Trump’s trade deal an achievement but isn’t perfect
Presidents Donald Trump and Andrés Manuel López Obrador of Mexico met this past week, with the stated intention of celebrating the new United States-Mexico-Canada Agreement. While the agreement is a positive step, the USMCA is no panacea and the overall bilateral environment challenging.
On July 1, the USMCA finally entered into force. The agreement replaces the North American Free Trade Agreement as the region’s guiding trade framework, governing the movement of hundreds of billions of dollars in goods and services. While the agreement will provide order for regional trade, its immediate effects will pale in comparison to the other structural forces currently at play.
In large part, the new agreement looks a lot like its predecessor. However, the USMCA contains some significant new rules and frameworks. In particular, the North American automotive industry will now have to prove higher regional content for its vehicles (66 percent, eventually increasing to 75 percent, compared to 62.5 percent with NAFTA), Canada will open its dairy market, and there are guidelines for newer sectors such as e-commerce and digital trade. The agreement also includes a labor chapter, requiring that 40 percent to 45 percent of the work for any vehicle comes from employees making at least $16 an hour.
While the USMCA aims to boost North America’s interlocked economies, other forces are reshaping the region. The COVID-19 pandemic is the largest disrupting force, with the region’s three countries continuing to battle outbreaks and significant community spread. Across the United States and Mexico, new case numbers are quickly ticking upward, and there are few signs that the spread will be under control anytime soon. The pandemic has decimated the regional and global economy at the very moment that USMCA is promising to spur economic growth.
The situation is likely to be most severe in Mexico, where López Obrador has responded to the public health and economic crises by doubling down on government austerity. The Mexican president has also attempted to make Pemex, the state owned oil company, the centerpiece of the country’s economic development, even amid the bottomed out petroleum prices.
In response to these economic contractions, governments across the region have been speeding up timelines to reopen their economies. Earlier this month, Mexico City reopened its shops, markets, hotels and restaurants at a limited capacity. Other U.S. states and Canada have also undertaken similar reopenings. Yet while these steps will allow for some economic life to breathe back in, they also open the door for further outbreaks. These closings and reopenings have also contributed to a regional rethink of global business.
For more than two decades, North American businesses steadily expanded their supply chains across the continent and the world. Automotive, aerospace and electronics manufacturers shipped pieces and parts across the region’s borders as products were steadily assembled. Yet, COVID-19 exposed the risks associated with geographically dispersed supply chains, as each country’s response to the pandemic affects a company’s overall production.
In North America, this dynamic played out in dramatic fashion. As Mexico shut down its factories amid the pandemic, U.S. companies suddenly couldn’t get the parts necessary to continue their production. Eventually, U.S. companies pushed Mexico and succeeded in getting factories added to the country’s list of essential businesses that could reopen. However, this episode and similar experiences globally will reshape how companies think about their supply chains and resilience. USMCA provides a better framework around the supply chain issue, and updates several areas not contemplated under the former NAFTA. Additionally, as companies look to nearshore some of their activities, they’ll want the certainty that having a new agreement in place should provide.
Amid the economic turmoil, the region’s political leadership will also continue to influence North America’s economic integration, at times in direct opposition to the USMCA’s promotion of free trade. Just last week, the Trump administration once again threatened Canada with 10 percent aluminum tariffs during an increase in aluminum imports. If the U.S. administration moves forward with the threat, Canada will also impose retaliatory tariffs on aluminum and potentially on a range of other products within the USMCA’s first few weeks.
These types of threats and economic sanctions are unlikely to go away anytime soon. Since entering office, the Trump administration has wielded tariffs in its foreign policy to extract economic and other concessions from countries globally. The USMCA’s implementation, while important for the region, is unlikely to fundamentally change this dynamic. In fact, it could even aggravate tensions as businesses adapt to the new rules and the agreement’s effects become clearer.
Yet, even if North America’s most immediate economic shifts won’t come from the USMCA, the agreement remains a major regional achievement. It also represents another bet that North America makes on itself — where the three countries tie themselves and their economies together to ride out the current challenges.