One Year of USMCA and What’s to Come

August 18, 2021 • Posted in Market Insights, News

July 1 marked one year since the U.S. Mexico Canada Agreement (USMCA) replaced the North American Free Trade Agreement (NAFTA), which governed trade and guided relations among the U.S., Mexico and Canada for 25 years. But while USMCA implementation is gaining speed, we have yet to fully realize its potential benefits.

NAFTA vs. USMCA

NAFTA virtually transformed economic relations among the U.S., Mexico and Canada, tripling regional trade and leading to a sixfold increase in cross-border investment. Additionally, it powered significant job creation, with more than 12 million U.S. jobs supported by North America’s commerce. Of most importance for the plastics industry, NAFTA eliminated tariff barriers in the region, boosting U.S. exports. It also encouraged connected supply chains, making the region more competitive with other trading blocs and creating a legal framework for dispute resolution, which promoted cross-border investments.

Whereas NAFTA was revolutionary, USMCA is more of an evolution, building off past successes and adapting to modern economic realities, such as the rise of digital commerce and growing competition from other regional trade pacts. Unfortunately, the agreement took effect in the height of the COVID-19 pandemic, severely impacting the first year of its implementation. In addition to closing borders and workplaces and shutting down supply chains, the pandemic exacerbated doubts about the resiliency and adaptability of continental and global value chains. The U.S. presidential transition added further complications and delays to USMCA, with the outgoing administration’s ambitions tempered and the new administration limited by slow processes of appointing staff.

But despite these challenges, companies and governments have moved forward under the agreement over the last year, finding ways to continue vital commerce across borders and assure effective cross-continent management virtually. Additionally, USMCA proved valuable by providing both the private sector and governments with a clear set of rules and processes, which will govern North American commerce until at least 2036.

Year one of USMCA also revealed opportunities for improvement and its potential for continuing to enhance mutually beneficial economic growth for the U.S., Mexico and Canada.

Implementation Gaining Speed

When USMCA went into force, the pandemic’s economic fallout and the impending U.S. election eclipsed detailed discussion about the agreement’s longer-term impact. But the current administration has taken steps to ensure USMCA implementation. While USMCA has yet to change trading patterns fundamentally, it did signal a restart for cross-border investment, which froze when NAFTA’s future was unclear.

We’ve seen a surge of venture capital investments, particularly in Mexico. Both Ford and GM announced significant investments in Mexico since USMCA took effect. And, with more electric vehicle supply chains coming online, USMCA will help ensure regional efficiency and competitiveness.

One unfortunate impact of USMCA has been the agreement’s labor rules, which were never fully defined and are prompting tensions and concerns over future conflicts. Earlier this year, a union voting dispute at a GM plant in Mexico drew U.S. scrutiny over possible workers’ rights violations. And trade and labor unions in both the U.S. and Canada have publicly raised concerns about renewed U.S. investment in Mexico. However, it’s important to note that USMCA contains extensive new rules designed to boost wages and labor rights in Mexico. While it’s critical to examine what did happen during the first year of USMCA, it’s also important to consider how the agreement will evolve.

Future Updates to USMCA

USMCA helped shield North American trade from detrimental impacts while positioning the region to capitalize on a global economy and preparing it for pandemic-induced supply chain shifts. Many suppliers are reshoring manufacturing from labor advantaged countries in Asia, expanding plastics manufacturing and assembly throughout North America. We’re also beginning to see efforts to bolster the manufacturing of critical products in the region, from medical devices and personal protective equipment to semiconductors. USMCA will facilitate supply chain efficiencies as these shifts occur.

When looking to improvements of the agreement itself, there are some key areas of USMCA that require more work by governments and stakeholders, including:

  • Supply chains: Manufacturers and logistics providers, post-pandemic, will be focused on resilience and “near-shoring.” USMCA provides a platform that supports both concepts; doing so will strengthen North American economic security and competitiveness.
  • Critical minerals: The auto industry is moving increasingly toward electric vehicles. Access, movement and disposal of critical minerals will drive or impede North American competitiveness and its response to climate change. Governments must coordinate closely with the private sector to ensure USMCA facilitates rather than hinders energy transition.
  • Rules of origin: The automotive rules of origin contained in the USMCA are some of the most complex of any free trade agreement. Currently, USMCA and the auto industry have different interpretations of the intent of these rules. Clarification and guidance on implementation by customs agencies will be essential to ensuring the rules of origin achieve their intended outcome.
  • Ending border restrictions: Border restrictions established during the pandemic caused confusion around terms like “essential” and led to manufacturing disruptions for individual firms across sectors. The lack of universal definitions must be addressed in preparation for future pandemics or supply shock. Additionally, USMCA should establish clear guidelines for when and how border restrictions are executed, relaxed or removed.
  • Labor mobility and upskilling: The lack of common credentialing requirements in USMCA inhibits skilled workers from crossing borders, even to address a critical shortage. And, because the list of professions was not updated in the USMCA and doesn’t reflect the reality of today’s economy, the agreement needs to recognize the workforce requirements of the new digital economy.

Significant work remains to fully enact and demonstrate the value of USMCA. But there remains enthusiasm for the agreement and its ability to act as a critical anchor for North America in emerging from the COVID-19 crisis. For the plastics industry and M. Holland, a modernized trade agreement provides greater certainty, which will support business growth and innovation throughout our markets. And, despite the obstacles 2020 presented USMCA, the agreement is still an undeniable win for North America and will improve the region’s ability to compete globally.

Stay tuned for more from M. Holland about USMCA’s impact on compliance.

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