The United States-Mexico-Canada Agreement (USMCA) has provided the anticipated boost to North American trade during a tepid time in global commerce. Are the results fortuitous timing coming out of COVID or something more?
>When the United States-Mexico-Canada Agreement (USMCA) was introduced in 2020, the intention was to improve the conditions of North American trade. One of the most important provisions was a mandate for higher wages for Mexican labor, and a guarantee such workers would be able to organize and bargain collectively.
“NAFTA had been criticized for years as creating an unfair playing field by moving stuff south of the border because of cheap labor,” said Ashley Craig, Co-Chair of the International Trade Group at Venable LLP (venable.com). “That was to the detriment of workers in the US and, by extension, Canada.”
Acceleration of North American Trade
“The raw numbers show that the USMCA has increased trade among the three country parties to the agreement, which is a good thing,” said Tom Palisin, Executive Director of The Manufacturers’ Association, a York, Pa.,–based regional employers’ group with more than 420 member companies (mascpa.org). “There’s an increasing trend of trade between the U.S. and Mexico in particular, with more US exports going to Mexico, for sure. So, that’s all positive.”
The numbers back up this rosy view. According to the U.S. Census Bureau, with Canada and Mexico aggregated, total trade volume with the U.S. increased from $1.3 trillion in 2021 to $1.5 trillion in 2022.
The importance of North American trade to the U.S. economy cannot be denied. “In 2022 U.S. merchandise exports to Canada and Mexico totaled 680.5 billion,” said John Manzella, a consultant on global business and economic trends (JohnManzella.com). “This is more than U.S. merchandise exports to our next nine biggest export markets ($675.8 billion). Moving forward, Mexico and other friendly trading partners will benefit from greater U.S. trade, not less.”
Boosting Trade
So, what was in the agreement that stimulated trade? One was a change in rules of origin for the auto industry, increasing the portion of each vehicle that had to come from the three countries to 75 percent, up from 62.5 percent.
The new labor stipulations required 40% of each vehicle to come from factories paying at least $16 per hour. “Compared with NAFTA, the USMCA put specific focus on increasing the wage rates in Mexico to be more on par with the US, so that gives us kind of an advantage,” said Palisin.
Another spark was the requirement that at least seventy percent of a vehicle producer’s purchases of steel and aluminum, had to be melted and poured in North America. This decreased reliance for such metals from China imports.
Such provisions put upward pressure on sourcing among the three countries. “The agreement focused more of our trade in North America rather than in Asia and Europe,” said Palisin. “That can be important going forward, given the confrontations we’re having with China these days.”
Increasing tripartite trade has come at a time of a similar increase in American manufacturing in general. “After the blip caused by COVID, there has been a big rebound with manufacturing, particularly in the auto sector, which is a critical one between the US and Mexico,” said Palisin. “I don’t think we’ve seen over a million people employed in auto manufacturing since before the great recession. So, these are positive things.”
Palisin noted that manufacturers are hiring more workers. “We now have nearly 13 million manufacturing employees, and it has not been that high since prior to the great recession,” said Palisin. “There’s a lot of reasons for it, but you could probably point in some ways to the revised trade agreement with the USMC versus NAFTA. So something good is happening.”
A Murky Picture
Did all of the tripartite trade increase emanate from the USMCA? Probably not. Isolating the agreement’s effect is complicated because of another factor that stimulated trade over the last couple of years: the post-pandemic recovery. “We cannot underestimate the impact that the pandemic has had on global trade in general, and trade amongst the United States, Mexico and Canada in particular,” said Craig.
Separating the impact of the USMCA from the effects of the recent economic recovery, noted Palisin, is virtually impossible. “There’s no way you can decouple where we are several years into USMCA from the fact that we are coming out of a pandemic that consumed the entire globe for the last three years.”
Another force for increased North American trade has been the recent supply chain issues that pushed more manufacturers to localize production. “Supply chain crunches have increased interest in nearshoring and onshoring,” said Palisin. “So that should have really positive effect on employment and growth within the US and probably Mexico as well.”
Yet another force was the section 301 tariffs imposed on China. These resulted in US companies moving production of components and parts, as well as complete finished products, from mainland China to other areas. Those included not only Vietnam, Malaysia, India, and other Southeast Asian countries, but also the United States, Canada, and Mexico.
Yet another stimulus to North American trade, if unintentional, was the increase some years ago by U.S. Customs and Border Protection of the so-called de minimis exemption to $800 from the former $200, allowing for shipments of less than that amount to avoid duties and taxes. While the goal was to expedite shipments to consumers, some companies are gaming the system by sourcing from overseas, sending the goods to Canada and Mexico, and then circumventing the 301 tariffs by taking advantage of the de minimis to drop ship the goods to the United States.
Looking Ahead
Looking ahead, economists expect the tripartite agreement to continue to stimulate trade among the three involved nations. “The USMCA will certainly strengthen the trade relationships in North America,” said Palisin. “It will give the US and Mexico the opportunity to having more predictable supply chains.”
But there remains room for improvement in the enforcement area. “It’s fairly early in the process, but I think there were a lot of promises in USMCA about making the wage rates more competitive in Mexico, and it’s unclear if that’s happening at a fast enough pace,” said Palisin. “There might also be concerns about the dispute mechanisms that have been put in place for the three countries. Additionally, Canada and Mexico might challenge some of the things that the U.S. is doing to support US manufacturing.”
Palisin points to the huge investment in semiconductor chips that the U.S. is making as possible cause for international concern, and the new infrastructure law increases the requirements for US-based manufacturing.
And then, of course, the devil will always be in the details. “The USMCA requires a large percentage of auto parts to be manufactured in North America,” said Palisin. “We need to make sure those are in the US and not in Mexico or Canada.”
Most of the members of Palisin’s association feel that the USMCA has helped level the playing field. Yet there remains room for companies to be more aggressive in their international activity. “I don’t think we have as many manufacturers exporting as we could,” said Palisin. “So I think there’s an opportunity there to continue to increase that side of the equation for us.”
As for a final assessment of the USMCA, it will have to wait. “We don’t know for sure how all this will shake out probably for a couple more years,” said Palisin.
