This is the second installment in a three-part series addressing implications of the United States-Mexico-Canada Agreement (USMCA). It was written by Alejandra Diaz, Senior Analyst in Global Trade Content at Thomson Reuters; and Moises Garcia, Senior Foreign Trade Implementation Specialist at Thomson Reuters. You can read the first installment of this series here.
Many foreign and national companies in Mexico perceive the United States-Mexico-Canada Free Trade Agreement (USMCA) as an obstacle because it contains more restrictions than the North American Free Trade Agreement (NAFTA) that it replaces.
This includes new duties on steel and aluminum, and an increase in the percentage of regional content that must be used in vehicles assembled in North America. In the automotive sector, for example, the minimal amount of Regional Value Content (RVC) included in each vehicle will increase from 62.5% under NAFTA to 75% under USMCA over the next three years. (The RVC goal will be phased in at levels of 66% in 2020; 69% in 2021; 72% in 2022; and 75% in 2023.)
Assembly plants that opened production in Mexico over the past few years — including BMW, Audi, Toyota, and Kia factories — have until 2025 to reach the goal. In addition, companies that do not comply with the RVC goal will be levied a duty of an 2.5%, a provision intended to promote the installation of suppliers in three countries covered by the agreement. Also, quotas totaling 2.6 million Canadian and Mexican vehicles (well above the current 1.8 million) were established in the USMCA.
Another significant change is a labor clause stating that between 40% to 45% of vehicles must be manufactured by workers who earn at least US$16 per hour — a measure designed to avoid the relocation of production to Mexico, where wages are around US$3.50 per hour.
Mexico appears to fare well under USMCA
The effects of these changes can only be projected at this stage, but what can be seen is that, despite U.S. pressure, the Mexican auto industry did not suffer a setback in the USMCA negotiations. Some of the measures to be implemented could help the industry continue growing in the country by attracting companies or generating new local auto suppliers to achieve the regional content goals.
For more on this subject, join us for a one-hour webinar, What to Expect in USMCA’s New Origin Rules, at 2 pm EDT on June 4.
Mexico went through a long period of economic uncertainty during the negotiations to replace NAFTA. The process resulted in investment being driven out because companies were wary regarding their long-term options. When the protracted negotiations were finally concluded, Mexico was the first country to sign and ratify the new agreement, followed a short time later by the U.S. On March 13, the Canadian Parliament ratified the USMCA before taking a three-week break forced by the COVID-19 emergency.
It was initially thought that the agreement would go into effect on June 1 — as it was established that the agreement would take effect on the first day of the third month after it was ratified by the three countries — but the countries failed to send their letters to certify their counterparts’ readiness to adopt the new agreement, and the deadline was missed.
Calls for postponement
The Canadian Chamber of Commerce acknowledged its government’s effort to modernize the agreement, but argued that it is not the right time to implement it due to the global pandemic, as the crisis has companies focused on maintaining their production capacity and supply chains.
The Canadian dairy industry also made a call to postpone the agreement’s implementation until at least August in order to give companies time to prepare for the changes that come with the new deal. In addition, the auto industry made multiple requests to the governments of each country to grant an extension until January 2021.
In the U.S., the Senate Finance Committee, which has jurisdiction over trade, also recently called for a delay “in light of the COVID-19 pandemic.” However, Mexico and Canada recently sent their letters confirming that the countries are prepared to implement the USMCA; and the U.S. trade representative recently announced the agreement will go into effect on July 1. So, it seems we are closer than ever.
A differentiator for Mexico
Mexico’s president, Andrés Manuel López Obrador, has declared that the USMCA will differentiate Mexico from other countries, and he is hopeful that its implementation will boost the economy.
From Mexico’s perspective, the USMCA agreement represents an opportunity to keep doing business with its largest trading partner, the United States, and offers a beacon of hope to reactivate the Mexican economy once the crisis caused by the pandemic is over.
If implementation is hastened and current market and global economic conditions are not taken into account, however, it could have the exact opposite effect — a negative impact on companies’ operations and the disruption of efficient supply chains.