A Good News, Bad News Week

July 6, 2020

Last week featured good news—the United States-Canada-Mexico Trade Agreement (USMCA) went into effect—and bad news—China imposed a new national security law on Hong Kong. 

The long-awaited arrival of USMCA was, on the whole, good news, though tempered by the kind of unexpected uncertainties that have become the hallmark of this administration, in this case, threatened aluminum tariffs on Canada. Overall, it was good news because it brings an element of certainty to the trilateral trade relationship. The North American Free Trade Agreement (NAFTA) is gone, so threats to pull out of it are gone. The USMCA is much the same as NAFTA, and where it is different (e-commerce, intellectual property, for example), it is largely better. Most people know what to do because they’ve already been doing it for the past 25 years. The auto manufacturers face major challenges complying with the new rules of origin and will have to make some supply chain adjustments. The administration believes that will produce more jobs in the United States, but we won’t know if that is true for several years.  Even there, however, at least there are now rules, and companies can focus on compliance.

There will be challenges. There are already complaints in the United States about Canada not being willing to honor its dairy commitments, and there will no doubt be Canadian complaints about similar U.S. failures. A bigger issue will be who, and how many, walk through the now-open door to filing complaints against Mexican labor practices. Mexican labor problems are believed to be widespread, and there should be plenty of cases filed under the new USMCA process. They will take time to investigate and adjudicate, so it is too early to make a judgment about whether the new procedure will achieve its objectives and whether the Mexican government will help the investigators do their work or get in the way. As often happens in bureaucracies, the problems may not be at the top but at the bottom—the local officials and plant managers who now have to do things differently.  How this develops will set the tone for our broader relationship with Mexico, particularly if there is a Democratic administration in the United States next year.

 A sleeper issue is how the new dispute settlement procedures will work out. State-to-state procedures are newly revitalized, while investor-state procedures have been severely truncated and limited only to certain sectors. NAFTA state-to-state procedures were never really utilized, so it is hard to predict what will happen now that there is a viable process. Hopefully, all three countries will engage in a spirit of goodwill. Investor-state procedures (ISDS), have been limited at the very time the Mexican government has begun to engage in problematic treatment of U.S. companies—delayed permitting, aggressive tax collections, and discriminatory investment practices. Some of those problems will not be susceptible to ISDS procedures, which will surely lead to U.S. companies complaining about the lack of an acceptable remedy. ISDS is not popular among Democrats in Congress, and its shrinkage did not produce complaints from them. If concerns about Mexican practices mount, that is a decision we may come to regret.

The situation in Hong Kong, in contrast, is getting worse, not better. The announcement that the new national security law was coming was met with considerable trepidation despite Chinese assurances it would not be onerous. The decision to move it forward clearly broke China’s commitment to the British that Hong Kong would maintain its autonomy for 50 years, and the regime’s tightening grip on civil society in the mainland provided plenty of reasons for pessimism. Worst fears were confirmed when the law finally arrived, and some 370 people were arrested at protests on the first day (not all of them for violating the new law). As with many Chinese laws, the text is ambiguous, leaving room for the authorities to interpret it as they wish and encouraging residents to exercise self-censorship for fear of violating it. This situation is bound to get worse, as the Chinese seem determined to crack down in the wake of last year’s demonstrations and profess not to care what the West thinks about it. This is one more sign that China views what it sees as its century of humiliation as being over, and that it is now time for it to reassert itself. That will mean more collisions with the United States and others.

Western reaction to China’s moves was not swift, handicapped in part by not wanting to do anything that primarily hurt Hong Kong, since its residents are already the main victims, but it has been gathering steam. At this point, it appears we will see a combination of offers to take in Hong Kongers who want to leave, and a range of sanctions applied to Chinese and Hong Kong officials charged with implementing the new law. The United States has begun the process of treating Hong Kong like China rather than as an independent entity, and others will likely follow suit, particularly in areas that involve security, like export controls and investment restrictions. Unfortunately, the damage is already done. The uncertainty caused by the new law has doomed Hong Kong’s status as an independent financial center. People may not move, but money will, and China will be a major loser. Sadly, the people of Hong Kong will pay the highest price.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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