The enactment of the USMCA this week will not prevent an economic recession in Mexico or the US, but should bring hope of a faster recovery.
The North American Free Trade Agreement (NAFTA), proved to be the most binding economic instrument in modern history between the United States and Mexico. However, July 1st, 2020 marked the end of it, as well as the beginning of the United States-Mexico-Canada Agreement (USMCA). Although it is unclear how this new deal will impact North America in the post-Covid-19 era, this article expands on six reasons to believe that the new commercial agreement could help the region’s recovery in the medium term:
- The USMCA advocates for North American car production. The automobile industry is the poster child of how NAFTA wove Mexico and the US economies together. Today, over 60% of an exported car from Mexico is manufactured in the US. In the new agreement this threshold will increase to 75% and will also force more of this production to pay US salaries. In other words, automakers will have to buy parts in North America that were once bought from Germany, Japan, South Korea or China, in order to keep the zero-tariff benefit. These measures may seem to benefit the US in the short term, but could benefit Mexico in the long term by sourcing more local manufacturing into its supply chain.
- Labor rules will be stronger and supervised. Although this has been one of the most controversial changes of the new deal, in the end it will level out working conditions between Mexico and the US. On one hand, the agreement modifies old negotiation practices between employers and Unions. On the other, it sets up a mechanism to ensure Mexico’s labor reforms are being properly enforced. Plants that are found consistently violating labor rights could be prevented from exporting to the US.
- It fosters the digital economy. Like its predecessor, the USMCA will be a pioneer on many issues, including digital economy. A new chapter within USMCA puts personal data, technology neutrality and nondiscrimination of digital products at its core. It also boost e-commerce by allowing data to flow and be stored unrestrictedly amongst countries, and increase the amount of freely traded merchandise through digital platforms. In terms of protection, consumers and companies will be protected against the content posted by their users, cybersecurity rules will be the same across borders and governments will be unable to ask tech companies to disclose their source code. These are all fundamental issues that are reshaping the world’s economy and its integration.
- It includes two strategic sectors in its Dispute Settlement Mechanism. Although the USMCA narrowed some doctrines where Investor State Dispute Settlement can be used (i.e. equitable treatment doctrine and indirect expropriation claims), the new deal includes both doctrines in government contracts for energy and telecommunications, the two main drivers of foreign direct investment in Mexico over the past 5 years. This is also relevant for US as Mexico is the No. 1 export market for U.S. natural gas and refined products and the No. 4 export market for upstream oil and gas equipment.
- It encourages environmental protection. One of NAFTA’s main criticisms was that it encouraged companies to send their polluting facilities to countries with less stringent environmental controls. The USMCA emphasizes the responsibility of each country to carry out environmental impact assessments that include the effects on ozone layer, conservation of marine environment, air quality, biodiversity, and sustainable forest management. It also promotes best practices in corporate social responsibility and recognizes the importance of consulting indigenous people on efforts to enhance environmental protection.
- It combats bribery and corruption. The USMCA chapter on anticorruption practices is an official commitment by all three countries to support each nation’s efforts to combat bribery and corruption. By adopting standards and encouraging enterprises to prohibit facilitation payments, as well as keeping records, regulators may be able to prosecute companies that record improper payments as proper payments.
In short, although the USMCA will come into effect during one of the most challenging and deprived economic times in modern history, as well as in an unsettling social and political environment, we should find optimism in its potential impact to improve the region’s economic thrive and recovery in the medium term.
* Rodrigo Gallegos is an economic and policy advisor at De la Calle, Madrazo and Mancera and current Board Member of The US-Mexico Foundation. The U.S.-Mexico Foundation is a binational non-profit organization dedicated to fostering bilateral cooperation and improving the understanding between the United States and Mexico by activating key people in the relationship that once were dormant. Twitter: @R_GallegosT
