USMCA Expected to Bring Some Relief From Pandemic Economic Woes

July 1, 2020 Updated: July 1, 2020

WASHINGTON—The new trade agreement between the United States, Mexico, and Canada took effect on July 1, opening a fresh era in North American free trade.

The agreement contains new “rules of origin” on cars, which incentivize the use of high-wage labor in auto manufacturing and make U.S. and Canadian workers more competitive vis-a-vis Mexican workers. It also expands market access for U.S. farmers and ranchers.

The U.S.–Mexico–Canada Agreement (USMCA), comes at a crucial time since it encourages businesses to bring their production closer to home.

COVID-19 has caused severe supply disruptions across the globe, forcing companies to diversify their supply chains. And the hard lessons learned from the pandemic are expected to increase trade and investment activity within North America in the future and reduce the region’s reliance on China or other Asian countries, according to experts.

USMCA replaces the North American Free Trade Agreement (NAFTA), which entered into force under President Bill Clinton in 1994. The new agreement comprises 34 chapters of provisions governing the trade relationship between the three countries.

The agreement maintains most chapters of NAFTA but makes significant changes in the areas of market access for autos and agriculture as well as investment, government procurement, intellectual property rights, labor, and the environment. It also addresses new issues such as digital trade, state-owned enterprises, and currency devaluation.

Known as CUSMA in Canada, and T-MEC in Mexico, USMCA has strong labor provisions, which makes the deal an important milestone for international trade, according to trade experts.

The use of high-wage labor is expected to boost production in the United States and Canada, which suffered from Mexico’s cheap labor for decades.

While NAFTA successfully integrated the three economies and boosted trade in the region, it resulted in net job losses and lower wages for many American workers, according to experts.

The Economic Policy Institute estimated that the United States lost 682,900 jobs to NAFTA from 1994 through 2010.

A Win for US Workers

USMCA is estimated to have a significant effect on the U.S. manufacturing sector, particularly automotive.

Under the new agreement, 75 percent of auto content must come from North America, up from the original threshold of 62.5 percent. In addition, producers must certify that 70 percent of the steel and aluminum purchases come from the region. The higher thresholds are expected to boost production and employment in North America.

The agreement also requires 40 percent of each car and 45 percent of each truck to be made by employees earning at least $16 an hour in order to qualify for duty-free treatment.

A study released in April 2019 by the U.S. International Trade Commission showed that the trade pact would raise the United States’ real gross domestic product by $68.2 billion, or 0.35 percent, and create 176,000 new jobs.

Another study by the Office of the U.S. Trade Representative found that the agreement would boost automotive manufacturing investments in the United States by $34 billion over the next five years, adding nearly 76,000 new automotive jobs.

Labor provisions of the agreement hold Mexico accountable for improving workers’ rights, and the agreement grants the United States new enforcement authorities.

“This is the first time that Mexico negotiates a chapter that has very strong commitments,” Luz Maria De La Mora, undersecretary for foreign trade of Mexico, said at a virtual panel hosted by the Wilson Center on June 30.

Mexico passed a labor reform measure that guarantees collective bargaining and freedom of association for labor, she said, adding that the Mexican private sector is completely on board with the reform.

Impact on Farmers

The agreement also gives relief to U.S. farmers and ranchers who are struggling to recover from the losses caused by the pandemic and depressed commodity prices.

“The launch of the USMCA brings optimism to the country’s farmers and ranchers at a time they need it the most,” Zippy Duvall, president of American Farm Bureau Federation, said in a statement.

The pact is expected to boost U.S. agricultural exports by $2 billion annually, according to the Farm Bureau.

Under the new agreement, Canada will increase quotas on U.S. dairy products and will treat wheat imports the same as domestic wheat for grading purposes, which are cited as two big wins for U.S. farmers.

The deal establishes modern digital trade rules that have significant implications for the U.S. technology sector. It addresses many of the digital trade barriers that internet service companies and businesses have encountered.

‘A Monumental Change’

After his election, Trump followed through on his promises and began ending what he called “broken trade deals.”

A few months into his presidency, he announced plans to renegotiate the terms of NAFTA, which he called “the worst trade deal in the history of the country.”

Following a lengthy and intense negotiation process, the three countries signed the agreement on Nov. 30, 2018, on the sidelines of the G-20 summit in Argentina.

Modifications were made to the agreement after Democrats raised issues concerning enforcement, labor, environmental, and pharmaceutical provisions.

A bipartisan majority in the House and the Senate approved the revised deal. And in January, Trump signed it into law, sealing one of his biggest trade wins.

“From day one of his Administration, President Trump has changed the focus of America’s trade policy away from what is best for big, multi-national corporations to instead what is best for America’s workers, farmers and ranchers,” U.S. Trade Representative Robert Lighthizer said in a statement.

“That’s a monumental change,” he added.

Challenges Ahead

USMCA will help drive new manufacturing investments to the United States and also encourage investment in the North American supply chain.

“The pandemic, for which China has been widely blamed, has added substantial pressure for the ‘reshoring’ (to the United States) or ‘nearshoring’ (to Mexico and Canada) of supply lines,” David Gantz, a fellow in trade and international economics at Rice University’s Baker Institute, wrote in a report.

“This is particularly critical for personal protective equipment, and pharmaceuticals and materials used in their manufacture,” he added.

Without the USMCA, Gantz said, this shift in supply chains would have been costly and difficult to implement.

However, many experts including Gantz believe that vehicles made in North America will likely become more expensive for consumers due to new rules of origin, which require a significant increase in regional content and use of high-wage labor.

The auto industry is currently facing a hurdle due to declining consumer demand and temporary closure of factories in North America as a result of the pandemic. In addition, carmakers will face compliance challenges as they have to implement strict labor and content requirements under the new agreement.

“There are challenges where flexibility will be needed,” the Chambers of Commerce of the United States, Canada, and Mexico said in a joint statement on July 1.

“The COVID-19 pandemic and economic downturn may make adapting to these new rules even more challenging.”

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