How can the United States–Mexico–Canada Agreement, or USMCA, help Mexico, and what challenges might this agreement bring for Mexico?
The new NAFTA
The USMCA is a free trade agreement that governs trade between the three title countries. Effective since July 1, 2020, it’s essentially an updated version of NAFTA. The differences between the two agreements are not massive, but there are some key ones. Much of the English-language coverage of the deal focuses on the US and Canada and how the deal affects their economies. But what are the USMCA pros and cons for Mexico?
Pros of the USMCA for Mexico
The biggest pro for Mexico, and arguably the biggest positive of the USMCA for everybody involved, is increased security. Altering NAFTA was a key priority for US president Donald Trump during his time in office, and although he is now gone, much of the dissatisfaction with NAFTA persists. Many Americans, and some Canadians, felt like the deal wasn’t working for them. With the USMCA now in place, Mexican businesses now have more security that there won’t be any big shakeups in trade with its North American neighbors. For a country that sells about 80% of its exports to the US, that’s good news.
The deal also offers more security for Mexican workers, especially those in auto manufacturing. The USMCA stipulates that 40%–45% of the automobiles manufactured in North America must be made in a factory that pays a minimum of $16 per hour. There are also provisions to strengthen the collective bargaining of labor unions. Mexico has five years to phase in these measures.
Furthermore, an automobile rules of origin requirement mandates that 75% of an automobile’s value must come from within the governed region. This is an increase from 62.5% in NAFTA. This can benefit auto workers in all the countries.
Cons of the USMCA for Mexico
While the USMCA provides stability for now, it also requires that all three nations review the agreement every six years, with a 16-year sunset clause. This means that if one of the three countries doesn’t like the agreement in 16 years, they can terminate it. While this gives national governments more control over their trade policy, it also introduces long-term uncertainty into the economy.
For Mexico specifically, there is the export risk of penalties. While the provisions for workers’ protections are good, they introduce the possibility of instability into Mexican manufacturing, especially in the auto industry. Furthermore, if a Mexican business exports goods made by a manufacturer who has violated these new labor provisions, they could be vulnerable to penalization themselves, even if they did so unknowingly. This adds increased risk for small- and medium-sized enterprises, or SMEs, in Mexico seeking export opportunities to the US and Canada.
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