Mnuchin's USMCA growth estimate might be too optimistic

Key Points
  • U.S. Treasury Secretary Steven Mnuchin says the replacement for the North American Free Trade Agreement will boost the U.S. economy by .5%, but some leading economists do not agree.
  • ITC has forecast the impact would raise GDP by .35%, while the IMF has said the impact would be negligible.
  • The White House has been touting the revised trade bill as a victory for Trump as he gears up for the 2020 election.
A commercial truck exits the highway for the Bridge to Canada, in Detroit, Michigan, August 30, 2018.
Rebecca Cook | Reuters

U.S. Treasury Secretary Steven Mnuchin says the replacement for the North American Free Trade Agreement will boost the U.S. economy by .5%, but some leading economists do not agree.

"I think we are going to get an excess 50 basis points of additional growth in GDP as a result of this agreement. People who say this is just the NAFTA 2.0 just don't understand the technicalities of this agreement," Mnuchin said on CNBC's "Squawk on the Street" on Thursday.

"This is our largest trading block — incredibly important to U.S. workers and U.S. farmers. This addresses everything from enabling small businesses to be able to compete more fairly, to expanding agricultural opportunities in opening markets, to protecting digital trade," he added.

Mnuchin did not drill into the mechanics of his calculation. His office did not immediately respond to a request for further comment.

But his projection outpaces those put forward by two independent economic authorities. Based on the original revised treaty that the U.S. signed with Mexico and Canada last year, the U.S. International Trade Commission forecast the impact would raise the gross domestic product, or GDP, by .35% after six years, while the International Monetary Fund has said the impact would be negligible.

Sec. Mnuchin: USMCA deal will add more than 0.5% to GDP growth

A report published this week by The Peterson Institute for International Economics, based on the ITC's original projections for the United States-Mexico-Canada Agreement, or USMCA, said that U.S. GDP will decline by .12%. The nonpartisan, nonprofit institution said the ITC's projections were based on "the dubious assumption" that the USMCA will spur more U.S. investment by reducing uncertainty in policies on data, e-commerce and intellectual property rights. But it said in the report, "Canada and Mexico have already committed to those reforms through their participation in the successor to the Trans-Pacific Partnership," known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

"The International Trade Commission's projections of growth were based on assumptions that there would be a flood of investment because of elimination of uncertainty once the deal was signed," said a spokesperson for The Peterson Institute. "Our scholars found that assumption as having no basis."

A spokeswoman for the IMF said "IMF Working Papers" describe research in progress by its authors and do not necessarily represent the views of the IMF, its board or management.

The ITC referred CNBC to Mnuchin's office for explanation of any differences in projections.

The White House has been touting the revised trade bill as a victory for President Donald Trump as he gears up for the 2020 election, in which the economy will take center stage. Trump, who counts manufacturers as one of his key constituents, has called NAFTA the "worst trade deal ever made," blaming it for a decline in U.S. manufacturing jobs.

Manufacturing has continued to drop in the U.S., as jobs shift to services and automation. In December, the ISM Manufacturing Index continued a streak of dips and missed expectations, sending stocks lower. Earlier this month, the Business Roundtable, which represents the chief executives of the nation's biggest companies, downgraded its outlook for the U.S. economy, citing in part a contraction in the U.S. manufacturing sector.

NAFTA originally went into effect in 1994, with the aim of furthering trade and economic linkage between its countries, a goal the IMF wrote in March was achieved, though the extent of which it said was hard to quantify.

The revised deal that the U.S. first struck with Canada and Mexico in 2018 has language aimed at keeping production in its member countries. It raises the percentage of a car or auto parts that must be made by a partner country in order to obtain a duty-free import status. Auto companies are likely to take as much as a $3 billion hit from those rules over the next 10 years, according to a new report by the Congressional Budget Office. The CBO said the car companies are unlikely to replace higher-priced imports entirely with domestic production.

In later concessions to the Democratic-led House, the White House agreed to eliminate language that would have given 10-year patent protections for the classification of drugs known as "biologics," which are often the most cutting edge in the industry. Republicans and pharmaceutical companies fought for its inclusion, arguing it protected U.S. drugs from intellectual property theft and limited the country's reliance on medicine made overseas.

As result of that concession, the industry trade group for pharmaceutical companies, Pharmaceutical Research and Manufacturers of America, or PhRMA, has said it would not support USMCA. Its members include Allergan, Eli Lilly and GlaxoSmithKline.

The United Food and Commercial Workers International Union, the largest U.S. private-sector union, has also expressed serious concerns about the deal because it omits country-of-origin labeling requirements. "Consumers have a right to know where their food is from, whether it's safe, and if it's produced by American workers," wrote the group's president in a statement Wednesday.