In its first year in force, the US-Mexico-Canada Agreement (USMCA) has 1) helped to seal foreign investment deals in Mexico’s automotive sector, 2) led companies to build new logistics facilities on the border, and 3) added steam to the merger of Kansas City Southern and Canadian National railways. Resilinc CEO, Bindiya Vakil recently stated: “USMCA is off to a great start and is poised to enable and support the Pan-American Manufacturing Ecosystem advocated by Resilinc.” (For more of our CEO’s sentiments, see her recent Harvard Business Review article and register for our July 15 webinar: The Case for a Pan-American Manufacturing Ecosystem.
“The USMCA has been a significant factor in creating an environment of trade certainty,” agreed Patrick J. Ottensmeyer, CEO of Kansas City Southern (KCS) in a June 30 webinar sponsored by the Wilson Center. The pending merger of KCS with Canadian National would create a freight rail network from southern Mexico through the US Gulf Coast and Midwest and across Canada from British Columbia to Newfoundland.
Ottensmeyer predicted that under the USMCA, the three North American countries will become “the most power trading bloc in the world” and that companies engaged in trade across the three borders will experience “improved performance and resiliency of supply chains.”
As expected, disputes have already surfaced under the USMCA’s rules, and some of the most contentious issues going forward will revolve around the wages and labor rights of Mexican workers. But trade ministers from the three countries and other experts at the Wilson Center webinar said enforcement and dispute resolution will be smoother under USMCA than it had been under NAFTA. “The state-to-state dispute settlement [process] under NAFTA was broken by allowing any party to block the formation of dispute panels,” said Rep. Kevin Brady (R-TX).
Recent examples of USMCA-inspired supply chain investment cited by FreightWaves include new warehouses and cold storage space in the Rio Grande Valley in Southeast Texas. Noteworthy investments south of the border include an 800-employee advanced auto parts manufacturing center in Monterrey by Germany’s ZF Group and a 400-employee auto parts plant for France’s Le Bélier in San Miguel de Allende.
From NAFTA to USMCA
USMCA replaced NAFTA, the 1994 free trade agreement between the three countries which helped drive North American trade to its current robust status, with Mexico and Canada providing more than 25% of U.S. imports and purchasing more than 32% of U.S. exports, according to 2020 data from the Commerce Department. “In its time, NAFTA was extremely beneficial to the United States and certainly to Texas,” said Brady, the top Republican on the House Ways and Means Committee. “But it needed updating and modernizing to work for the 21st Century.”
USMCA builds on NAFTA’s core provisions, especially the elimination of most tariffs. But it goes further to open new markets for U.S. dairy, wine and poultry exports, according to Brady. “It locks in key reforms in energy and telecommunications [and] It includes vastly improved IP protection for copyrights, trademarks and trade secrets along with innovative provisions to ensure the enforcement of IP rights both at national borders and online,” he said.
Referring to the first disputes surfacing under USMCA, Brady praised the agreement’s mediation process which has been “improved to require timely outcomes.” Among those disputes is a protest by the U.S. oil and gas industry against the energy nationalism of Mexican President Andres Manuel Lopez Obrador (aka AMLO). The American Petroleum Institute says AMLO’s energy policies “hinder new private investment [and] destroy the value of already operating private assets.”
While that issue hasn’t yet risen to the formal dispute stage, the Office of the U.S. Trade Representative (USTR) filed in May 2021 its first request for a dispute settlement panel under the USMCA to hear U.S. dairy producers’ claims that Canada’s set-asides for domestic dairy producers violate the agreement.
The most rigorous tests of USMCA’s enforcement and dispute resolution process will likely center Mexican workers’ wages, working conditions and collective bargaining rights. As U.S. Trade Representative Katherine Tai said in the Wilson Center webinar, the USMCA’s cross-border labor standards are the strongest “in any trade agreement ever [and were designed to] create a race to the top.” The agreement includes a rule that requires at least 40% of the content of automobiles be produced by workers earning at least $16 per hour—a provision that if enforced will result in large wage increases for many Mexican workers in the auto parts factories. The current federal minimum wages in Mexico are $7 to $11 per day depending on the occupation and location.
USMCA also allows any member of the public in any of the three countries to raise complaints about labor issues and workers’ right in another country. If a government decides the complaint has merit, a Rapid Response Mechanism is triggered that could ultimately deny a “covered facility” the right to trade until the issues are remedied.
Mexico is already the target of two U.S. Rapid Response complaints, according to Politico: one from the Labor Department’s international division and one from USTR. Politico also reports that Mexico has raised concerns about the treatment of migrant workers in U.S. meatpacking and agricultural sectors. But Mexico will likely face the most challenges in complying with USMCA labor rules.
Under the Trump and Biden administrations, the U.S. Labor Department called Mexico’s pro-business unions “protection unions” and said they deprive workers of fundamental rights. While the department credits AMLO for enacting “labor justice reform” in 2019, it says authentic “democratic worker organizations” still can’t compete with entrenched protection unions. The department will spend $130 million over the next four years to “support the Government of Mexico to implement labor reform, strengthen labor standards to protect workers, promote acceptable conditions of work, and address risks of child labor and forced labor.”
These challenges notwithstanding, it appears that USMCA will provide a tremendous boost to development of a North American or Pan-American based supply chains. “Supply chain leaders … are looking to de-risk and shrink [their] global supply chains to achieve improved predictability and resiliency,” said KCS’s Ottensmeyer at the Wilson Center webinar. “We have a fantastic opportunity with USMCA in place.”