A New North American Trade Deal on the Horizon

After over a year of negotiations, the United States-Mexico-Canada Agreement (“USMCA”) is set to go into effect this year once Canada ratifies it. The USMCA will replace the 25-year-old North American Free Trade Agreement (“NAFTA”), which President Trump referred to as the “worst trade deal ever made.” President Trump’s campaign threat to axe NAFTA had caused concern among many industry leaders given the importance of NAFTA to the North American economy since its enactment. Specifically, NAFTA increased trade among the region from roughly $290 billion in 1993 to more than $1.2 trillion in 2016 and was a significant boon for the U.S. agricultural and automotive industries, as well as Mexico’s export-oriented industries like maquiladoras and auto plants.

On February 12, 2020, experts on U.S.-Mexico affairs discussed the USMCA and its ramifications during a panel hosted by The Center for the United States and Mexico at Rice University’s Baker Institute. The panel was moderated by Rice’s Mexico Center Director Tony Payan, Phd., and featured international trade experts David Gantz and Robert Givens.

While the panel had mixed thoughts about whether USMCA is an overall upgrade from NAFTA, they acknowledged the new deal left the vast majority of NAFTA unchanged. All agreed that one of the biggest benefits of the USMCA’s passage was the uncertainty it would remove for businesses as they adapt to the new framework, just as they did after NAFTA went into effect in 1994.

Though the final version of the USMCA leaves the bulk of NAFTA unchanged, there are some significant differences, specifically in the areas of automobile manufacturing, intellectual property, labor, and investor-state dispute resolution.

In line with the President’s focus on manufacturing in America’s Rust Belt, one of the biggest changes will affect the North American automotive sector. The USMCA will require that 75 percent of a vehicle’s content be produced within North America, an increase from 60 to 62 percent under NAFTA. It also mandates that 70 percent of vehicles’ aluminum or steel come from the three countries and that 40 to 45 percent of auto content be made by workers who earned at least US$16 an hour—both provisions that were not included in the original NAFTA.

U.S. automakers like General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV support the changes that will likely give them a competitive advantage over foreign rivals that rely more heavily on production outside of North America. Within North America, the wage requirements may result in automakers relocating some manufacturing to the U.S. or Canada from Mexico, where workers at assembly plants were paid less than $8 an hour in 2017, according to analyses by the Center for Automotive Research. However, Dr. Payan noted that Mexican workers involved in export-oriented manufacturing already earn higher-than-average wages, sometimes exceeding $9 an hour. Therefore, the USMCA’s impact on labor relocation may not be as drastic as many anticipate.

Just like NAFTA contributed to job losses in certain sectors but overall job growth in all member states, the USMCA could lead to thousands of new jobs as manufacturers start sourcing more of their supplies from domestic partners. According to an estimate by the U.S. International Trade Commission, while auto makers themselves might shed 1,500 jobs, automotive suppliers would likely add the equivalent of roughly 28,000 new full-time employees.

The USMCA will also have a significant effect on Mexico’s labor conditions. The deal requires that its member countries not only enforce their own labor laws but also adhere to international standards. In anticipation of the deal, Mexico passed labor reforms on May 1, 2019, giving workers more rights and unions more power to organize. While these changes could be a long-term success for Mexico’s labor movements, corruption and difficulties in ensuring compliance make the short-term impact uncertain. Still, workers have already begun asserting their new rights, most notably in January of 2020 when Home Depot workers in Mexico cited the new labor laws while striking to demand better conditions, salary, and benefits.

The USMCA significantly limits investor-state dispute resolution (“ISDR”), a dispute-resolution process whereby a company in one member state could sue the government of another state for enacting measures that amounted to expropriation of the company’s property rights. The ISDR provisions in Chapter 11 of NAFTA were controversial, particularly in Mexico where there was a fear that U.S. multinational corporations would use private arbitration proceedings to undermine the ability of Mexico’s government to regulate the environment and public safety. Because NAFTA allowed for ISDR proceedings even when a regulation was “tantamount to expropriation,” a U.S. company could, for example, sue a Mexican government for attempting to regulate the company’s dumping of pollutants into a water supply. Interestingly, David Gantz of the Rice Panel noted that the largest number of ISDR actions under NAFTA were actually brought against Canada.

The USMCA completely eliminates the ISDR procedure against Canada within three years and limits it in Mexico to foreign investments in industries like hydrocarbons, utilities, and telecommunications. These investor protections could conceivably encourage U.S. energy companies to continue investing in Mexico (which accelerated after Mexico’s 2013 energy reform), with at least some assurance that their investments would not be jeopardized by President Andres Manuel Lopez Obrador’s (“AMLO”) unpredictable anti-market policies.

The Rice panelists noted that despite the increased market certainty that may come with the USMCA, the freewheeling governing styles of both Presidents Trump and AMLO create some questions as to how the provisions will actually play out in the first few years. For instance, even though the USMCA lowers or eliminates tariffs on a majority of goods, the U.S. executive has significant discretion to impose protectionist anti-dumping tariffs on certain goods. We have already seen these types of duties on steel and aluminum by the Trump administration (duties that have since been removed as a condition to further negotiations on the USMCA). Tomatoes are another prime example. Dr. Payan stated how Senator Marco Rubio unsuccessfully tried to include restrictions on Mexican tomatoes to protect Florida tomato producers, but the panelists noted that the U.S. producers had found an indirect way of restricting imports through the enactment of increased inspection requirements for tomatoes, which may result in many imports perishing while they await entry into the U.S.

AMLO has taken similar protectionist measures that have discouraged foreign investment. Shortly after taking office, he scrapped a $13 billion project to build a new international airport in Mexico City after punting the decision to a public referendum in which only 1% of the electorate voted. He also placed a moratorium on new deepwater oil exploration bids that were introduced in Mexico’s 2013 energy reforms, exacerbating the country’s 15-year decline in oil output.

Given the remaining questions about the USMCA’s impact and the current political environment, many industry leaders and experts are cautiously optimistic about the new deal, including Dr. Payan. One opportunity he sees is that the regional manufacturing requirements, combined with the U.S.’s current anti-China measures, may result in significant reshoring of manufacturing from China to Mexico. The trade war with China has already caused other countries to pick up the slack from the 16% reduction in Chinese imports in 2019. The biggest winner of the trade war has been Vietnam, whose imports to the U.S. increased 17% according to the U.S. Census Bureau. Though Mexico saw a more modest increase of 3% in U.S. imports, this number may likely increase with the USMCA.

Though many questions remain, industry leaders and consumers can enjoy a temporary sigh of relief because, at least for the time being, the North American trade block appears to have survived the anti-globalist rhetoric on both side of the U.S.-Mexico border.

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