AFL-CIO Pre-Hearing Brief
For the U.S. International Trade Commission’s “Investigation No. TPA-105-003, United States-Mexico-Canada Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors”
Hearing To Be Held November 15-16, 2018
The AFL-CIO reserves judgment, at this time, on the renegotiated North American Free Trade Agreement (NAFTA), also called the US-Mexico-Canada Agreement (USMCA). While there are positive provisions in the renegotiated NAFTA, including improved labor and investment terms, both the labor rules and enforcement tools should be improved. There are also provisions in the agreement that undermine the interests of workers and consumers, as a result of provisions including pharmaceutical monopolies, financial services, and regulatory practices. We urge the USITC to demonstrate that improvement in rules regarding workers’ rights alone will have no impact without effective enforcement; to scrutinize the auto rule of origin to provide a reliable analysis of its potential impacts; and to examine the negative effects of locking excessive pharmaceutical monopolies into NAFTA. We also urge the USITC to update its modeling to focus on empirical evidence, including outsourcing and transfer of production under the current NAFTA. Outsourcing has already had severe negative impacts on U.S. jobs and wages in numerous sectors including auto, aerospace, electronics, processed foods, and call centers. If the new NAFTA does not effectively curtail the suppression of wages in Mexico, the transfer of high-skilled, high-paying jobs to Mexico will continue.
On behalf of its 55 affiliates representing more than 12 and a half million workers and their families, the AFL-CIO appreciates the opportunity to provide this written submission to the United States International Trade Commission (USITC) for its “United States-Mexico-Canada Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors” Investigation.
The AFL-CIO appreciates the efforts that the United States (U.S.) government has made to improve the original North American Free Trade Agreement (NAFTA) and secure fairer and more balanced terms of trade. The AFL-CIO opposed the original NAFTA and most subsequent so-called ‘free trade agreements” (FTAs) because we oppose trade rules made largely by and for global corporations that reward greed and employer irresponsibility at the expense of hardworking families across the globe.
Beginning with NAFTA, trade agreements have incorporated rules and restrictions designed to limit the way citizens organize, and benefit from, economic rules. Sweeping trade rules have received only superficial examination under the computable general equilibrium (CGE) model. As a result, NAFTA and other subsequent trade deals have failed to perform as predicted, instead contributing to growing U.S. trade deficits, accelerated outsourcing and job loss, income inequality, suppressed wages, and a weaker middle class than we would have otherwise. The CGE model only looks at an extremely limited slice of the provisions in a modern trade agreement. This outdated and myopic approach has resulted in misleading conclusions that have had devastating results for America’s working families when put into practice.
Simply put, NAFTA’s rules have not benefitted working people. It is an inescapable fact that millions of workers across economic sectors regard NAFTA as a failure. They have been left behind and have not shared in the gains from globalization. NAFTA and subsequent trade agreements have contributed to stagnant wages, rising income inequality and increased outsourcing of jobs and production. Across the country, workers and communities have lost confidence in the way the United States manages globalization.
This renegotiation, while not all that the AFL-CIO recommended, begins to take a new direction in some key areas. It reduces the power and scope of the investor-to-state dispute settlement mechanism (ISDS), a key outsourcing incentive in the original NAFTA. Likewise, it provides much-needed language to improve Mexico’s labor law and practice, especially with respect to "protection unions." It also strengthens the rules of origin for automobiles (though we are unsure whether the rules will effectively preserve and create new U.S. jobs), creates a six-year review mechanism, and includes some additional provisions to address duty evasion.
On the other hand, this renegotiation maintains many of the basic flaws of corporate-driven trade agreements, with some rules that are worse than the original NAFTA. For example, it includes excessive monopoly rights for brand-name prescription drugs; creates stricter rules limiting the ways the United States can protect the public interest through food safety, chemical safety, and financial services regulations; restricts our ability to enact provisions protecting the security and privacy of consumer data; and locks in current executive orders regarding how the United States creates regulations in general—preventing this and future Congresses from improving our processes for creating and modifying regulations unless those changes conform to the strict rules promulgated in the Good Regulatory Practices Chapter.
Imagine if the U.S. government of 1878, 150 years ago, had attempted to lock in through an international agreement not only certain regulations, but the processes to create those regulations. Such a scheme would have interfered with the passage of fundamental laws such as the 1906 Food and Drugs Act and the 1938 Federal Food, Drug, and Cosmetic Act. More importantly, it would be absurd to think that the preferences of citizens and opinions on the “best” ways to protect the public interest would remain unchanged in 150 years. The idea of locking in not only current rules, but current methods of creating new rules, is not only short-sighted, it interferes with the right of citizens to use the levers of democracy to make different choices.
In this investigation, the USITC will analyze the likely impacts of this renegotiation. Given that the renegotiation is primarily one of rules (and not one of tariffs), it is more important than ever that the USITC expand its toolbox beyond its traditional CGE approach, which focuses primarily on tariff changes and has never adequately accounted for impacts such as currency misalignment, higher drug costs, decreased worker bargaining power, the empirical disconnect between worker productivity and workers’ wages, and social welfare losses due to regulatory chill and standstill. We encourage the USITC to expand its methodologies and provide a broader and more comprehensive view of this NAFTA renegotiation than traditional, limited CGE analysis allows. In the following sections, we highlight a few issues of note.
Under the original NAFTA and subsequent trade agreements. U.S. communities lost millions of jobs as companies shed their U.S. workforces to shift jobs and production to places where workers’ fundamental labor and human rights are routinely violated and wages are consequently unfairly suppressed. If and only if the labor obligations of the new NAFTA are fully implemented by all three Parties, lend themselves to stronger interpretation, and are combined with swift and certain enforcement mechanisms, which we note do not yet exist in the current draft, the new NAFTA has potential to alter this trend.
For the past three decades, Mexico has pursued a low-wage, low-rights strategy to attract investment. This strategy has led to rapid growth of foreign direct investment in manufacturing, but it has done little to improve the living standards of Mexican workers and their families. Mexican industry has world-class productivity yet falling wages. Mexican manufacturing workers earn on average less than a fifth of manufacturing workers in the U.S., and that wage gap has remained steady for 30 years despite wage stagnation in the U.S. Despite the massive increase in foreign investment since NAFTA, more than half of Mexicans live below the poverty line. Economic growth is simply not benefiting average Mexicans.
Low wages obviously hurt Mexican workers and their families. But they hurt American and Canadian workers, too. For example. Mexican workers do not make enough to buy U.S. exports, which keeps trade unbalanced. In addition. Mexico’s low-wage strategy continues to encourage companies to move production and jobs from the U.S. to Mexico devastating communities and undermining U.S. worker leverage to bargain for higher wages.
Mexico keeps wages low through a corporatist system of labor relations that has remained basically unchanged during 70 years of one-party rule. Under this system, employers sign “collective bargaining agreements” with employer-dominated unions, generally without the workers’ knowledge and sometimes before they have even been hired. These agreements are known in Mexico as “protection contracts,” and they are a very effective way for companies to keep wages low and deny workplace rights.
Critically, the Labor Chapter includes an annex that details labor law changes Mexico must enact and implement to eradicate the “protection contracts” that keep wages low and interfere with the rights of workers to form unions and negotiate with employers. However, given the Government of Mexico’s history of policies that purposely undermine wages and obstruct the rights of workers to organize and bargain collectively, the USITC should not assume that the mere presence of such obligations will effectively promote changes to law and practice. Although the incoming Mexican president has signaled strong support for labor reform, Mexico has not yet enacted the legal changes required, much less put them into practice. The AFL-CIO recommends withholding trade benefits for Mexican firms until such time as these obligations have been fulfilled.
In addition to the annex on Mexican labor law reform, the renegotiated NAFTA includes other meaningful improvements to labor obligations, including new provisions regarding violence, migrant workers, wage-related benefit payments, non-discrimination, and the right to strike. The text, however, retains the basic flaws of the “May 10” agreement, limiting itself to the International Labor Organization’s (ILO’s) 1998 Declaration of Fundamental Principles and Rights at Work, as opposed to the clearer ILO Conventions. While the text retains the objectionable limitations that labor violations under the agreement must be in a “manner affecting trade or investment” (which likely excludes much of the public sector) and occur in a “sustained or recurring course of action or inaction” (which excludes egregious but one-time acts such as murder or torture), the footnotes clarifying these standards are welcome improvements. A strengthened rule regarding goods made with forced labor and compulsory labor, including forced or compulsory child labor, is also welcome; however, it fails to cover goods from NAFTA parties (covering only goods from “other sources”) and fails to cover goods made in whole or in part by the worst forms of child labor, as we had recommended.
Important weaknesses remain, including a footnote that makes it difficult to uphold international labor standards and the absence of rules prohibiting abusive labor recruitment practices or requiring the payment of living wages. Most importantly, there are no labor-specific monitoring or enforcement provisions (such as an independent secretariat or certification requirements) that would promote the rules and create greater confidence that they will be swiftly or certainly enforced. As a result, the AFL-CIO has serious doubts that the improved rules will make a meaningful difference to North American working families without additional provisions, assured funding, and implementing language. Unenforced rules are not worth the paper they are written on. Therefore, we continue to push for improvements to the labor provisions within the text of the NAFTA (as well as in domestic law) in order to consider these gains meaningful.
In the past, the U.S. FTA Labor Chapters and side agreements have largely gone unmonitored and unenforced, as the Government Accountability Office has noted in two separate studies. As a result, NAFTA has put downward pressure on wages in the United States, Canada and Mexico. Moreover, given that increases in U.S. worker productivity no longer bear any relation to increases in wages, the USITC should abandon in its modeling the traditional assumption that increasing productivity automatically leads to higher wages. This has been particularly true in Mexico: though auto, auto parts and tire plants in Mexico are as productive as those in the United States and Canada, the gap between Mexico’s wages and that of its NAFTA trading partners is as great as or greater than ever.
As predicted by the Stolper-Samuelson theorem and recognized by economists such as Paul Krugman, existing trade deals have driven U.S. wages down. This is because returns are flowing to capital, rather than to wages for so-called “unskilled labor.” We implore the USITC to account for this trend in its study and to specifically identify what impact the renegotiated agreement is expected to have on wages, by quintile.
Auto Rules of Origin
Despite clear improvements over the auto rule of origin in the original NAFTA— including a higher regional value content (RVC) requirement (raised from 62.5% to 75%), the elimination of the “deeming” loophole, the creation of various classes of parts (e.g., core and principal parts) with higher RVCs than the original NAFTA, and the creation of a first-ever labor value content (LVC) requirement, the AFL-CIO has serious questions and concerns about the new rule and its potential to meaningfully preserve and create new high-wage auto supply chain jobs in the United States. We urge the USITC to analyze this rule carefully. Among our key concerns and questions regarding the deal’s Appendix to Annex 4-B (containing product-specific rules for automotive goods) are the following:
Table A.1: Core Parts for Passenger Vehicles and Light Trucks
- Table A.1 fails to include electric motors or anything relating to autonomous vehicles (e.g., CPUs, semiconductors, LIDAR modules). On an autonomous electric vehicle, this table could have little impact. Article 4-B.3.10 allows for other items to be added later, but why does it fail to front-load these items to give direction to the industry?
- Table A.1 appears to exclude heavy trucks from its coverage. If heavy trucks have no core parts, this appears to be a serious oversight.
Article 4-B.6 Steel and Aluminum
- Though this section includes a helpful requirement that automakers purchase 70% of the steel and aluminum they use from North American sources, it does not require those purchases to be originating by requiring a “melted and poured” standard for steel or a similar standard for aluminum. The lack of robustness in this standard will result in some automakers continuing to use steel and aluminum from North American producers who import steel slabs or semi-finished aluminum from China and elsewhere, doing minimal U.S. work and creating few U.S. jobs.
Article 4-B.7 Labor Value Content (LVC)
- The $16/hr. standard is arguably too low to make a significant difference in production location decisions such that new, family-wage jobs would more likely than not be created within the territory of the United States.
- The $16/hr. standard is not tied to inflation. Within 10 years. the provision could be relatively meaningless. It is conceivable that some producers may simply wait out inflation, continuing to locate new production in Mexico in hopes that inflation will catch up.
- The $16/hr. standard is an average, rather than a minimum, which blunts its impact. For example, manufacturing facilities will continue to be able to pay workers much less than $16/hr. so long as there are enough higher wage workers to raise the average. When there is near universal agreement that a minimum reasonable wage in the United States is $15/hr., establishing $16 as an average instead of a threshold seems unlikely to create the significant new family-wage jobs promised.
- As noted in the previous section of this brief, without a strong labor chapter, this provision could backfire, actually increasing pressure on Mexican workers to keep wages, benefits, and safety costs down, aggravating current levels of outsourcing.
- The R&D and IT expenditures described in Article 4-B.7.3 do not include a $16 requirement. It is wrong to assume that R&D and IT expenditures will always meet a $16/hr. minimum. As the provision currently reads, original equipment manufacturers could expand the already substantial R&D and IT footprint in Mexico or relocate U.S.- based R&D or IT functions there, and these operations will qualify no matter what the wage level. If we are reading this correctly, Article 4-B.7.3(b) is counterproductive.
- The labor content for heavy trucks has no “phase-in.” In contrast, pursuant to Article 4- B.7.6, the $16/hr. manufacturing expenditures above 30 percentage points can be used as credits towards its regional content requirement in 4-B.4.1 for the first seven years of the agreement, undermining potential gains.
- We encourage the USITC to consider how the LVC will be certified and how manufacturers will be held accountable. Without strict accountability and meaningful penalties, producers seem likely to cut corners, which would undermine the intent of the rule.
- To avoid confusion, we urge the USITC in its report to make clear that the $16/hr. standard is limited to the automobile sector, leaving the vast majority of workers in traded and non-traded sectors uncovered.
- Finally, we urge the USITC to model a scenario in which automakers avoid the $16/hr. altogether and pay the 2.5% automobile tariff instead. It is important to understand the choices that face producers who are addicted to low wages and exploitive labor practices.
Despite the importance of the manufacturing industry to the U.S. economy, we have roughly one-million less jobs in manufacturing than we did 10 years ago. The Economic Policy Institute has estimated that NAFTA has contributed to the loss of more than 850,000 jobs, in part due to companies taking advantage of wage suppression in Mexico. Moreover, studies indicate that wages for the majority of workers in the U.S.—even in non-traded sectors— have faced downward pressure from companies who have merely threatened to move the work to Mexico, amounting to an average annual loss of $2,000 for average workers. In the case of just one industry, Mexico now employs between 30,000-40,000 workers in aerospace and has become a major exporter of parts to the U.S. Similarly, there has been a huge expansion in the business process outsourcing industry in Mexico, including many call centers that serve the U.S. market. Working people have experienced job losses due to transfer of production to Mexico in industries as wide-ranging as aerospace. appliances, autos and auto parts, call centers, processed foods, steel, and textiles and apparel. We are concerned that there is too little in the renegotiated NAFTA to directly curtail this outsourcing and urge an explicit focus on outsourcing and transfer of production as opposed to mere tariff and trade effects.
Excessive Monopoly Rights for Medicines
The AFL-CIO believes the renegotiated NAFTA, as currently drafted, is poised to drive up the price of medicines for working families and retirees, extending economically inefficient monopolies and price-gouging. We urge the USITC to consider this in its report. Rather than learning from the mistakes of prior trade rules that have increased the price of medicines in developing countries and that made the Trans-Pacific Partnership so deeply unpopular, the redrafted NAFTA incorporates nearly wholesale the wish list of the brand-name pharmaceutical industry with respect to intellectual property rights and drug pricing provisions. Measured against the status quo, public health is likely to be harmed as prices on drugs and medical devices continue to skyrocket. Life-saving medicines could be increasingly out of the reach of those most in need.
The Intellectual Property (IP) Chapter includes specific measures that undermine access to affordable medicines. These harmful measures also lock in current US. patent rules that many policymakers and stakeholders seek to reform to promote the interests of workers, retirees, and businesses trying to compete with monopolists. In the future, Congress will be less able to rebalance U.S. patent policies to give affordability and cost-effectiveness a higher priority than guaranteeing excessive rents to multibillion-dollar brand-name pharmaceutical companies. The situation is even more precarious for our Mexican brothers and sisters who face greater resource constraints than the United States does.
In particular, Articles 20.F.13 and 20.F.14 require countries to establish periods of test or other data exclusivity for chemical and biologic drugs that could lead to delays in the introduction of generic competition, even beyond the original patent period. In particular, expansion of IP exclusivity for biologics to ten years goes far beyond the original NAFTA standard of five years that applies to other pharmaceutical products. This provision would primarily benefit those who seek to delay domestic market access to lower cost prescription alternatives and would prevent the United States from changing its domestic exclusivity period to less than 10 years. It is also unfortunate that patent holders may be able to extend monopoly protections by delaying applications for marketing approval for generics, per Article 20.F.16. These provisions run counter to the Administration’s stated goal of lowering the high cost of prescription drugs for American consumers and will harm working families by ensuring they pay high prices for drugs, which already far outpace the standard measure of inflation.
Article 20.F.1 requires Parties to establish at least one of three paths that allow pharmaceutical companies to “evergreen” drugs or extend patents for an additional 20 years. This misguided policy will further push the cost of medicines in NAFTA countries in the wrong 15 direction and undermine efforts to reform U.S. laws. Evergreening inhibits innovation by encouraging pharmaceutical companies to make small changes in existing technologies, and to roll them out slowly, rather than focus their research efforts on real breakthroughs.
Requirements for patent term adjustments in Articles 20.F.9 and 20.F.11 could significantly delay generic competition and restrict access to affordable medicines. During the negotiation of the TRIPS Agreement, patenting and regulatory delays were used as a justification for the adoption of a 20-year patent term—three years longer than the previous term in the United States. Now, that justification appears to have been abandoned, opening the door for ever-more excessive pharmaceutical monopolies given that the new NAFTA includes only minimum and not maximum terms.
Article 20.J.4.4 requires that NAFTA Party courts be authorized to consider “any legitimate measure of value the right holder submits, which may include lost profits, the value of the infringed goods or services measured by the market price or the suggested retail price,” when deciding damages in a patent infringement case. It is not clear how these considerations may exceed the remedy of a “reasonable royalty” allowed for patent infringement under the Biologic Price Competition and Innovation Act section of the Affordable Care Act.
The USITC Should Update Its Economic Modeling for the Updated NAFTA
The ITC has an unfortunate history of overstating the benefits of potential trade agreements while understating potential losses. This is due, at least in part, to the nature of computable general equilibrium (CGE) model itself. In the words of economist Jim Stanford:
[W]hile CGE models allow for considerable structural detail and theoretical precision, they are quantitatively ungrounded, any CGE model can be calibrated to precisely replicate any real-world economic data set; hence, their quantitative predictions are highly ambiguous, completely dependent on both the theoretical specification and quantitative calibration that has been performed by the modeler. CGE modeling is thus a "quasi-empirical exercise", at best; the quantitative detail these models produce in their results should not he misinterpreted as empirical reliability.
As Stanford explains, CGE modeling depends heavily on the assumptions made, including “full employment” and lower than realistic capital mobility, given that investor rights and investment promotion are a central purpose of such agreements—beginning with the original NAFTA.
The Economic Policy Institute’s Robert Scott has also described this critical CGE problem as a “lamppost problem,” in other words, trying to determine real-world impacts of modern trade agreements using a model that is wholly inadequate to the purpose. As he explains: “Both FTAs and the China-WTO accession agreement included numerous clauses designed to make those countries safe for U.S. and other foreign investors, to open markets for services and other traditionally nontraded goods, and to secure intellectual property and other investor rights.” A 1999 USITC study done for China’s entry into the World Trade Organization contained spectacularly and unrealistically rosy forecasts of the impacts of that agreement—forecasts that were used to increase Congressional support for the agreement.
The fundamental problem with the current USITC model is that it is designed to evaluate the effects of tariff changes—not other sorts of changes, particularly those that might be negative.
Tariff-based trade models are the economic equivalent of a lamppost highlighting the ground far from where an inebriated man actually lost his wallet—they shine light on the relationship between tariffs and trade, but they cannot be used to predict the impacts of FTAs on offshoring, on foreign and domestic investment in factories making products for export to the United State and other countries, on other factors affecting trade, investment, and wages that are unrelated to tariff changes.
In the real world, the most important impacts of FTAs ... are on outsourcing. This is reflected in data on foreign direct investment (FDI), a measure of the investment in factories and corporations by U.S. and other foreign multinational corporations (MNCs) to make goods for export from Mexico and China to the United States. Tariff-based CGE models have no ability to forecast the effects of trade agreements on FDI, or the operations of MNCs, including their trade flows. The USITC's CGE lamppost can shine no light on such questions because it is not designed to evaluate the effects of trade agreements on FDI and MNC operations.
To illustrate this principle, the AFL-CIO notes the following predictions in the USITC’s original NAFTA report:
- NAFTA would have negligible to positive wage effects in the U.S. and Canada but large positive effects on wages in Mexico (p. viii). The U.S.-Mexico wage gap has actually increased, Moreover, for the vast majority of Americans, wages have stagnated.
- “NAFTA is likely to have a minor negative impact on U.S. production of automobiles over the long term. In the U.S. automotive parts industry, U.S. production is likely to increase modestly in the long run. Because changes in U.S. employment may be less pronounced than changes in U.S. production, the employment level in the automotive sector overall is not expected to change significantly in the long run. Both industries are mainly located in the Midwest, where any long-term loss of employment in the automobile industry and minor gain in employment in the auto parts industry are most likely to be concentrated. The long-term impact of NAFTA on U.S. global competitiveness in the automotive industry appears to be relatively insignificant for the U.S. automobile industry and slightly beneficial for the U.S. parts industry (p. 4-2).” Instead, in the last 24 years. thousands of manufacturing facilities, including many in auto parts and auto assembly, have closed across the United States, particularly in the Midwest.
- Electronics: “Employment in the U.S. industry is not expected to change appreciably, although some employment of U.S. operators, fabricators, and laborers may shift to Mexico. At the same time, employment of professionals, engineers, and precision workers may increase in the United States (p. 5-2)”. Instead, electronics is the sector with the greatest NAFTA job losses in the U.S. and high tech jobs continue to be outsourced.
In short, despite its best efforts, the ITC’s past analyses of trade deals have proved less than optimal. The AFL-CIO urges the ITC to adjust its methods and assumptions to provide an evaluation of the renegotiated NAFTA that is more relevant to workers and accounts for the realities of the current model of globalization, with its relentless race to the bottom in wages and conditions of production.
The AFL-CIO urges the ITC to use more relevant methods to evaluate the renegotiated NAFTA to adequately measure outcomes meaningful to workers: investment, job creation, MNC behavior, costs of medicines (as a result of patent, exclusivity and pricing provisions), outsourcing, wages, regulations (including those that protect working families with respect to banking, public services, job safety and the environment), and the freedom to organize and collectively bargain. A USITC study based solely on the CGE model is unlikely to provide the information that the U.S. Congress and America’s working people need to accurately evaluate the likely impact of the renegotiated NAFTA on the quality of life for the working families of North America.
The AFL-CIO has not taken a final position on the renegotiated NAFTA. We welcome many of its changes and have concerns about other changes. We urge the USITC to update and supplement its traditional economic modeling and assumptions in order to provide the best quality, most comprehensive evaluation of the renegotiated NAFTA for America’s working people.