Auburn professor addresses new trade deal by U.S., Mexico and Canada

Auburn University professor of supply chain management Glenn Richey answers the below questions regarding the recent trade deal struck by the U.S., Mexico and Canada (called the United States-Mexico-Canada Agreement, or USMCA) that replaces the North American Free Trade Agreement, or NAFTA. Richey is the Harbert Eminent Scholar in supply chain management in Auburn’s Harbert College of Business. He serves as senior editor for Decision Sciences Journal and as associate editor of the Journal of Business Logistics and the Journal of Supply Chain Management.

What does this mean for consumers?
This morning I listened to an international trade lawyer (Mark Warner) say “what we describe as a win for Canada is usually a loss for Canadian consumers and vice versa.” This is the unfortunate reality of Canadian “supply management” and an opposing view to free trade policy. The U.S. trade laws are largely written around protecting the consumer and encouraging competition. Overall, this deal should stabilize prices, encourage more local (N. American) trade, make it easier to track unethical business behavior and result in more exchanges that positively impact competition. But this is all industry dependent. For instance, the price of cars should rise due to impacts on international parts coming into the three countries. Canadians will also experience a cost increase in pharmaceuticals thanks to new U.S. protectionism in that industry.

Will this have an effect on jobs in our country?
Expect across-the-board middle class job growth, increases in manufacturing opportunities and new life and interests in agricultural product jobs. Our new issue will be finding people to fill these jobs as some may not be attractive to U.S. citizens. This will make the immigration politics even more complex in future years. We need more labor.
Sen. Doug Jones made a comment recently that he is concerned that the Alabama automotive industry will be hurt by the USMCA. That may be a bit shortsighted and probably is an example of him not understanding the supply chain. Certainly, the interventions related to steel will drive prices up on most quality vehicles. But the automotive industry moved to Alabama and Georgia for strategic proximity reasons. They were coming to the states anyway and we provided economic incentives to get them here. Today, every major company in the world that I speak with is talking about being closer to the customer and enhancing the consumer experience. You still really can’t do that in the U.S. when you are sitting in Korea or Germany. Additionally, the agreement should help companies pressure their business partners to move closer to the U.S. plants. We will be pulling foreign made parts out of free trade zones and into the U.S. economy (jobs, revenue and taxes). It is likely that pressure on our automotive sector will cause it to evolve rather than eliminate jobs. Alabama’s auto industry should have greater concern about the future reduction of vehicle ownership (less than 40 percent of the population of New York City own a vehicle) than the USMCA.

What is the biggest change with this new agreement?
The opening up of the Canadian dairy/ag markets is a major change. It will be important to watch the Canadian agriculture groups as they work to influence this part of the agreement. The increased protection of pharmaceuticals by two years (no generics) in Canada is also notable. But probably the biggest impact is building in restrictions that stop China from using Mexico as a discounted entry point into the U.S. As for Mexico, government policy was focused on keeping wages low to support competitive pricing. The facilitated growth of labor unions will have an impact on Mexican prices. Mexico will need to find ways to keep their manufacturing growth moving as well as build better relationships with the energy sector.

Finally, we aren’t done talking about steel with Canada and Mexico. This trade barrier will be dependent on U.S. global negotiations, but if the president can show a pathway to reduced barriers through better agreements, he will then be able to use the reduction of steel tariffs as a reward to specific partners who negotiate in good faith. The day that happens¬—you will want your retirement money to be invested in the stock market.

The stock market seemed to respond favorably to this new agreement.
The stock market responds positively to economic policy movement and reduced uncertainty. People and intuitions wait to invest when they aren’t sure where policy is headed. So, when these areas of concern are addressed with a longstanding policy, investors take a deep breath and invest more heavily in industry.

Will this have a positive effect on our economy?
I believe it will. The great economist Schumpeter wrote about a concept called creative destruction. The best way to describe his ideas in the southern vernacular is to say “If it ain’t broke, break it.” He noted that if you don’t “break it” someone else will … and they will leave you in a worse position. This is, of course, a simplification, but we have antiquated agreements around the world that have needed to be revisited for years now. Politicians don’t like to do this as it can result in ugly behaviors between partners, including culture clashes. But if you don’t break down the old agreements and update them to the new economy—they just won’t work. Some industries will feel pain due to increased costs, but the economy should rise as a whole as we redefine these relationships with our most important friends and neighbors, both here in North America and across the globe.