent litigation as the industry goes through the same growing pains it did with generic regulation.

As well, drug development is an inherently expensive and risky business, characterized by high failure rates. On average, the process of discovery and commercialization takes 10-15 years at a cost of $2.6 billion. Less than 12 percent of drug candidates make it all the way from lab to patient.

Because of the complexity and high fixed costs required to develop the capacity to manufacture biosimilars, it takes eight to 10 years for biosimilars to come to market, there are fewer entrants than is the case with generics, and the cost savings realized are 10 to 30 percent off the brand, versus an average of 80 percent achievable by generics. Considering the length of time normally required to achieve safe and reliable production of biosimilars, the data protection period in USMCA is unlikely to be a cause of undue delay in getting them to market. Data protection terms are also often less than the remaining patent term.

Your Loss is My Gain

The prominent healthcare research firm, IQVIA, forecasts the biopharmaceutical industry stands to lose $121 billion between 2019 and 2023 as periods of market exclusivity end. Eighty percent of that impact, or loss for innovators, will be in the U.S. market as nearly all of the top branded drugs will have generic or biosimilar competition.

IQVIA says competition among biosimilars is on a path to grow three-times larger in 2023 than it is today. If that’s so, savings over branded biologics could produce approximately $160 billion in lower spending just over the next five years, even as overall spending on biologic drugs grows.

This is part of the business cycle of the pharmaceutical industry and why the innovators maintain strong pipelines because they have limited exclusive time in the market before competitors arrive. That’s good for patients. The data protections in USMCA are not likely to materially impact this cycle or spending. When Canada and Japan lengthened their duration of data protection, drug spending as a percentage of GDP remained nearly flat.

ME losses

Reason for Optimism

Biologics are called the drug of tomorrow. They comprise nearly 70 percent of the innovation pipeline which includes some 4,500 drugs in development in the United States and another 8,000 globally.

Breakthrough products are expected for cancer treatments, autism and diabetes. This is great news, but specialty and niche products tend to come at a higher price so spending may increase as these new drugs enter the market. According to IQVIA, average spending on the brand versions will nonetheless decline from 8.2 percent of the U.S. market to 6.7 percent, a demonstration there’s a healthy market for originals and copies.

There would be no copies without the originals, which is why pharmaceutical regulatory and legal frameworks are full of public policy trade-offs to strike a balance that will support return on innovation while not impeding the availability of affordable drugs. As we make scientific progress, the systems that include IP protections must evolve to accommodate new types of drugs, new capabilities in data analytics and clinical practices, and even changing business models. Not doing so can imperil the pace of progress at precisely the moment when breakthroughs are on the horizon.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

USMCA Sunset Clause Offers Potential Resolution to Ratification Impasse

Those who have been closely following the saga of revamped free trade in North America will know well that the fate of the United States-Canada-Mexico Agreement (USMCA) could very well be decided on the degree to which lawmakers are able to suspend their cynicism over labor reforms in Mexico to buy into the labor-enforcement provisions set out in the agreement.

Democrats in Congress want to see labor-enforcement provisions within the USMCA made stronger, clearer and part of the actual agreement (as opposed to a side letter). Their demands stem from the fear the USMCA will do little to curb the flight of manufacturing jobs from the United States and into Mexico where workers are paid less and there are fewer regulations with which to contend.

These concerns are fair and warranted, but both Mexico and Canada have unequivocally stated they do not intend to reopen negotiations. Mexico in particular, which just recently passed a labor reform bill that will allow workers to vote on unions and their labor contracts via secret ballot, has said no further concessions will be made.

All three parties have dug in their heels, making ratification of the USMCA seem unlikely in the near term. And yet the agreement’s ratification is crucial to the ongoing prosperity of all three countries’ economies and to North America’s status as the world’s largest trading bloc. Failure to ratify the USMCA won’t simply mean that free trade will revert back to NAFTA. The president has stated repeatedly that if the USMCA isn’t ratified, he will unilaterally withdraw from NAFTA, pitting himself against lawmakers in Congress and putting the future of free trade in North America in jeopardy.

Sunset can brighten gloomy outlook

While each party presents a valid position, digging in on labor provisions (and, more peripherally, environmental ones) that prolong trade uncertainty in the largest trading bloc in the world is entirely unnecessary.

There are valid mechanisms in place that Democrats can use to ensure the enacted labor reforms are enforced and that Mexico is holding up its end of the bargain with respect to labor practices.

When the USMCA was signed in November 2018, it included a sunset clause that had been a source of tension and controversy during the negotiation period. The purpose of the clause was to force the parties to revisit the deal periodically to ensure it is working as it should for all involved. In its final iteration, the clause would see the USMCA automatically terminated 16 years after its implementation. However, six years after implementation, a joint review of the agreement would take place, at which time the parties could unanimously choose to extend the sunset period to 16 years from the six-year review, with another joint review to follow six years later. Failure to achieve unanimity at any six-year interval would require additional reviews to take place each year thereafter until the initial 16-year period concludes or until a consensus is reached on how to address the complainant party’s concerns.

If that sounds awfully and unnecessarily complicated, that’s probably because it is, particularly since the USMCA allows for any one party to withdraw from the agreement at any time with a six-month notice, making a sunset clause gratuitous. Nevertheless, it is how the current text of the agreement reads and, barring the unlikely possibility of the USMCA’s renegotiation, is how the agreement will be implemented.

Drifting off into the sunset

Assuming no one party relents, the most obvious way around the impasse would be for Democrats to ratify the agreement as it is currently written with the intent to watch closely how its labor provisions are enforced in Mexico. (Precisely how the monitoring of enforcement will take place is a separate but related disagreement between the White House and Congressional Democrats.)

After six years, there will be an opportunity to review the agreement and put Mexico on notice that it will need either to better enforce the labor provisions set out in the USMCA or see the U.S. exit the agreement when the 16-year period closes. In the event the annual review gets bogged down in bureaucratic inefficiency, lawmakers and the president of the day will have the withdrawal clause at their disposal to expedite compliance.

Unfortunately this will put U.S. industry in a Catch 22 position. Those businesses invested heavily in Mexican production will have to choose either to remain steadfast in their support of Mexico’s existing cost-effective labor regime or align with USMCA detractors in Congress at that time to exert pressure on Mexico to improve enforcement of labor provisions with the understanding that their failure to do so could put free trade in North America in danger.

Relying on the sunset clause may seem to be the equivalent of kicking the can down the road. However, the interim period would offer tremendous benefit. It would provide businesses the opportunity to adapt to the agreement’s new provisions and reconfigure their supply chains to make optimal use of the USMCA. It would allow production practices in Mexico to adjust to new labor and environmental provisions. It would offer Mexican officials the chance to demonstrate to the U.S. government that they intend to honor their USMCA commitments (not just in spirit, but in practice), and would demonstrate to Mexican officials that U.S. lawmakers are willing to give them the benefit of the doubt. Most importantly it would allow for stability to return to North America’s trade environment and the businesses and consumers who rely on it for prosperity and cost efficiency.

It may not be a perfect solution, but it is a viable alternative to the current options of lingering trade uncertainty, or worse yet, quashing the USMCA altogether and potentially precipitating a presidential decree to withdraw from NAFTA and with it a lengthy legal battle over the president’s legal authority to do so.

Cora Di Pietro is vice president of Global Trade Consulting at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations. She can be reached at cdipietro@livingstonintl.com.

How Global Subnational Relationships Promote Stability in Challenging Times

Over the past several years, the leaders of America’s 55 states, territories, and commonwealths have taken more prominent roles on the world stage. State Governors have been advancing Americans’ interests in building strong economic and other ties across the globe.

Our state economies are intertwined with numerous nations to the point that many Americans have jobs because companies around the world invest in the U.S. and we sell countless products and services to other nations. International economic relationships are vital — so foreign officials, businesses, nonprofits, and community groups are turning more often than ever before to our states’ chief executives for insights and stability.

With this in mind, the National Governors Association (NGA) created a new program called NGA Global as a platform for governors to convene with their counterparts beyond U.S. borders. Our member governors foster mutually beneficial relationships to boost their states’ global competitiveness and fulfill their goals in infrastructure, energy, agriculture, tourism, innovation, workforce development, public health, law enforcement, human rights, education, the environment and more. Most importantly, Governors working with their fellow leaders in other countries and with companies across the Globe creates economic development and job creation in their states.

America’s governors certainly honor their role in the U.S. constitutional system by staying within the parameters of all federal treaties and policies, while adding depth and detail through their direct interactions with international colleagues. Their activities link their home-state communities with bustling global marketplaces and opportunities for capital – contributing to the $1.5 trillion the U.S. reaps from exports and the nearly $370 million we attract in annual foreign investment, according to SelectUSA.

As leaders of economies that rival most countries in size and prosperity, our state governors are continually sought out by heads of state, including Justin Trudeau of Canada, Nana Akufo-Addo of Ghana, and Malcolm Turnbull of Australia, each of whom addressed NGA meetings over the past year. Governors equally value the peer-to-peer contact made possible through important working relationships with the Governors association equivalents from all over the world including Japan, Mexico, Canada, and Kenya. Governors also partner with global organizations such as the German Marshall Fund, Council for The Australian Federation and the World Economic Forum to create important relationships and leverage their expertise to improve economic development and create jobs in their states.

The relationships developed through these organizational alliances position the U.S. for success on many fronts. For example, earlier this year, just as NAFTA discussions faltered, NGA Global was convening its North American Summit. Governors from Mexico and the U.S. and Premiers from Canada cordially shared information, seriously discussed even controversial topics and developed important professional relationships. The event underscored the cross-border commitment that unites the continent and encourages necessary continued cooperation.

Governors are working to expand these healthy international relationships. Idaho Governor Butch Otter recently embarked on a trade mission to Canada while Arizona Governor Doug Ducey traveled to Mexico, which connected major commodity groups from their states with Canadian and Mexican business leaders and government officials. While there, they provided their local companies significant venues to pursue potential business partnerships, network and develop trade opportunities.

Similar progress is being made in Europe. Governor Phil Murphy was recently on hand for the opening of a Choose New Jersey office in Berlin, Germany, which will leverage investment possibilities in Garden State manufacturing, biotech, and technology startups, among other sectors. Similarly, Indiana Governor Eric Holcomb is developing a Hoosier presence in the EU through interactions within Switzerland, Austria, Germany and France.

Last month, Louisiana Governor John Bel Edwards went to Israel to promote economic development and research partnerships. He’s already sealed an agreement tapping Louisiana’s water-technology industry and is keen to tie in cybersecurity as well. Governor Edwards also demonstrated global leadership on non-economic issues, having visited the Vatican, for instance, on an anti-human trafficking mission.

In a time of uncertainty in Washington and around the world, America’s governors are reaffirming the country’s value as a trading partner and ally. As governors forge and deepen their relationships with counterparts and business leaders around the world, NGA Global will continue to help them break down international barriers and expand the opportunities available to their constituents worldwide.

Mr. Pattison is Executive Director and CEO of the National Governors Association.

Asian Investment in Latin America: What you Should Know

As China and Latin America continue making news headlines with high-profile summits and ever-growing investment relations, critical factors driving investment movements take shape, paving the way for successful initiatives between the two countries and ultimately creating an increase in overall diversification of investment in sectors from transportation infrastructure to natural resources, and technology. Relations between Latin America and China continue to strengthen, and we see the relative involvement of the United States slowly tapering off as its commitment to free trade and traditional investment promotion vehicles such as the Export-Import Bank of the United States are in question. So, what exactly does this mean for Latin America and how is the U.S. affected? Gaston Fernandez, partner at Hogan Lovells, weighs in on the subject.

“The numbers in terms of Chinese investment in the U.S. show that such investment has fallen off significantly. The enactment of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) has placed more scrutiny on foreign investment, and I think there is a perception that national security review has been expanded to something on a broader scope, perhaps more than it was in the past. One example from the headlines would be the U.S. imposing steel and aluminum tariffs on the E.U., Canada and Mexico for national security reasons. I think it’s hard to pin down the motivations for the decline in Chinese investment in the U.S. but there has certainly been a decline, and as a result we’re seeing the same amount of overall Chinese outbound investment going to other regions in the world such as Europe, Latin America, and other developing countries.”

This poses the question of how Mexico will be involved. NAFTA may soon be a thing of the past upon ratification of its replacement, the USMCA, but uncertainty remains in the minds of global trade leaders and investors alike. In this new environment, diversification of investment sources might very well be the key to success if the government wants to see its vision of development projects come to fruition, such as railways extending from the Pacific to the Caribbean and expansion of electricity transmission infrastructure. It’s not a question of opportunity as much as it is a question of lessons learned from recent history in the region, claims Fernandez.

“For many years in Mexico there was a natural tendency to focus on development through NAFTA because it was in many ways taken for granted as the simplest and most effective option for promotion of foreign direct investment. Considering the recent rise of foreign investment from other sources throughout Latin America, there may be some value in diversifying and trying to attract more investment from other countries.”

Diversification presents opportunities when the right investors are involved. Smart selection of projects and partners will determine success in Mexico as plans move from policy goals to implementation.

“In the last 20-30 years, China has built an incredible amount of infrastructure in terms of rail, electricity transmission, and highways, so they have the recent experience and in general China tends to subsidize project costs through loans that are below market rates to promote exports. That combination of attributes has made China an attractive partner for countries throughout Latin America, and I think that could appeal to Mexico as well,” added Fernandez.

The most critical element of global diversification will ultimately lead to a greater economic impact. As more countries are involved with each other to collaborate on economic development, the sources of investment become more diverse. Not all countries are open for investment in the current political environment, and that provides more opportunities for developing countries to tap into the open market to capture the overflow of investment which may have originally ended up elsewhere. Many countries in Latin America are currently looking promising.

“I think now we’re seeing a wider range of Chinese commercial banks and project owners willing to invest their equity, as well as Chinese insurance companies looking to invest insurance assets and Chinese tech startups that are now expanding their offerings of products into Latin America. There’s going to be increased diversification of where the money is coming from, which is good. Going forward, investment will be reaching more sectors of the economy than just the traditional perception of Chinese investments being principally related to natural resources and transportation infrastructure. We’re starting to see investments across a more diverse range of industries, and I think that’s going to be a good thing for Latin America,” Fernandez concluded.

Gaston P. Fernandez is a partner at Hogan Lovells.  He often represents Latin American national governments and companies and has worked on matters involving Asian investment throughout Latin America in the petrochemical, power generation, transportation, and mining industries. He has been involved with the negotiation and successful closing of credit facilities for Latin American national governments and companies from U.S., European, and Asian banks, including China Development Bank, The Export-Import Bank of China, Bank of China, Industrial and Commercial Bank of China (ICBC), The Japan Bank for International Cooperation (JBIC), and The Export-Import Bank of Korea.

The USMCA – Beyond Labor & Autos

There’s been a tremendous amount of ink spilt as of late about the ongoing battle on Capitol Hill over the labor-enforcement provisions of the United States-Mexico-Canada Agreement (USMCA) and, more recently, about the degree to which the new Rules of Origin for autos will positively impact sector employment.

There is still no light at the end of the tunnel with respect to labor-enforcement impasse. While Mexico recently passed labor-reform legislation that will allow workers to vote on unions and their labor contracts through secret ballots, Democrats maintain the enforcement provisions within the USMCA are insufficient and are unlikely to create the conditions necessary to prevent the continued flight of American jobs south of the border. Republicans maintain the labor provisions are a cut above NAFTA and are America’s best chance of holding Mexican officials accountable (politically and financially).

Similarly, the White House maintains the automotive Rules of Origin, featuring significantly higher North American content requirements, will generate far more jobs the 28,000 highlighted by the U.S. International Trade Commission’s report released last month.

The result of the impasse is ongoing ambiguity over the fate of the beleaguered trade deal and, in turn, the fate of free trade in North America.

While there’s no question these are important considerations and that reconciling the impasse would serve to secure the longevity of the USMCA, there is significant danger in making these issues deal breakers.

There’s more to free trade than labor enforcement and auto-sector employment

The USMCA is about far more than updating or improving labor standards, or even refining Rules of Origin for North American automobiles. It’s is a wholesale modernization of a trade deal that has solidified North America’s position as the largest trading bloc in the world.

While impassioned pleas have been made by Republicans and Democrats, policymakers often fail to acknowledge the impact of the agreement and free trade in general across the broader U.S. economy.

The importance of free trade to America’s economy and industries presents an irrefutable argument for ratifying the USMCA and augmenting free trade in North America.

Canada and Mexico are among the top three export markets for 49 U.S. states, and either Canada or Mexico is the top trading partner for 39 U.S. states. Approximately two million American jobs are supported by manufacturing exports to Canada and Mexico alone.

Since NAFTA was enacted in 1993, U.S. services exports to Canada and Mexico have tripled from $27 billion to $91 billion. American farmers rely heavily on access to the Canadian and Mexican markets with one-third of U.S. agricultural exports going to their southern and northern neighbors.

Much of the prosperity generated by free trade in North America has directly benefitted small businesses in the U.S. which count Canada and Mexico as their top two export destinations.

Looking beyond labor provisions and automotive rules of origin

The aforementioned data should be reason enough to make the ratification of the USMCA a sure bet. And yet, the new deal has the potential to further expand trade across North America and provide real benefits to American businesses and workers.

The intellectual property protections will shield producers against counterfeit goods and spur activity in IP-intensive industries, which currently support 45.5 million jobs that generate 6.6 trillion in U.S. GDP, according the U.S. Chamber of Commerce.

The agreement also reduces red tape and puts forward fair and transparent regulatory procedures, further enabling America’s small businesses to engage in the import and export of goods.

And while the growth of e-commerce and digital products creates new challenges for international customs agencies and the World Customs Organization regarding the appropriate application of duties, the USMCA introduces new provisions for a digital economy that will help to secure cross-border data flows, prohibit customs duties on transmission of electronic products such as e-books, and see continental cybersecurity collaboration.

The USMCA streamlines customs procedures, harmonizes regulatory policies, promotes e-commerce, offers greater access to Canada’s dairy market and retains critical dispute-resolution provisions for country-to-country disputes.

Broadening Public Discourse of USMCA

Rarely are the benefits listed above mentioned in public discourse over the USMCA, which has become almost obsessively hinged to labor-enforcement provisions. This is not to suggest those provision aren’t important. Indeed, the very impetus behind renegotiating NAFTA was to level the playing field with respect to labor, particularly in the manufacturing sector.

Similarly, changes to the Rules of Origin for autos are important to consider. No other industry has seized on the benefits of NAFTA to create integrated, continental supply chains the way the automotive industry has. Changes to how these supply chains function will impact production and distribution models, as well as employment and consumption trends.

It’s critical to discuss these issues. But it’s equally important the many other wide-ranging reforms outlined in the USMCA aren’t lost or overshadowed by that discussion. Neglecting to consider these benefits would be a disservice not only to the many stakeholders and negotiators who fought hard to ensure their inclusion into the agreement, but to the millions of Americans who would stand to benefit from these inclusions. Given that these same Americans are the constituents of the men and women in Congress, failing to ratify the USMCA over any single provision would be a classic case of members of Congress cutting off their noses to spite their faces.

Candace Sider is vice president of Government and Regulatory Affairs North America at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations.

ITC Report on NAFTA Revision Doesn’t Impress Democrats

President Trump got a gift from the U.S. International Trade Commission Thursday – a mostly positive assessment of the probable economic effects of the US-Mexico-Canada Agreement, formerly NAFTA.

That won’t appease congressional democrats, though. They’re concerned about the extent to which the USMCA’s rules on labor and environmental protection would be enforced. And there’s not much in the agreement to assuage them.

“USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world,” the ITC said in a 379-page report.

“[T]he agreement would likely have a positive impact on all broad industry sectors within the U.S. economy. Manufacturing would experience the largest percentage gains in output, exports, wages, and employment, while in absolute terms, services would experience the largest gains in output and employment,” the report said.

It predicts nominal gains in employment and GDP, which is the most that one can expect from any trade agreement.

While not explicitly saying so, the report strongly suggests that the agreement’s benefits will only be realized if its rules are enforced.

“If fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment,” the report said.

Caveats like that appear throughout the report:

– “The agreement, if enforced, would strengthen labor standards and rights.”

– “The Commission assesses that full implementation and enforcement of the IPR (intellectual property rights) chapter’s provisions would benefit U.S. industries that rely on IPR protections.”

– “Overall, labor organizations and other observers express the view that USMCA labor obligations will have no impact on wages or labor conditions if member countries fail to enforce these provisions. Despite the agreement’s new and strengthened labor provisions, some groups criticize the agreement’s lack of measures guaranteeing the enforcement or monitoring of its labor obligations.”

– USMCA holds that “parties must enforce their environmental laws, while also retaining the right to exercise discretion with respect to enforcement of those laws.”

Now there’s a loophole you could drive an 18-wheeler through; sure, we’ll enforce our environmental laws, subject to our discretion. It’s glaringly obvious how much enthusiasm the Trump administration has for enforcing environmental laws and regulations – none whatsoever. Dozens of environmental regulations imposed during the Obama administration have been put off or repealed – all for the benefit of business and industry.

And business and industry liked what they saw.

“This comprehensive analysis shows that all broad industry sectors across the U.S. economy will benefit from USMCA,” the Business Roundtable said in a statement.

“[M]embers of Congress reviewing the ITC report and considering their vote on USMCA should look at the big picture. Liberalized trade with Canada and Mexico has been tremendously important to the U.S. economy,” the U.S. Chamber of Commerce said before the report was released. “A vote for USMCA is a vote to continue these far-reaching benefits. To recap, U.S. trade with Canada and Mexico.”

U.S. Sen. Ron Wyden, D-Ore., the ranking democrat on the Senate Finance Committee, said, “This report confirms what has been clear since this deal was announced – Donald Trump’s (USMCA) represents at best a minor update to NAFTA, which will offer only limited benefits to U.S. workers. As I’ve said for months, the administration shouldn’t squander the opportunity to lock in real, enforceable labor standards in Mexico and fix the enforcement problems that have plagued NAFTA.”

The Finance Committee has jurisdiction over U.S. trade policy, as does the House Ways and Means Committee. It’s chairman, Rep. Richard E. Neal, D-Mass., said it was “notable that the Commission consistently highlights the inclusion of enforcement provisions as the key factor in determining whether labor standards and rights will actually be strengthened in Mexico.”

“Before the release of the ITC report, I believed that the renegotiated NAFTA, as written, needed to be improved before House consideration. Nothing in this report alleviates those concerns,” said Rep. Earl Blumenauer, , D-Ore., chairman of the Ways and Means Trade Subcommittee. The House requires stronger provisions on labor, the environment, access to medicine and enforcement.”

NAFTA has no chapters on labor rights or environmental protection. They are addressed in side agreements that are only marginally enforceable. USMCA negotiators agreed to move those side agreements into the body of the agreement and to make them fully enforceable. But there’s a big difference between “enforceable” and “enforced.” Enforcement costs money, and in some cases it’s difficult to do.

For example, USMCA stipulates that at least 40% of a car built in Mexico be built by workers earning at least $16 per hour. Good luck enforcing that.

In order to add enforcement language to USMCA that will satisfy congressional democrats, U.S., Canadian and Mexican negotiators would have to reopen the negotiations and spend weeks or even months hashing it out. That’s not going to happen.

What will happen is that Trump, now in re-election mode, will claim that he transformed what he once called “the worst trade deal in the history of the world,” into what now says is “the largest, most significant, modern, and balanced trade agreement in history.”

Hyperbole aside, Congress still has to approve USMCA and that is far from a foregone conclusion.

John Brinkley was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.

This article originally appeared in Forbes.

2020 Democratic Candidates Won’t Find It So Easy To Be Anti-Trade

Maybe this time around, a Democratic presidential candidate will have the courage to be honest about trade.

Hillary Clinton supported free trade in general and the Trans-Pacific Partnership in particular until she ran for president in 2016, when she made the cold political calculation that continuing to support the TPP would result in a net loss of votes. So, she ran away from it though it were radioactive.

You may remember seeing delegates at the 2016 Democratic Convention holding signs that said “TPP” with a red line through it.

Bernie Sanders kept carping about “job-killing trade agreements” during his 2016 campaign, but never said which trade agreements he was talking about or what jobs they had killed. That didn’t matter to his followers, who thought everything he said was prophetic.

In many parts of the country, particularly Appalachia and the Midwest, it’s a lot easier to go with popular sentiment and blame NAFTA for the decline in manufacturing jobs than it is to explain to voters why that’s not true. A candidate would have to explain that jobs started migrating to Mexico three decades before NAFTA took effect; that U.S. manufacturing jobs peaked at 19.5 million in 1979 and had fallen to 17 million in 1994, when NAFTA took effect; and that they increased in number for the remainder of that decade. That takes time and requires the use of statistics that bore people. Moreover, if someone believes something strongly, he or she will continue to believe it even in the face of proof that it’s wrong.

Anti-trade politicians don’t use statistics, because there aren’t any that bolster their argument. Instead, they use evocative imagery that elicit an emotional reaction – pictures of closed factories with broken windows and weeds climbing the walls, abandoned communities, welfare lines.

Well, things have changed. It used to be that Republicans supported free trade in much larger numbers than Democrats. But as the 2020 election cycle gets under way, polls show that Democratic voters are more open to trade than they used to be.

Gallup poll conducted in early February found that 74% of Americans saw foreign trade “as an opportunity for growth.” Three years earlier, the same question had gotten a 58% positive response rate.

An NBC/Wall Street Journal poll in July 2018 found that 50% of Americans thought trade “has helped the United States.” That was up from 31% in June 2016.

These polls and others have found that a plurality of Americans think increasing tariffs is bad for the United States, that President Trump’s trade policies in general are bad for the U.S. economy and bad for respondents’ “personal financial situation.”

Nowadays, it’s President Trump and his followers who think the U.S. had gotten the short end of the stick on trade policy. They think the poor little United States has been bullied by the likes of Mexico, Canada, the European Union and China.

Sanders also has the distinction of agreeing with Trump, whom he despises, on trade policy. Trump even said so.

“I like Bernie. He is the one person that, on trade, he sort of would agree (with me) on trade. I am being very tough on trade. He is tough on trade,” Trump said last month.

That’s probably the last thing Sanders wanted to hear.

It will be several months before the 2020 presidential race gets going in earnest. In the meantime, the Peterson Institute for International Economics has published a guide to how each of the announced and expected-to-announce democratic candidates stands on international trade. You can see it here.

Oh, and one other thing: Go UVa!

About the author

John Brinkley was a speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement

This article originally appeared in Forbes.

Ratifying USMCA the Only Responsible Option at this Point

The fate of free trade in North America is hanging in the balance.

That sentiment would have been true 18 months ago when negotiations of NAFTA began. It would have been true six months later when the parties failed to meet their self-imposed first deadline. It would have been true last October when it appeared the U.S. was prepared to sign a bilateral deal with Mexico and exclude Canada. And it’s still true today as the agreement gets lost in the fracas of politicking in Washington.

The impending release of the U.S. International Trade Commission (ITC) report, which provides members of Congress with in-depth analysis of the potential economic impact of the proposed United States-Canada-Mexico Agreement (USMCA), may very well have minimal impact in swaying Congressional opponents of the deal.

According to a recent report in Politico, the ITC’s analysis is likely to suggest the USMCA will have a negligible impact to U.S. GDP, which won’t serve as a bulwark against complaints by House Democrats that the agreement is short on enforcement mechanisms for its labor provisions. If that weren’t threatening enough, Ottawa has now suggested it may not ratify the USMCA unless Washington removes the Section 232 tariffs on aluminum and steel imports.

Yet, regardless of the ongoing warfare on Capitol Hill and the potentially uninspiring data in the ITC report, the reality is that at this point in time the ratification of the USMCA is the best possible option. The handful of alternatives available will only serve to further destabilize confidence in and certainty around the future of trade within North America.

Renegotiation

Democrats have been demanding stronger enforcement of the USMCA’s labor provisions. These demands are in keeping with the party’s longstanding complaint that NAFTA offered Mexico’s low-wage, low-regulation economy a leg up on attracting manufacturers. While the USMCA’s new labor provisions are intended to address this, Democrats argue the agreement lacks teeth in ensuring Mexico holds up to its end of the agreement.

However, creating an enforcement mechanism means going back to the negotiating table, something none of the parties are interested in doing, particularly since it took a great deal of intense negotiation over more than a year to come up with the agreement that’s currently on the table. It’s quite likely Canada and Mexico will demand significant concessions in exchange for a stronger enforcement mechanism, which may negate some of the agreement’s other benefits.

The Trump card

Whether or not the agreement is negotiated is, in some ways, irrelevant. U.S. President Donald Trump has already threatened that if Democrats attempt to quash the USMCA – either before or after a renegotiation of its enforcement provisions – Washington will simply pull the U.S. out of NAFTA, pitting the administration against Congress in a legal battle over trade-agreement decision making that is certain to become a wedge issue in the 2020 presidential campaign. The president recently reiterated his threat to withdraw from NAFTA during a recent interview on the Fox Business Network.

The result would be a return to a trade environment of uncertainty that would surely result in reduced cross-border investment that would adversely impact the economies of all three USMCA countries and potentially stymie Washington’s efforts to negotiate bilateral trade deals with Japan, the European Union and the United Kingdom – all important trade partners.

Forget the whole thing

If the threat to withdraw from NAFTA is simply bluster on the part of the President and ratification of the USMCA ends up locked in a Congressional stalemate, the other alternative is to simply do away with the renegotiated agreement and revert back to the original NAFTA deal. While that would certainly be a viable – and minimally disruptive alternative – the truth is that the USMCA made substantial gains in modernizing free trade in North America, addressing critical issues such as regulatory harmonization, the digital economy and intellectual property protection and host of other aspects that are not addressed in NAFTA. Whether these updates result in tangible gains to GDP and/or employment only time will tell. But at the very least they serve to incentivize those engaged in cross-border trade to continue doing so and perhaps even broaden the scope of their activity. Given that North American trade represents more than a trillion dollars annually, it’s critical to – at the very least – maintain the gains already made over the past 25 years. The USMCA does exactly that and more.

It took very seasoned negotiators and trade experts more than a year of intense talks to arrive at the agreement that’s currently on the table, including the chapters that serve to bring free trade into the 21st century in a fair and equitable manner. It would be irresponsible to do away with these gainful additions in the name of partisanship, and voters would presumably hold their elected representatives to account should they choose to do so.

The best course of action

The responsible and most advantageous thing for Congress to do at this point would be to ratify the USMCA. That’s the opinion of approximately 400 businesses and business associations that are now part of the USMCA Coalition, a collective of like-minded enterprises that believe in the importance of free trade to the U.S. economy and to U.S. jobs, and of which Livingston International is a member.

Given the impressive gains made by the USMCA in fostering an environment of fair and free trade across the continent, and the risks associated with returning to the negotiating table and/or drawing out the ratification of the agreement into the political fray of the 2020 election campaign, it is critical that lawmakers on Capitol Hill make ratification of the new deal a key priority in the coming months.

Failing to do so would put into peril the advantages of free trade on which so many jobs rely, and would serve to reinforce the perception that lawmakers are all too eager to put partisanship ahead of effective representation. 

Candace Sider is vice president of Government and Regulatory Affairs North America at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations.

With NAFTA redo, Mexico looks to boost economic growth

More than twenty years ago, Ross Perot warned that removing trade barriers with Mexico would create a “giant sucking sound,” as jobs left the United States for its southern neighbor. Today, the sound you hear in Mexico is a giant exhale.

That’s the sigh of relief after the United States, Canada and Mexico reached a new North American Free Trade Agreement. Mexico heavily relies on NAFTA, which has been in place since 1994, and was vulnerable after President Trump criticized the trade pact and threatened withdraw.

The uncertainty over NAFTA was cloud hanging over Mexico’s new president, Andres Manuel Lopez Obrador, who took office on Dec. 1 after his landslide victory a few months earlier. There is still some anxiety over the proposed agreement because it needs congressional approval. Congressional Democrats, who will lead the House next year, say the deal doesn’t go far enough to protect workers and the environment. Still, no one wants to see NAFTA scrapped because it would harm the economies of all three countries.

Mexico is the poster child for the benefits of free trade. NAFTA was an unusual deal in that it involved two highly developed economies and a developing one in Mexico. Since 1994, Mexico’s gross domestic product, a measure of output in goods and services, has more than doubled to $1.15 trillion. The economy has been driven by exports, as foreign investors built factories across northern and central Mexico to supply the North American market.

Last year, Mexico exported nearly $410 billion worth of goods, about 80 percent to the U.S. and Canada. The largest export is vehicles, followed by electric equipment and machinery, including computers. The auto industry is a big winner in the revamped trade deal, which is being called the U.S.-Mexico-Canada Agreement, or USMCA, simply by averting a major disruption to it supply chain.

NAFTA’s impact on Mexico has gone well beyond economics. The deal signaled a new era of openness for Mexicans, increasing their willingness to venture out into the world to forge new ties. Mexico has embraced free trade, striking deals with Europe, South America and parts of Asia.

The nation has also liberalized foreign investment in some national sectors previously forbidden or heavily capped to foreign ownership. Under Lopez Obrador’s predecessor, Enrique Pena Nieto, the Mexican government reformed the energy sector four years ago to allow private operators into its territorial waters for the first time. Until then, state-owned Pemex had sole exploration and production rights.

But a drastic decline in oil production in the last 15 years led the government to invite foreign investment to boost production. Oil is a significant source of revenue for the government.

The international industry has moved into the country and achieved quick results. In July 2017, the first offshore exploration well drilled by the private sector in Mexico’s history discovered oil. Energy reform is expected to continue to attract new capital and provide local jobs and government revenues.

As foreign oil firms develop the areas they have won at government auctions, they could bring in more than $100 billion in investment to the country. Much of the foreign investment after NAFTA was to take advantage of Mexico’s lower wages to manufacture goods for export. But financials flows into the country are shifting from labor arbitrage to infrastructure and consumer-driven investments. Despite all the political rhetoric about building walls, U.S. investors remain big fans of Mexico, accounting for nearly half of the foreign direct investment last year.

To attract investment to economically underdeveloped areas in the southern states, Mexico created Special Economic Zones in 2016. Companies setting up in these areas receive various incentives, trade facilities, duty-free customs benefits, infrastructure development prerogatives and regulatory and administrative benefits.

Investors are making big bets on Mexico despite concerns about Lopez Obrador, a leftist who once criticized free-market policies. He has come around on USMCA because It provides stability and certainty as he tries to stimulate the economy.

While Mexico has successfully integrated into the world economy with NAFTA and other trade agreements, it still struggles with slow economic growth.

GDP has increased about 2 percent annually in recent years in Latin America’s second largest economy. Structural reforms are needed to address tax, labor and social insurance rules that stifle productivity and undermine economic progress.

The lack of growth has generated poverty, crime, violence and migration. How Lopez Obrador tackles these stubborn issues will be closely watched by foreign investors. But now that the dust has settled on NAFTA, there is increased optimism about Mexico’s future.

Raimundo Diaz is head of Americas at TMF Group, a professional services firm based in the Netherlands. TMF Group provides accounting, payroll, HR and other corporate services, with a focus on companies expanding internationally.

NAFTA 2.0

After more than a year of negotiations and minutes before the midnight deadline, the United States, México, and Canada reached a new free trade, tri-national agreement. The US-México-Canada Agreement (USMCA) will ultimately replace the North American Free Trade Agreement (NAFTA). USMCA or NAFTA 2.0, contains 34 Chapters and 12 side letters covering agriculture, dispute resolution, e-commerce, and labor relations.

1. Background on NAFTA 1.0

Before we can understand the USMCA, it is important to understand the history behind NAFTA. NAFTA, or as it is known in Spanish: Tratado de Libre Comercio de América del Norte (TLCAN), was executed by the United States of America, México, and Canada on January 1, 1994.

The goal of NAFTA was to create a free trade zone between the U.S., Canada, and México. In addition to the core agreement, incorporated in NAFTA are the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC). The NAALC and NAAEC were added with the goal of protecting workers and the environment.

The NAALC is typically referred to as the “Labor Side of the Agreement,” and within the agreement each country agreed to enforce its own labor standards and to strive to improve labor standards within its respective countries. The NAAEC is the “Environmental Side of the Agreement,” within which each of the three countries agreed on principles and objectives for the conservation and the protection of the environment.

NAFTA created the largest free trade area in the world, helping drive down consumer good prices, and boosting economic growth, profits and employment in all three countries.

II. The Impact Of NAFTA to Employers in the Region

Many economic experts note that NAFTA was quite beneficial to the United States.  This benefit came in the form of lowered tariffs and import prices, as well as a narrowed risk of inflation.  Some argued that it also had a positive impact on interest rates in the United States.

From 1993 to 2017, the United States increased its exports of goods to México and Canada from $142 billion to $525 billion, which equates to a third of its total exports. It is estimated that NAFTA helped create at least 5 million direct and indirect jobs in the United States associated with the export of goods.

In México, NAFTA facilitated the growth of the maquiladora industry. A maquiladora is essentially a subcontractor manufacturing operation, where factories import material and equipment on a duty-free basis for assembly and manufacturing. The assembled product may then be returned to the raw materials’ country of origin.  NAFTA had a direct result in the growth and expansion of this industry.

The interdependence of the three economies is seen not only through the growth in the maquiladora industry, but also in the automobile manufacturing industry. For example, by 2020, México will manufacture 25% of all North American cars. Additionally, approximately 75% of Mexican exports are sold to United States consumers, a number which in large part is a direct result of NAFTA.

On September 30, 2018, the United States, México, and Canada completed negotiations of an updated trade agreement now known as United States-México-Canada Agreement—“USMCA,” or as we like to refer to it, NAFTA 2.0.  While the deal was agreed upon by the three countries, it must ultimately be ratified by each country’s legislature and, as such, will likely not go into effect before 2019.

III. USMCA-What it means to Employers

Chapter 23 of the NAFTA 2.0 is dedicated to the issue of labor.  This chapter establishes that all the parties should recognize, adopt, and follow the following rights:

-Freedom of association and the effective recognition of the right to collective bargaining;

-The elimination of all forms of forced or compulsory labor;

-The effective abolition of child labor and, for the purposes of this Agreement, a prohibition on the worst forms of child labor; and

-The elimination of discrimination with respect to employment and occupation.

The USMCA contains specific provisions impacting each of the countries that is a party to the agreement. For example, within the USMCA, there is a provision requiring México to create adequate legislation to ensure freedom of association as well as requirements relating to collective bargaining and labor relations. Additionally, the car manufacturing industry will be impacted by the updated agreement as it provides that a significant percentage of work performed on car manufacturing must be completed by workers earning at least $16 an hour, or about three times what the typical Mexican autoworker currently makes.

Canada’s dairy industry will also be impacted by the USMCA. Under NAFTA, United States farmers had limited access to the Canadian market as a result of tariffs and set quotas on dairy products exported to Canada. These restrictions are eased under the new agreement, thus opening up opportunities in the Canadian market for the United States dairy industry.

While the agreement was officially reached on September 30, 2018, the USMCA will not become effective until ratified by the legislatures of the United States, México, and Canada.  The anticipated date for each country’s respective legislature to pass the agreement is sometime in the middle of 2019.  One important difference between NAFTA and the USMCA is that the USMCA expires in 2034; NAFTA was a perpetual agreement.

IV. Forecast and Conclusion

While it is early to make concrete predictions on the true impact of the USMCA, there will no doubt be some impact to employers across the three countries. For example, those in the automotive industry will need to grapple with increased salary requirements for their employees in México, which may ultimately impact consumer cost. Some analysts predict that the automotive industry will shift manufacturing to Asia in order to reduce costs. This, along with other provisions regarding collective bargaining and labor relations, may be a generating force for labor-related issues for employers, particularly in México. Additionally, the United States dairy industry may see an uptick in labor demands as a result of the new market opportunities in Canada. While these changes may be gradual, growth and updated labor dynamics as a result of the USMCA should be addressed with the guidance and counsel of legal professionals.

 

 

About the authors:

Mishell Parreno Taylor is a shareholder in Littler’s San Diego office.

 

David Leal González is an associate in Littler’s Monterrey, Mexico office.