## 1. Split of GTAP Motor Vehicle Sector (wpiea2019073)

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### III. Introduction — context and paper focus
- NAFTA in force since January 1994.
- Trade between the three NAFTA parties increased from US$ 290 billion in 1993 to over US$ 1.1 trillion in 2017.
- USMCA signed on November 30, 2018; requires ratification by the three countries before implementation.
- USMCA provisions modeled include:
  - higher vehicle and auto parts regional value content requirement,
  - new labor value content requirement for vehicles,
  - stricter rules of origin for textile and apparel trade,
  - agricultural trade liberalization (expanded U.S. access to Canadian supply-managed markets; reduced U.S. barriers on Canadian dairy, sugar and sugar products, and peanuts and peanut products),
  - trade facilitation measures.
- Analysis also examines removing U.S. tariffs on steel and aluminum imports from Canada and Mexico and reciprocal withdrawal of surtax countermeasures.
- Caveat: many USMCA aspects not modeled due to limitations or uncertainty; results are model-, assumption-, and representation-specific.

### II. Model — specifications and calibration
- Model: GTAP Computable-General-Equilibrium (CGE) model; standard, static CGE describing medium-term adjustment with factors fully mobile within countries; no dynamic investment/productivity gains.
- Core assumptions:
  - perfect competition;
  - nested CES import demand;
  - constant difference of elasticities for final demand;
  - constant elasticity of transformation for factor mobility among industries;
  - production functions with factor substitutability.
- Elasticities drawn from GTAP literature/database.
- Import substitution parameters for textiles/apparel and vehicles/parts adjusted downward to reflect cross-border supply chains and ROO switching constraints.
- Base data: GTAP v10 (2014) recalibrated to include:
  - ad valorem tariffs from WITS,
  - ad valorem equivalents of rules of origin,
  - AVEs of non-tariff barriers to services from Fontagne and others (2016).
- Base equilibrium updated to include CPTPP, U.S. steel and aluminum tariffs, reciprocal surtaxes (Coalition of American Metal Manufacturers and Users, 2018), and U.S.-China trade tensions through August 2018.
- Motor vehicle sector split:
  - Motor vehicles (HS Code 8701-05; NAIC Code 3361)
  - Motor vehicle parts (HS Codes Parts 8407-8409, 8609, 8706-8708, 8716; NAIC Codes 3362, 3363)
- Splitting tool: SplitCom utility (Horridge, 2008); post-split rebalanced so subdivided sector variables sum to original sector values.
- GTAP aggregation for this paper: 16 sectors and 7 regions; GTAP’s eight factors aggregated into four (capital, land, unskilled labor, skilled labor).
- Data sources used for split: WITS; Eurostat; Global Affairs Canada; Government of Canada; Ibisworld; International Organization of Motor Vehicle Manufacturers; Library of the European Parliament; Ministry of Economy, Pro-Mexico; Japan MITI; National Bureau of Statistics of China; United States Census Bureau; United States International Trade Administration; Aguiar (2016).

### IV. Scenario design — representation of five USMCA provisions and extensions
- Core modeled approximations:
  - Vehicles and Parts RVC: increase in AVE of ROOs on U.S. and Canada vehicle imports from 50 to 75 percent of the margin of preference; 3-percent vehicle tariff for Mexico; vehicle parts sourcing moves to MFN tariff rates.
  - Vehicle LVC: US$16/hour threshold modeled as a 50 percent increase in labor costs in Mexico’s vehicle sector (proxied via an increase in the labor tax), moving average labor cost toward about US$5 per hour from US$3.38 in 2015.
  - Textiles and Apparel ROOs: increase AVE of rules of origin in U.S.-Mexico trade from 50 to 75 percent of the margin of preference.
  - Dairy, Sugar and Peanuts: Canada’s dairy TRQ AVE adjusted so U.S. exports equal about 3 percent of Canada’s domestic consumption volume; U.S. dairy import barrier AVE reduced by 50 percent; combined sugar and peanuts approximated as 50 percent decline in U.S. tariffs on Canadian food products.
  - Trade facilitation: reduction in iceberg trade costs proxied as AVEs. Core assumption: USMCA reduces trade costs by one-tenth of one percent (0.1 percent) ad valorem for all partners, excluding textiles, apparel, dairy, vehicles and parts. Sensitivity experiments include a 0.5 percent AVE reduction and Mexico-specific efficiency gains between 0.5 percent and 2.0 percent AVE.
- Extensions:
  - Removal of U.S. tariffs on steel and aluminum imports from Canada and Mexico (U.S. Steel and Aluminum Tariffs eliminated).
  - Elimination of Canada and Mexico reciprocal surtaxes on imports from the United States (Reciprocal Surtaxes eliminated).
- Base equilibrium already includes existing steel and aluminum tariffs and surtaxes; extended scenarios remove them.

### Ad valorem equivalents (AVE) and selected non-tariff measures (Table 3 excerpts)
- AVEs of rules of origin / NTMs (imports from indicated partner; percentages retained exactly as in source):
  - Textile: Canada imports from U.S. 3.1; Canada imports from Mexico 6.6; Canada imports from United States 5.0; Mexico imports from U.S. 5.1; Mexico imports from Canada 3.3; United States imports from Mexico 4.6.
  - Apparel: 7.8; 8.2; 10.0; 10.0; 6.3; 5.3 respectively.
  - Motor vehicles: 2.9; 3.0; 17.0; 15.4; 1.5; 5.3 respectively.
  - Motor vehicle parts: 1.3; 1.1; 0.5; 4.0; 0.7; 0.6 respectively.
  - Finance/insurance: 67.4; 50.7; 63.5; 84.6; 52.6; 52.6 respectively.
  - Other services: 69.9; 52.4; 72.4; 115.2; 63.3; 63.3 respectively.

### Macroeconomic effects — welfare and GDP (selected quantitative results)
- Aggregate welfare:
  - Combined USMCA countries welfare gain: $538 million.
  - Text summary: "Canada’s welfare increases by $700 million and Mexico’s increases by $600 million, while that of the United States declines."
- Decomposed regional welfare effects (US$ millions; values preserved exactly):
  - Canada: Vehicles RVC 172; LVC -40; Textile/apparel ROOs 4; Agriculture 139; Trade facilitation 460; Total USMCA 734.
  - USA: Vehicles RVC -740; LVC -380; Textile/apparel ROOs -57; Agriculture -85; Trade facilitation 468; Total USMCA -794.
  - Mexico: Vehicles RVC -14; LVC 332; Textile/apparel ROOs -111; Agriculture 3; Trade facilitation 388; Total USMCA 597.
  - Total (region): Vehicles RVC -582; LVC -89; Textile/apparel ROOs -164; Agriculture 56; Trade facilitation 1,316; Total USMCA 538.
- Effects when removing U.S. steel and aluminum tariffs and reciprocal surtaxes (US$ millions; values preserved):
  - Remove U.S. steel and aluminum tariffs: Canada 1,428; USA -1,609; Mexico 567; Total 386.
  - Remove reciprocal surtaxes: Canada -933; USA 3,701; Mexico -614; Total 2,153.
  - Total tariff and surtax reforms combined: Canada 494; USA 2,091; Mexico -47; Total 2,538.
  - USMCA + steel and surtax reforms Total: Canada 1,229; USA 1,297; Mexico 550; Total 3,076.
- GDP effects (percent change from base; preserved):
  - Canada: Total USMCA 0.02 percent; Remove U.S. steel and aluminum tariffs 0.00; Remove reciprocal surtaxes 0.02; Total tariff and surtax reforms 0.04.
  - USA: Total USMCA 0.00 percent; effects of tariff/surtax reforms about 0.00–0.10 depending on reform.
  - Mexico: USMCA leads to -0.01 percent in some components; overall around 0.00 percent; tariff/surtax reforms produce small changes with total about 0.00 percent.

### Distributional and sectoral drivers
- Vehicles and parts RVC and LVC:
  - Tightening ROOs and LVC jointly contribute a US$700 million welfare loss to the region.
  - Country effects:
    - Canada: benefits from RVC via terms-of-trade gains (decline in vehicle export supply boosts export price); loses from LVC (increases prices of vehicle imports).
    - Mexico: welfare gain from LVC mainly due to higher price of its reduced export supply of vehicles.
    - United States: welfare losses from both RVC and LVC as they increase prices of vehicle and parts imports.
  - Result: decline in intra-USMCA trade in vehicles and parts; sourcing shifts to non-USMCA producers.
- Textiles and apparel ROOs:
  - Tightening and stronger enforcement generate total regional welfare loss of US$164 million; negative impacts for Mexico and the United States; Canada less affected due to low TPL fill rates.
- Agriculture:
  - US$56 million regional welfare gain from agricultural provisions; includes U.S. welfare loss of -US$85 million and Canada gain of $139 million, driven by higher U.S. demand for Canadian dairy and processed food exports.
- Trade facilitation:
  - Largest positive contributor: $1,316 million (US$1.3 billion) to regional welfare in the USMCA scenario.
- Steel and aluminum tariff/surtax reforms:
  - Ending the dispute and eliminating reciprocal surtaxes increases regional welfare by nearly $2.5 billion; total USMCA welfare gains rise to about $3 billion when reforms included.
  - Removing U.S. steel and aluminum tariffs alone: Canada +$1,428 million; Mexico +$567 million; United States -$1,609 million.
  - Removing reciprocal surtaxes alone: Canada -$933 million; Mexico -$614 million; United States +$3,701 million.
  - Tariff and surtax reforms support a minimal real GDP gain in Canada (0.02 percent); effects on Mexico and U.S. GDPs about zero.

### Competitiveness, trade balances, and trade volumes (selected)
- Real exchange rates (percent change from base; directional results preserved):
  - USMCA causes small appreciation in Canada, negligible change in USA, and small depreciation in Mexico; extensions to steel/surtax reforms produce appreciations for Canada and USA and moderate Mexico’s depreciation.
- Aggregate trade balances (US$ millions; base and impacts preserved):
  - Base trade balances: Canada -93,111; USA -827,253; Mexico -18,018.
  - USMCA impacts (Total USMCA): Canada -36; USA -275; Mexico 6.
  - Remove U.S. steel and aluminum tariffs: Canada -83; USA 131; Mexico 64.
  - Remove reciprocal surtaxes: Canada 36; USA -206; Mexico -52.
  - Total tariff and surtax reforms: Canada -47; USA -75; Mexico 17.
- Intra-North American trade:
  - Base total intra-North American exports: 1,129,391 (base value).
  - USMCA causes a decrease in the value of trade among the three countries by US$4.4 billion (0.4 percent), from an initial value of trade of US$1.13 billion (text).
  - Extending to include steel and surtax reforms boosts intra-partner trade by about US$15 billion relative to baseline and narrows Canada and Mexico surpluses with the United States.

### Sectoral output and trade volumes (selected tables preserved)
- Sectoral output percent changes (selected; percent change from base preserved):
  - Canada: Motor vehicles base 61,438; USMCA -1.29 percent; USMCA + reforms -1.20 percent. Vehicle parts base 28,364; USMCA -0.93 percent; USMCA + reforms -0.50 percent. Food mfg. base 104,319; USMCA 0.46 percent; USMCA + reforms -0.20 percent.
  - Mexico: Motor vehicles base 63,192; USMCA -5.63 percent; USMCA + reforms -5.60 percent. Vehicle parts base 75,911; USMCA -2.11 percent; USMCA + reforms -2.10 percent. Textiles base 8,751; USMCA -2.16 percent; USMCA + reforms -2.40 percent. Electronics base 77,835; USMCA 1.45 percent; USMCA + reforms 1.40 percent. Machinery nec. base 98,638; USMCA 1.41 percent; USMCA + reforms 2.30 percent.
  - United States: Motor vehicles base 449,108; USMCA -0.03 percent; USMCA + reforms 0.00 percent. Vehicle parts base 283,042; USMCA -0.44 percent; USMCA + reforms -0.50 percent.
- Bilateral export volume changes (selected examples preserved):
  - Motor vehicles: Canada to Mexico -5.7 percent; Canada to United States -5.7 percent; Mexico to United States -9.6 percent; United States to Canada -11.8 percent; Mexico to Canada -4.0 percent.
  - Vehicle parts: Canada exports to United States 3.2 percent (under some reforms); Mexico to United States -3.2 percent; U.S. to Canada -6.5 percent (under some reforms).
  - Textiles and apparel: Mexico apparel to United States -17.5 percent under USMCA (larger declines under some reform permutations).
  - Dairy: United States to Canada increases 10.0 percent under USMCA; some reform scenarios show larger increases (e.g., 25.5 percent in specific table entries).

### Labor markets, wages, and factor prices (selected)
- Wages and rents (percent change from base; values preserved):
  - USMCA without tariff and surtax reforms:
    - Canada: Land -0.1; Unskilled labor 0.0; Skilled labor 0.0; Capital 0.0.
    - Mexico: Land 0.8; Unskilled labor -0.4; Skilled labor -0.2; Capital -0.1.
    - United States: Land 0.0; Unskilled labor 0.0; Skilled labor 0.0; Capital 0.0.
  - USMCA with tariff and surtax reforms:
    - Canada: Land -1.0; Unskilled labor 0.2; Skilled labor 0.2; Capital 0.2.
    - Mexico: Land -0.2; Unskilled labor -0.2; Skilled labor 0.0; Capital 0.1.
    - United States: Land 0.1; Unskilled labor 0.0; Skilled labor 0.0; Capital 0.0.
- Summary points:
  - Wages for unskilled and skilled labor unchanged in Canada and the United States under USMCA; they decline in Mexico under the core scenario.
  - RVC and LVC place downward pressure on Mexican wages; removing steel tariffs and reciprocal surtaxes moderates Mexican wage losses by supporting production and exports of relatively labor-intensive machinery and manufactures.

### Key conclusions and policy implications (quantitative and qualitative)
- Aggregate effects are relatively small:
  - USMCA would reduce trade among the three partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million.
  - Effects on real GDP are negligible.
- Main source of gains:
  - Trade facilitation measures (modernizing and integrating customs procedures) provide the largest benefits, contributing US$1,316 million (US$1.3 billion) to regional welfare gains.
- Costs of tighter ROOs and LVC:
  - Tighter rules of origin in autos and the labor value content requirement reduce production of vehicles and parts in all three countries, increase vehicle prices, and shift sourcing toward non-USMCA suppliers.
  - Textiles and apparel ROOs create inefficiencies harming Mexico and the United States; Canada less affected due to low TPL fill rates.
- Steel and surtax dispute resolution:
  - Ending the dispute and eliminating reciprocal surtaxes substantially increases welfare: extension increases regional welfare gains by US$2,538 million to a total of about US$3,076 million.
  - Removing U.S. steel and aluminum tariffs yields Canada +US$1,428 million and Mexico +US$567 million but a US$1,609 million loss to the United States in that isolated reform experiment; removal of reciprocal surtaxes yields opposite-signed country impacts (Canada -US$933 million; USA +US$3,701 million; Mexico -US$614 million).
- Sensitivity and caveats:
  - Results sensitive to assumptions about trade facilitation efficiency gains; larger assumed non-tariff efficiency gains produce larger aggregate impacts.
  - Many USMCA aspects not examined due to modeling limitations or uncertainty; results should be interpreted with caution and updated as implementation clarifies provisions.

*Source: wpiea2019073 - 1. Split of GTAP Motor Vehicle Sector (excerpt).*

### 1. Split of GTAP Motor Vehicle Sector __________________________________________7

### 1. Split of GTAP Motor Vehicle Sector

### III. INTRODUCTION (excerpted thematic points)
- NAFTA has been in force since January 1994.
- Trade between the three NAFTA parties increased from US$ 290 billion in 1993 to over US$ 1.1 trillion in 2017.
- USMCA was signed on November 30, 2018, and still needs ratification by the three countries before implementation.
- USMCA includes: tighter rules of origin in the automobile, textile, and apparel sectors; a new labor value content requirement in the auto sector; higher U.S. access to Canadian supply-managed markets; further goods trade facilitation; updated provisions related to financial services; a new currency provision; and a provision about entering free trade agreements with non-market economies.
- Contextual trade developments noted:
  - March 2018: Canada and Mexico joined the CPTPP.
  - May 2018: United States imposed import tariffs of 25 percent on steel and 10 percent on aluminum.
  - April and August 2018: United States levied additional tariffs on a combined US$ 50 billion of imports from China; retaliation by China followed.
- Paper focus: analytical assessment via a global multisector CGE model of five key USMCA provisions:
  1. higher vehicle and auto parts regional value content requirement,
  2. new labor value content requirement for vehicles,
  3. stricter rules of origin for USMCA textile and apparel trade,
  4. agricultural trade liberalization that increases U.S. access to Canadian supply-managed markets and reduces U.S. barriers on Canadian dairy, sugar and sugar products, and peanuts and peanut products,
  5. trade facilitation measures.
- The analysis also examines effect of removing U.S. tariffs on steel and aluminum imports from Canada and Mexico and their reciprocal withdrawal of surtax countermeasures.
- Caveats: many USMCA aspects not modeled due to limitations or uncertainty (e.g., review clause, greater patent protections in pharmaceuticals, new chapter on financial services); results are model-, assumption-, and representation-specific.

### II. MODEL (key specifications and assumptions)
- Model used: GTAP Computable-General-Equilibrium (CGE) model.
- Model type: standard, static CGE; describes medium-term adjustment period with factors fully mobile within countries but without dynamic investment and productivity gains.
- Core modeling assumptions:
  - Perfect competition.
  - Import demand modeled with nested constant elasticity of substitution aggregation functions.
  - Final consumer demand: constant difference of elasticities demand system.
  - Factor mobility among industries: constant elasticity of transformation functions.
  - Production technologies: production functions with factor substitutability.
- Elasticities drawn from GTAP literature/database.
- Import substitution parameter values for textiles/apparel and vehicles/parts are adjusted slightly downward to reflect cross-border supply chains and ROO switching constraints.
- Base data: GTAP v10 database describing world economy in 2014, recalibrated to include:
  - ad valorem tariffs from WITS,
  - ad valorem equivalents of rules of origin,
  - ad valorem equivalents of non-tariff barriers to services trade from Fontagne and others (2016).
- Base equilibrium updated in model experiment to include:
  - CPTPP,
  - U.S. steel and aluminum tariffs,
  - reciprocal surtaxes by Canada, Mexico, China and the European Union (Coalition of American Metal Manufacturers and Users, 2018),
  - U.S.-China trade tensions through August 2018 (USTR 2018a and 2018b; China Ministry of Commerce, 2018).
- Model limitations noted and sensitivity to calibration choices referenced (Costinot and Rodriquez-Clare, 2014).

### III. DATABASE AGGREGATION (motor vehicle sector split details)
- Original GTAP v10: 140 regions and 57 commodities.
- For this paper: aggregated into 16 sectors and 7 regions.
- Steel and aluminum sectors aggregated within the “manufacturing nec” sector.
- GTAP’s eight factors of production aggregated into four: capital, land, unskilled labor and skilled labor.
- Motor vehicle sector split into:
  - Motor vehicles (HS Code 8701-05; NAIC Code 3361)
  - Motor vehicle parts (HS Codes Parts 8407-8409, 8609, 8706-8708, 8716; NAIC Codes 3362, 3363)
- Splitting tool: SplitCom utility (Horridge, 2008).
- Inputs to split utility: data on production, trade, employment, and tax rates for each split commodity and region.
- Post-split: global database rebalanced; all other GTAP database data unaffected; sum of new subdivided sector variables equals original sector values.
- Data sources used for the split include: WITS; Eurostat; Global Affairs Canada; Government of Canada; Ibisworld; International Organization of Motor Vehicle Manufacturers; Library of the European Parliament; Ministry of Economy, Pro-Mexico; Japan MITI; National Bureau of Statistics of China; United States Census Bureau; United States International Trade Administration; and Aguiar (2016).

### IV. SCENARIO (five modeled USMCA provisions and their model representations)
- General: CGE model used to simulate separate and combined effects of 5 key USMCA provisions (summarized below).

1) Vehicle and parts Regional Value Content (RVC) requirements
- USMCA increases regional value content requirement for vehicles and parts from 62.5 percent to 75 percent and introduces sourcing requirements for steel, aluminum and core auto parts while removing NAFTA tracing requirements (USTR, 2018e).
- Stated capacity: Most U.S. and Canadian vehicle production can meet new rules but less than 70 percent of Mexico’s vehicle production has the capacity to meet the requirements.
- North American trade in vehicle parts is more globally sourced; almost one-quarter of parts traded by Canada and Mexico with the United States already enter outside NAFTA preferences (Dziczek and others, 2018).
- Compliance costs modeled as ad valorem equivalents (AVE) approximated at one-half of the margin of preference (MFN tariff rates minus preferential NAFTA rates).
- Model approximations:
  - Increase in AVE for vehicles from 50 to 75 percent of the preference margin for U.S. and Canadian imports of vehicles.
  - Comparable increase to a 3-percent vehicle tariff by Mexico.
  - North American trade in vehicle parts assumed to move entirely to MFN tariff rates.
- Stylized representation captures conclusion that USMCA auto provisions “raise rather than lower barriers to trade and investment ... (and) add layer upon layer of costly new regulations” (Schott, 2018).

2) Labor Value Content (LVC) requirements for vehicles
- USMCA LVC: 40 percent of a passenger vehicle and 45 percent of a pickup or cargo vehicle must be made by workers earning at least US$16 per hour (USTR, 2018d).
- Average hourly earnings in Mexico’s vehicle sector were US$3.38 in 2015 (Statista, 2018).
- Evidence suggests some production may shift to higher wage member countries rather than wages fully increasing.
- Modeling assumption: labor costs in Mexico’s vehicle sector increase by 50 percent (proxied as an increase in the current labor tax imposed on Mexican vehicle producers), representing an increase in average labor cost to about US$5 per hour.
- Shortcoming noted: this approach generates tax revenue rather than directly raising employee wages.

3) Rules limiting use of non-USMCA inputs in textile and apparel trade
- USMCA tightens requirements for sewing threads, coated fabrics, and some other textile inputs; strengthens customs enforcement; removes some restrictive requirements (e.g., originating rayon and visible lining).
- Canada’s low fill rates of tariff preference levels (TPL) may allow accommodation of changes that Mexico and the United States cannot.
- Modeling approximation: increase AVE of rules of origin for textiles and apparel from 50 to 75 percent of the margin of preference for U.S.-Mexico trade.
- Historical note: In 2016, 6 percent of NAFTA apparel trade was already under MFN rules due to compliance costs (Congressional Research Service, 2017).

4) Agricultural provisions
- USMCA provides the United States with expanded access of up to 3.6 percent of the domestic Canadian market for dairy, including poultry and egg products (Congressional Research Service, 2018; USTR 2018c).
- US reciprocation: expanded access for Canadian dairy, sugar, and sugar-containing products; U.S. tariffs on cotton, peanuts and peanut products imported from Canada eliminated after five years.
- Modeling approximations:
  - AVE of Canada’s dairy tariff-rate quota on U.S. products adjusts to achieve a target U.S. market penetration equal to about 3 percent of Canada’s domestic consumption volume.
  - Increased Canadian access to U.S. approximated as a reduction of 50 percent in the AVE of the U.S. dairy import barrier.
  - Combined provisions for sugar and peanuts approximated as a 50 percent decline in the U.S. tariff on Canadian food products.
- Model’s dairy sector includes only milk and milk products and eggs; USMCA provisions referenced: 3.6 percent for dairy, 1.4 percent for eggs, 0.6 percent for chicken and 0.6 percent for turkey.

5) Improved goods market access (trade facilitation)
- USMCA introduces a Customs Administration and Trade Facilitation Chapter with measures including single location border inspections, use of IT (electronic submissions), greater transparency in customs regulations, and other practices to reduce customs inefficiencies.
- De minimis thresholds changed:
  - Canada: threshold increased from C$20 to C$40 for tax-free entry, and C$150 for duty-free entry with simplified customs forms.
  - Mexico: current $50 threshold for tax-free entry unchanged; increased to US$117 for duty-free entry with simplified customs forms.
  - U.S. threshold unchanged at $800.
- Anticipated beneficiaries: small- and medium-sized companies and online retailers; potential tax advantage to foreign retailers noted.
- Agricultural facilitation measures include: Canadian grain grading policy for U.S.-grown wheat registered in Canada; modernized SPS chapter with enhanced rules on import checks, audits, equivalence and regionalization.
- Modeling of trade facilitation: proxied as a reduction in iceberg trade costs expressed as AVEs.
  - Hillberry and Zhang (2015) estimate global best-practice adoption could yield a reduction of about 1 percent ad valorem in trade costs.
  - This study conservatively assumes USMCA reduces trade costs by one-tenth of one percent ad valorem by all partners, with no changes in trade costs for textiles, apparel, dairy, vehicles and parts (which are covered by ROOs).
- Sensitivity analyses:
  - Appendix Tables 5 and 6 report experiments with a higher one-half percent ad valorem equivalent value of trade facilitation by all partners, and with higher trade efficiency gains in Mexico ranging between 0.5 percent and 2.0 percent AVE while U.S. and Canadian efficiency gains remain at (text truncated in source).

*Source: wpiea2019073 - 1. Split of GTAP Motor Vehicle Sector (excerpt).*

### 0.1 percent AVE.

### 0.1 percent AVE.

### Scenario design and extensions
- Core USMCA provisions modeled:
  - Vehicles and Parts RVC requirements: increase in the AVE of ROOs on U.S. and Canada vehicle imports from 50 to 75 percent of the margin of preference; 3 percent tariff on Mexican vehicle imports; RVC for parts described as imposition of MFN tariff rates.
  - Vehicle LVC requirement: $16/hour minimum wage requirement described as a 50% increase in labor costs in Mexico’s vehicle production.
  - Textiles and Apparel: increase in the AVE of ROOs in U.S.-Mexico trade from 50 to 75 percent of the margin of preference; no change to Canadian barriers due to low TPL fill rates.
  - Dairy, Sugar and Peanuts: reduction in the AVE of Canada’s tariff rate quota on U.S. dairy products causing U.S. exports to equal about 3 percent of Canada’s domestic market volume; reciprocal fifty-percent reduction of U.S. tariffs on Canadian dairy and food manufactures (includes sugar, peanuts and products).
  - Customs and Trade Facilitation: one-tenth of a percent reduction in regional merchandise trade costs, excluding products subject to ROOs.
- Extension considered:
  - Removal of U.S. tariffs on steel and aluminum imports from Canada and Mexico (U.S. Steel and Aluminum Tariffs eliminated).
  - Elimination of Canada and Mexico reciprocal surtaxes on imports from the United States (Reciprocal Surtaxes eliminated).
- Base equilibrium already incorporates U.S., Canadian and Mexican steel and aluminum tariffs and surtaxes; the extended USMCA model scenario removes them.

### Ad valorem equivalents (AVE) and non-tariff measures (selected)
- Table 3 AVEs (imports from indicated partner):
  - Textile: Canada imports from U.S. 3.1; Canada imports from Mexico 6.6; Canada imports from United States 5.0; Mexico imports from U.S. 5.1; Mexico imports from Canada 3.3; United States imports from Mexico 4.6.
  - Apparel: 7.8, 8.2, 10.0, 10.0, 6.3, 5.3 respectively.
  - Motor vehicles: 2.9, 3.0, 17.0, 15.4, 1.5, 5.3 respectively.
  - Motor vehicle parts: 1.3, 1.1, 0.5, 4.0, 0.7, 0.6 respectively.
  - Finance/insurance: 67.4, 50.7, 63.5, 84.6, 52.6, 52.6 respectively.
  - Other services: 69.9, 52.4, 72.4, 115.2, 63.3, 63.3 respectively.
- Sources: AVEs of rules of origin in textiles, apparel, motor vehicles and parts calculated as 50% of the margin of preference (MFN tariff rates from WITS minus applied tariff rates from GTAP v10 database). AVEs of NTMs in finance, insurance and other services drawn from Fontagne and others (2016).

### Macroeconomic effects — welfare and GDP
- Aggregate welfare:
  - USMCA countries have a combined welfare gain of $538 million.
  - Text summary statement: "Canada’s welfare increases by $700 million and Mexico’s increases by $600 million, while that of the United States declines."
- Decomposed regional welfare effects (Table 4, $US millions):
  - USMCA total (columns sum): Vehicles and parts RVC (RVC) and LVC impacts, Textile and apparel ROOs, Agriculture, Trade facilitation, Total USMCA:
    - Canada: 172 (Vehicles RVC) -40 (LVC) 4 (Textile/apparel ROOs) 139 (Agriculture) 460 (Trade facilitation) Total USMCA 734.
    - USA: -740 -380 -57 -85 468 Total USMCA -794.
    - Mexico: -14 332 -111 3 388 Total USMCA 597.
    - Total (region): -582 -89 -164 56 1,316 Total USMCA 538.
  - Effects when removing U.S. steel and aluminum tariffs and reciprocal surtaxes:
    - Remove U.S. steel and aluminum tariffs: Canada 1,428; USA -1,609; Mexico 567; Total 386.
    - Remove reciprocal surtaxes: Canada -933; USA 3,701; Mexico -614; Total 2,153.
    - Total tariff and surtax reforms combined: Canada 494; USA 2,091; Mexico -47; Total 2,538.
    - USMCA + steel and surtax reforms Total: Canada 1,229; USA 1,297; Mexico 550; Total 3,076.
- GDP effects (Table 5, percent change from base):
  - Canada: Total USMCA 0.02 percent; Remove U.S. steel and aluminum tariffs 0.00; Remove reciprocal surtaxes 0.02; Total tariff and surtax reforms 0.04.
  - USA: Total USMCA 0.00 percent; effects of tariff/surtax reforms about 0.00–0.10 depending on reform; overall negligible.
  - Mexico: USMCA leads to -0.01 in some components, overall around 0.00 percent; tariff/surtax reforms produce small changes with total about 0.00.

### Distributional and sectoral drivers of welfare changes
- Vehicles and parts RVC and LVC:
  - Tightening ROOs (RVC increase) and LVC contribute a US$700 million welfare loss to the region (text).
  - Country-specific effects:
    - Canada benefits from RVC through terms of trade gains as decline in its vehicle export supply boosts export price; loses from LVC that increases prices of its vehicle imports.
    - Mexico experiences a welfare gain from LVC, mainly due to higher price of its reduced export supply of vehicles.
    - United States experiences welfare losses from both RVC and LVC because these increase prices of vehicle and parts imports from Canada and Mexico.
  - Trade effects: decline in intra-USMCA trade in vehicles and parts; sourcing shifts to non-USMCA producers.
- Textiles and apparel ROOs and enforcement:
  - Tightening rules and customs enforcement generates a total regional welfare loss of US$164 million; negative welfare impacts for Mexico and the United States, but not for Canada due to excess capacity under its TPLs.
- Agriculture:
  - US$56 million regional welfare gain from agricultural provisions; includes U.S. welfare loss of -US$85 million and Canada gain of $139 million largely from higher U.S. demand for its dairy and processed food exports.
- Trade facilitation:
  - Contributes $1.3 billion to regional welfare gains in the USMCA scenario; largest single positive contributor that offsets other welfare losses from restrictive ROOs.
- Steel and aluminum tariff/surtax reform extension:
  - If ratification includes elimination of U.S. steel and aluminum tariffs and reciprocal surtaxes, the region as a whole has a welfare gain of nearly $2.5 billion (text) and total USMCA welfare gains rise to $3 billion.
  - Removing U.S. steel and aluminum tariffs yields: Canada welfare gain $1.4 billion and Mexico $600 million, but a $1.6 billion loss to the United States (text).
  - Removing reciprocal surtaxes causes welfare loss for Canada $900 million and Mexico $600 million and welfare gain to the United States $2.1 billion (text).
  - Steel tariff and tax reforms support a minimal real GDP gain in Canada (0.02 percent) while effects on Mexico and U.S. GDPs are about zero (text).

### Competitiveness, trade balances, and trade volumes
- Real exchange rates (Table 6, percent change from base):
  - USMCA causes: Canada small appreciation (Total USMCA 0.10 then 0.30 then 0.40 in components), USA no change (0.00 then 0.10 under reforms), Mexico small depreciation (Total USMCA -0.30 then 0.20 then -0.10 with reforms).
  - Extension to include elimination of steel tariffs and reciprocal surtaxes causes appreciations for Canada and U.S. and moderates Mexico’s depreciation.
- Aggregate trade balances (Table 7, $US million):
  - Base trade balances: Canada -93,111; USA -827,253; Mexico -18,018.
  - USMCA impacts (Total USMCA): Canada -36; USA -275; Mexico 6.
  - Removing U.S. steel and aluminum tariffs impact: Canada -83; USA 131; Mexico 64.
  - Removing reciprocal surtaxes: Canada 36; USA -206; Mexico -52.
  - Total tariff and surtax reforms: Canada -47; USA -75; Mexico 17.
- Bilateral and aggregate trade volumes (Table 8):
  - Base total intra-North American exports: 1,129,391 (base values) and base imports and balances reported.
  - USMCA causes a decrease in the value of trade among the three countries by $4.4 billion (0.4 percent), from an initial value of trade of $1.13 billion (text).
  - Extending the agreement to include steel and surtax reforms boosts intra-partner trade by about $15 billion relative to baseline and narrows Canada and Mexico surpluses with the United States (text).
- Sectoral export volume changes (Table 10, percent change from base) — selected:
  - Motor vehicles exports: Canada to Mexico -5.7; Canada to United States -5.7; Mexico to United States -9.6; United States to Canada -11.8; Mexico to Canada -4.0; etc.
  - Vehicle parts: varied changes including Canada exports to United States 3.2 under reforms, Mexico to United States -3.2, U.S. to Canada -6.5 under reforms.
  - Textiles and apparel: notable contractions in Mexico and U.S. bilateral exports (e.g., Mexico apparel to United States -17.5 under USMCA; larger under reforms).
  - Dairy: large increases in some bilateral flows under USMCA + steel tariff/surtax reforms (e.g., United States to Canada 10.0; United States to Canada remains 10.0 in some columns and 25.5 under reform in table).
- Trade-weighted average changes in export volumes (Table 10, last row):
  - For various bilateral pairs: values include -0.2, -1.8, -0.1, 1.5, -0.2, -0.6, -0.7, 0.4, -0.1, 2.4, -1.1, 1.0.

### Labor markets, wages, and factor prices
- Wages and rents (Table 9, % change from base):
  - USMCA without tariff and surtax reforms:
    - Canada: Land -0.1; Unskilled labor 0.0; Skilled labor 0.0; Capital 0.0.
    - Mexico: Land 0.8; Unskilled labor -0.4; Skilled labor -0.2; Capital -0.1.
    - United States: Land 0.0; Unskilled labor 0.0; Skilled labor 0.0; Capital 0.0.
  - USMCA with tariff and surtax reforms:
    - Canada: Land -1.0; Unskilled labor 0.2; Skilled labor 0.2; Capital 0.2.
    - Mexico: Land -0.2; Unskilled labor -0.2; Skilled labor 0.0; Capital 0.1.
    - United States: Land 0.1; Unskilled labor 0.0; Skilled labor 0.0; Capital 0.0.
- Summary points:
  - Wages for unskilled and skilled labor are unchanged in Canada and the United States due to USMCA but decline in Mexico under the core scenario.
  - The RVC and LVC put downward pressure on Mexican wages; removing steel tariffs and reciprocal surtaxes moderates Mexican wage losses by supporting increases in production and exports of relatively labor-intensive machinery and manufactures.

### Structural production effects and sectoral output (Table 12 selected)
- Canada (Base value of output $US mill. and USMCA % chng.):
  - Motor vehicles base 61,438; USMCA -1.29 percent; USMCA + reforms -1.20 percent.
  - Vehicle parts base 28,364; USMCA -0.93 percent; USMCA + reforms -0.50 percent.
  - Food mfg. 104,319; USMCA 0.46 percent; USMCA + reforms -0.20 percent.
- Mexico:
  - Motor vehicles base 63,192; USMCA -5.63 percent; USMCA + reforms -5.60 percent.
  - Vehicle parts base 75,911; USMCA -2.11 percent; USMCA + reforms -2.10 percent.
  - Textiles base 8,751; USMCA -2.16 percent; USMCA + reforms -2.40 percent.
  - Electronics: 77,835; USMCA 1.45 percent; USMCA + reforms 1.40 percent.
  - Machinery nec. 98,638; USMCA 1.41 percent; USMCA + reforms 2.30 percent.
- United States:
  - Motor vehicles base 449,108; USMCA -0.03 percent; USMCA + reforms 0.00 percent.
  - Vehicle parts base 283,042; USMCA -0.44 percent; USMCA + reforms -0.50 percent.
  - Textiles and apparel declines noted in percent changes.

### Key conclusions and policy implications (from summary and conclusions)
- Aggregate effects are relatively small:
  - USMCA would reduce trade among the three partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million.
  - Effects on real GDP are negligible.
- Main source of gains:
  - Trade facilitation measures that modernize and integrate customs procedures provide the largest benefits, contributing $1.3 billion to the region’s welfare gains.
- Costs of tighter ROOs and LVC:
  - Tighter rules of origin in autos and the labor value content requirement reduce production of vehicles and parts in all three countries, increase vehicle prices, and shift sourcing toward outside the region.
  - Textiles and apparel ROOs create inefficiencies harming Mexico and the United States; Canada less affected due to low TPL fill rates.
- Steel and surtax dispute resolution:
  - Ending the dispute triggered by U.S. tariffs on steel and aluminum and eliminating reciprocal surtaxes substantially increases welfare: extension increases regional welfare gains by $2.5 billion to a total of $3 billion, generates small GDP increase in Canada, and helps offset negative wage impacts in Mexico.
- Sensitivity and caveats:
  - Results are sensitive to assumptions about trade facilitation efficiency gains; larger assumed non-tariff efficiency gains produce larger aggregate impacts.
  - Many aspects of USMCA are not examined due to modeling limitations or uncertainty; results should be interpreted with caution and updated as implementation clarifies provisions.

*Source: wpiea2019073 - 0.1 percent AVE.*

### Appendix Table 1. Sectors in the CGE Model

### Appendix Table 1. Sectors in the CGE Model

### Sectoral listing
- 1. Crops
  - Paddy rice
  - Wheat
  - Cereal grains nec
  - Vegetables, fruit, nuts
  - Oil seeds
  - Sugar cane, sugar beet
  - Plant-based fibers
  - Crops, nec
- 2. Livestock
  - Cattle, sheep, goats, horses
  - Animal products, nec
  - Raw milk
  - Wool, silk-worm cocoons
- 3. Dairy products
  - Milk, butter, cheese, yoghurt, dried milk products, whey
  - Manufactures nec
- 4. Processed foods
  - Meat from cattle, sheep, etc.
  - Meat products nec
  - Vegetable oils and fats
  - Processed rice
  - Sugar
  - Food products nec
  - Beverages and tobacco products
- 5. Resources
  - Forestry
  - Fishing
  - Coal
  - Oil
  - Gas
  - Minerals nec
- 6. Textiles
  - Textiles
- 7. Wearing apparel
  - Wearing apparel
- 8. Wood products
  - Wood products
- 9. Paper products, publishing
  - Paper products, publishing
- 10. Petroleum and coal products
  - Petroleum, coal products
  - Chemical, rubber, plastic prods
  - Mineral products nec
- 11. Motor vehicles
  - Motor vehicles
- 12. Motor vehicle parts
  - Motor vehicle parts
- 13. Electronic equipment
  - Electronic equipment
- 14. Machinery and equipment, nec
  - Transport equipment nec
  - Machinery and equipment nec
- 15. Manufactures, nec
  - Leather products
  - Ferrous metals
  - Metals nec
  - Metal products
- 16. Finance and insurance
  - Financial services
  - Insurance
- 17. Other services
  - Electricity
  - Gas manufacture, distribution
  - Water
  - Construction
  - Trade
  - Transport nec
  - Sea transport
  - Air transport
  - Communication
  - Business services nec
  - Recreation and other services
  - PubAdmin/Defence/Health/Ed
  - Dwellings

### Notes
- 1/ nec = not elsewhere classified.

*Appendix Table 1. Sectors in the CGE Model*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019073.pdf_