The United States-Mexico-Canada Agreement, which recently passed both houses of Congress by overwhelming, bipartisan majorities, has been rightly hailed as one of President Donald Trump’s most historic achievements and a big win for America’s farmers, businesses and workers.
Too little attention has been paid, however, to one of USMCA’s most innovative — and misunderstood — features. The review and term extension provision, also known as the “sunset provision,” is a first-of-its kind provision designed to ensure that, unlike NAFTA, USMCA won’t become outdated, unbalanced and politically unpopular over time.
Under the sunset provision, the agreement will terminate automatically in 16 years unless all three countries affirmatively agree to an extension in the interim. The parties will hold a joint review every six years to evaluate how the agreement is working and, hopefully, agree on needed updates and adjustments.
If, after that process plays out, all parties agree to an extension, the term of the agreement will reset for another 16 years. If they cannot agree, USMCA will not disappear immediately, but a 10-year termination clock will start to tick. As the expiration date approaches, pressure will build on the parties to resolve their differences.
When the administration first proposed the sunset provision, the free trade establishment was aghast. Former Speaker Paul Ryan warned that a deal with a sunset provision would get no Republican votes in Congress. The Wall Street Journal editorial page, which I respect and read every morning, said the provision would destroy business confidence in the agreement. The fact that USMCA passed with less than a handful of Republican dissenters and with the overwhelming support of every major business group is proof that the critics were wrong on the politics. I believe experience will prove them wrong on the substance as well.
The goal of the sunset provision is not to encourage USMCA’s early demise, but to ensure that the agreement will continue to serve America’s interests over the long run in a highly competitive and always evolving global economy. Countries always find new and unexpected ways to give favored industries an unfair advantage. Therefore it is imperative that the United States retain leverage in any of our trading relationships to prevent unfair trade practices and market distortions and correct them when they occur. The sunset provision will give us just that.
Because I come from the real estate industry, the sunset concept made a lot of sense to me. When you own a great property that you believe will appreciate in value over time, the preference is always to lease space for a shorter duration rather than enter into than a long-term, much less a permanent, arrangement. Why lock in today’s market rates if you will be able to charge more in the future?
Yet America’s past trade agreements have been “forever deals.” We’ve essentially sold permanent access to our market, usually on the cheap, and left ourselves with no leverage — short of threatening to withdraw from the agreement — to make needed adjustments. The USMCA approach is akin to the United States granting Mexico and Canada a 16-year lease for market access, with a fair market value readjustment clause that is triggered every six years. In the event that the parties disagree on the adjustment, the shortening duration gives the leverage to the stronger party, which, given the relative sizes of our economies, likely will always be the United States.
Another virtue of the sunset provision is that it will force politicians to confront difficult issues and changing dynamics rather than kick the can down the road.
For years, labor unions and industry groups voiced valid complaints about NAFTA. But in typical Washington fashion, the politicians were better at complaining about problems than they are at rolling up their sleeves and finding solutions. Until President Trump, no one was willing to spend the political capital required to correct NAFTA’s many flaws. As a result, the agreement became for many a symbol of everything that is wrong with the global trading system. The sunset provision will prevent USMCA from meeting the same fate.
In politics, people are always scared of what is different and new. It therefore is understandable why the sunset provision generated so much controversy. Over time, however, I believe the provision will come to be seen as one of the most valuable parts of USMCA and become a staple of American trade agreements for generations to come.
