MAKING FREE TRADE FAIRER

Mexico 2020 | ECONOMY | FOCUS

Though many of its effects remain to be seen, the USMCA may bring about better conditions for the country's laborers and economy.

In January 2020, after two years of back-and-forth between Canadian, Mexican, and American politicians, President Trump signed what some have called NAFTA 2.0, officially known as USMCA (though Canadians refer to it as CUSMA). The idea of ripping up NAFTA to create more jobs in the diminishing US manufacturing sector was especially appealing to President Trump's protectionist economic dreams; however, the effect of this remains to be seen. Instead, the agreement may have a greater effect on Mexico's manufacturing sector, both for workers and for its supply chain. Though the agreement's intended consequence was to move supply chains, especially of automotive parts, into the US, the US-China trade war has actually helped move global supply chains from China to Mexico, thus creating more dynamism in Mexico's manufacturing sector. This dynamism may just be what the country needs to take full advantage of the agreement, which could also bring about modernization of the country's manufacturing sector.
Where as NAFTA had a set list of products exempt from tariffs, the USMCA has created more specific rules and limitations that products must meet in order to be sold in US markets. One stipulation to consider is the labor value content in the production of cars and trucks. Some 40% of cars and 45% of trucks must be made of products that were produced by workers earning at least USD16 per hour. As a caveat, 10% of this wage value can come from highly paid R&D workers; an additional 5% credit can be given based on manufacturing location. Many have seen this wage floor as a way to shut out factories in Mexico, thus bringing car manufacturing supply chains back into the US. However, this obligation is expected to fall on original equipment manufacturers (OEM) as opposed to suppliers, which are companies generally manufacturing parts in Mexico. Furthermore, US auto-manufacturing specialists say that while this could drive short-term change in supply chains, it may ultimately lead to greater automation in factories within the next three to five years.
But one of the most important consequences of the agreement for Mexico will come from stipulations around organized labor and environmental regulations. These labor stipulations include the allowance of factory unions, secret-ballot voting for union leaders, and an independent panel investigating factories accused of violating labor rights. Additionally, the agreement commits all countries to blocking imports of goods made with forced labor; Mexico, in annex to the agreement, has committed to legal reforms combating forced labor and violence in the workplace, and the creation of independent unions (which exist in theory but not in practice in automotive factories) and labor courts. All this should lead to better conditions for Mexican factory workers, and perhaps even close the pay gap between American and Mexican workers in the long run. In addition, stricter environmental regulations and enforcement will allow for better conditions for a country as whole.

While previously the greatest impacts on the newly signed deal was timing, it is now COVID-19 that will affect its short- and long-term benefits of the deal. Mexico's COVID-19 lockdowns have prompted closures in factories deemed as nonessential, though many factories have fought the government on how essential their parts are to US markets. While some people believe the pandemic could be an opportunity for Mexico as the US looks to relocate plants closer to home rather than in China, COVID-19 has still driven the uncertainty that was already present in global trade supply chains thanks to increasing protectionism on the part of the US, making many investors and businesses alike pause major investment plans. As such, how the agreement will affect Mexico, the US, and Canadian manufacturing supply chains remains to be seen. Hopefully, the agreement's positive effects will show by 2025, the time at which the countries must review whether to remain in the agreement or dissolve it in another 16 years.