It’s been a year since the USMCA free trade agreement was consummated between the three North American nations: the United States, Mexico and Canada. Whether the USMCA is a good deal, bad deal or something else altogether, is still being debated. But what is becoming increasingly clear one year later is the USMCA is better than no deal at all.
When the United States, Mexico and Canada finally implemented a new free trade deal in July, 2020, a mammoth sigh of relief echoed from the Gulf of Mexico to the Arctic Circle. The stakes were enormous. One of the world’s largest trading blocs had hung in the balance during often-tense negotiations and ratification that stretched from August 2017 until March 2020.
“Had there not been an agreement, there would have been widespread panic,” said Eric Miller, president of the Rideau Potomac Strategy Group, a trade-focused advisory and consultancy.
Now, a year into the US-Mexico-Canada Agreement, shrugs largely have replaced cheers.
“The USMCA is sort of like the fireworks that you light and then it goes ‘poof,’” said Nicole Bivens Collinson, who leads the international trade and government relations practice of the law firm Sandler, Travis & Rosenberg.
The USMCA in Context
The USMCA replaced the North American Free Trade Agreement, or NAFTA, the three-decades old treaty that melded trade between the three North American economies.
To be sure, several developments have impacted North American trade since implementation of the agreement began. Some are monumental, others more modest. But very little is directly linked to the treaty.
“There’s been a lot that has happened in the past year, but I don’t think that I could say, ‘oh, that’s because of the USMCA,’” said Bivens Collinson, a former negotiator with the Office of the U.S. Trade Representative.
To understand these changes and what — if any — relationship they’ve had with the agreement itself, it’s useful to think back at the state of play during talks and approval.
First, of course, is the global pandemic and the trade upheaval that COVID-19 wrought. During the first half of 2020, international trade plummeted and global supply chains were stretched and weakened. The US wrestled with acute shortages in high-profile goods like medical equipment, while China temporarily shut down ports, disrupting all sorts of trade. Then, when trade finally resumed, shipping costs skyrocketed and it often became difficult to even locate an empty container.
On top of the COVID-related uncertainty was layered a rapidly escalating trade dispute between the US and China during the Trump regime. The tit-for-tat slapping of tariffs saw hundreds of billions of dollars’ worth of goods become more expensive and the drying up of critical American exports including agriculture.
Mexico and the USMCA
Many assumed that US re-shoring or near-shoring to Mexico would accelerate because of the successful completion of the USMCA, coupled with America’s growing trade war with China. However, while some transfer of light industrial goods manufacturing has taken place, the moves have larger been within Asia, from China to Southeast Asia, notably Vietnam.
Part of that reflects the continued advantages of producing goods in Asia, despite the necessity for transpacific carry. Part is a function of Mexico’s own problems, including security and the government of President Andrés Manuel López Obrador (often known as AMLO), which appears to discourage foreign investment as often as it embraces it.
“Vietnam has lower wages, a stable political system, no drug problems or gang wars,” said Miller. “Compare that to Mexico, which has struggled increasingly with governance and citizen security.”
Then, there’s Mexico’s spotty record on foreign investment. The AMLO government, for example, engineered a plebiscite in March 2020 that blocked the construction in Mexicali of a $1.4 billion brewery by the American Constellation Brands. It cancelled the Mexico City airport project, resulting in billions of dollars of waste. And, it reversed efforts to open energy investment to the private sector.
“AMLO is someone who has been quite populist in his approach,” said Miller. “Investors look at Mexico and are very nervous.”
The North American vehicle trade was the single-biggest focus of the new agreement. Car and truck production comprises a more-than $100 billion manufacturing juggernaut, one that has developed since the advent of NAFTA into complex and efficient system of cross-border supply chains. The Trump administration spent considerable energy and political capital on giving the US more leverage in vehicle manufacturing, critics would say, to the exclusion of other sectors.
Under the USMCA rules of origin for duty-free status, North American content of cars, light trucks and auto parts increases to 75% over three years from the NAFTA requirement of 62.5%. Of this, at least 40% to 45% (depending on the category) must be made by workers earning at least $16/hour.
ICE Supply Chain, EVs and the USMCA
So far, at least, this reform has failed to evolve into dramatically more near shoring, especially Mexico-based manufacturing relocation. Part of this reflects investor skittishness. But a bigger factor may be the transformation of auto industry itself.
Focus among the US car makers going forward is now squarely on electric vehicles. That translates into a radical reordering of the vehicle value-creation proposition. Batteries and semiconductors become critical components, while internal combustion engines (ICEs) and transmissions become redundant. Supply chains for electric vehicles are expressed in terms of essential raw materials such as nickel, lithium, cobalt and graphite, not just steel and aluminum. Technology trumps low cost production and, indeed, trade agreements.
“The rules of origin that were negotiated in USMCA to some extent were fighting the last war,” said Miller.
Already, for example, semiconductor shortages are causing serious vehicle production delays. Evidence of how investment flows will change has become more apparent in recent days. The Taiwanese semiconductor giant TSMC began construction in June on a $12 billion semiconductor manufacturing plant in Arizona. Intel and Samsung also have announced plans to build new plants as well.
Even more critical will be large-scale battery manufacturing plants. China now dominates production, although a joint venture between GM and South Korea’s LG Chem will see two multi-billion-dollar factories in the US, one in Ohio already under construction and another announced in April for Tennessee.
These sorts of changes bode well for the US and, to a lesser degree, Canada. Meanwhile, Mexico is nowhere near to being prepared to capture this development, as investors in these critical components have shown absolutely no interest in locating there. Neither is it likely that Mexico will benefit from any move away from China.
“Clearly there is going to be some shift of auto-parts production sourcing from China,” said David A. Gantz a law professor and the Clayton Fellow, Mexico Center/Baker Institute, at Rice University. “Maybe it will go to Vietnam. Maybe some will go to Indonesia. The logical place in many respects for high labor content auto parts would be Mexico, except that the investment climate, in addition to concerns about electricity and gas costs, is discouraging.”
Likewise, said Gantz, the new rules of origin, especially wages-related requirements, could create a reporting nightmare that may discourage smaller parts manufacturers from moving to Mexico.
USMCA and Investment
On the other hand, he added, “a lot of people were sitting on their investment hands” during the Trump administration because of trade uncertainties. Gantz, for one, believes that some of those parts makers experienced in the Mexican milieu and seeking to expand already existing facilities may go ahead regardless of Mexico’s political and security climate.
Another bit of welcome news for Mexico came with the announcement in May that Canadian National (CN) and Kansas City Southern (KCS) railroads would merge. If approved, this will create a rail network that would stretch from Mexico to Canada. North American regional trade is consistently cited as an important rationale for the roughly $30 billion deal.
That development underscores a regional transportation and shipping integration that began with the emergence of NAFTA. “All that we’ve been doing for the last 30 years to build out the inland infrastructure in North America serves us exceedingly well,” said Miller.
NAFTA triggered a mammoth increase in regional trade, something even its most ardent critics must concede. But that doesn’t mean the movement of goods and services between the US, Mexico and Canada has become frictionless. Longstanding disputes remain, and will likely continue well into the life of the USMCA. This includes everything from the softwood lumber quarrel between the US and Canada to fights over water on the border between the US and Mexico.
“I don’t think any of the three governments entertain a vision of accelerating integration of the North American economy. And there are a lot of barriers in the North American economy, even though we’ve had NAFTA all these years,” concluded Gary Hufbauer, an economist and a senior fellow with the Peterson Institute of International Economics.
But Hufbauer, like others, remain thankful the USMCA was successfully concluded. “Instead of massive disruption, now we have these smaller irritants,” he said.