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By EARL ANTHONY WAYNE, former U.S. ambassador to Mexico

Two years into the North American Free Trade Agreement (USMCA), many challenges and opportunities for forging an Integrated North America remain.

The USMCA, known in Mexico as the Tratado entre México, Estados Unidos y Canada (T-Mec), created an updated legal framework within which the private sectors in Mexico, the United States and Canada, as well as the three national governments, can address and manage a wider range of trade issues than were covered by the prior North American Free Trade Agreement (NAFTA) to continue generating prosperity and seek solutions to differences more expeditiously.

The agreement needs to be implemented well and creatively to keep up with a rapidly changing economic and commercial environment, including global competition from China and others, rapid technological change, and the threat of further disruption to trade, as experienced because of the pandemic and more recently Russia’s invasion of Ukraine.

Overall, implementation of the USMCA is progressing well after two-plus years in operation, as is trade across North America. Trade across North America has surpassed 2019 levels, reaching over $2.6 million a minute.

Senior level dialogues have been regular and productive. Work has begun on many USMCA committees and topics. This includes work on challenging areas such as supporting labor democracy and countering forced labor, as well as efforts to better involve Small and Medium Enterprises (SMEs), to discuss workforce development, and to pursue outreach to disadvantaged populations.

Similarly, the initial agenda and work under the U.S.-Mexico High Level Economic Dialogue (HLED, or DEAN in Spanish) is promising, as is the work plan under North American Leaders Summit (NALS) set in November 2021. These efforts are complimentary to the USMCA and needed to take fuller advantage of opportunities in the current situation. They and the USMCA still need to deliver clear, concrete results, however.

Serious challenges remain, including productive use of the USMCA’s consultation and dispute settlement processes to solve important differences, as is evident in the recent complaints posed by the United States and Canada related to Mexican practices affecting companies working in the energy sector.

Ongoing good implementation and problem-solving will continue to be vital for the credibility of the USMCA agreement and to attract significant new investments into the massive cross-border trade networks built in North America since the early 1990s.

It is equally important to see the USMCA agreement as opening the door for complementary steps outside current formal trade mechanisms that can make all three member countries more competitive by enhancing economic alignment and connectivity.

This complimentary work outside of the context of USMCA includes taking advantage of post- pandemic developments that favor nearshoring or “partner-shoring” to build shorter, more dependable supply chains and to undertake reinvestment at home to strengthen domestic production networks.

Significant new policy initiatives and investment by the United States in infrastructure and key technology and “green tech” sectors have opened doors for Mexico, and Canada, as trusted and physically close partners.

During the recent meeting of the U.S.-México High-Level Economic Dialogue, U.S. officials highlighted how the new U.S. CHIPS and Science Act provides important incentives for research and development, workforce development and investment tax credits in key technology sectors that can benefit all of North America. This legislation opens the door for Mexico (and Canada) to participate, especially in semiconductor assembly, testing and packaging, and perhaps in production.

The HLED discussions highlighted how the U.S. Inflation Reduction Act also provides potential openings for Mexico (and Canada) in the Electric Vehicle and battery value chains, which includes production of critical minerals.

In addition, the U.S.’ Build Back Better legislation has promised over $3 billion of new investments in border infrastructure vital for trade flows, which prompted a commitment by Mexico to invest $1.5 billion in complimentary border projects during President Andrés Manuel López Obrador’s (AMLO) July visit to the White House.

The lessons from the pandemic underscore the importance of attention to health-related supply chains and the importance of much better government-to-government preparation to manage cross-border emergencies. Serious economic repercussions in global markets caused by Russia’s invasion of Ukraine remind us that we must prepare in North America to be even more resilient to potential disruptions. If managed and led well, the current global situation offers great incentive and opportunity for all three members of the USMCA to generate more economic prosperity, be more competitive in the world marketplace against such competitors as China, and to boost resilience to future crises and disruptions.

However, success requires concerted action to build on the USMCA’s advantages and to take the complimentary steps needed to foster private-sector investment in key sectors of our economies.

In response to this situation, Mexico should coordinate closely with its northern neighbors, commit substantial resources to improve its own human and physical infrastructure, and adapt polices and practices to create a more attractive investment environment to expand its role in key North American value chains.

Mexico should also consider offering its own incentives (federal and state) to attract companies in key sectors. It needs to make substantial long-term commitments to invest in the capacities of its workers and in the infrastructure essential for a future-oriented continental economy.

Mexico also needs to seriously address concerns related to public security, energy supply (and, in certain areas, water), as well as the respect for rule of law questions that have been raised by potential investors.

Key Elements in the USMCA’s Implementation

Achieving the best outcomes from the USMC requires:

1) Thorough implementation of the norms and commitments in the agreement;

2) Full development of the agreement’s digital trade chapter, which is very important, as the digital economy is becoming more important for success across so many sectors in the modern economy;

3) Effective use of the consultation and dispute resolution provisions, including the committees and cooperation outlined in the agreement;

4) Ample use of stakeholder consultations and incorporation of their feedback in the USMCA’s implementation;

5) Substantial progress in areas aimed at making North American trade more inclusive and beneficial to broader segments of the population, e.g., Small and Medium Enterprise (SME) participation and enhancing labor democracy and rights;

6) Transparency about the USMCA’s operation and public outreach so as to explain the agreement’s value and progress are vital;

7) A serious effort to measure and evaluate the results of the agreement in preparation for the upcoming review of the USMCA in years five-six.

Key Complimentary work outside the USMCA

The USMCA alone will not, repeat, not make Mexico, the United States or Canada more competitive globally or achieve significant additional prosperity. The three governments must work together outside of the agreement to enhance cooperation on key economic sectors in support of vibrant private sector investment, and each government must improve its own investment environment with policy actions and bettered infrastructure that will improve economic performance and enhance future-oriented sectors.

Key action areas include:

  • Building more resilient and efficient supply chains with special attention to key sectors such as semi-conductors; electric vehicles; batteries; critical minerals; traditional vehicles; medical devices, supplies of pharmaceuticals, aerospace; and telecom and electronics.
  • Development and deployment of emerging technologies, including “green” technology, such as those associated with electric vehicle value chains, and assuring access to critical minerals needed for production of batteries, as well as assuring recycling of waste from these products and processes.
  • Creating stronger and more advanced information and communications technology (ICT) networks and enhancing their protection from cyber-attack.
  • Expanding regulatory cooperation among the three countries, starting with priority sectors.
  • Greatly improving cross-border management of transportation infrastructure, including processes and forward planning that reduce costly bottlenecks while enhancing security.
  • Preparing for future cross border emergencies.
  • Seriously pursuing workforce development and skills investments needed for new growth sectors.

Mexico, the United States and Canada need both good implementation of the USMCA and additional bilateral and trilateral collaboration. Such collaboration is currently underway through the U.S.-Mexico High-Level Economic Dialogue (HLED), the U.S.-Canada Roadmap and in the action framework approved at the November 2021 North American Leaders Summit (NALS).

Importantly, Mexico, Canada and the United States must continue to deploy their own incentives, initiatives and programs that strengthen their economies and encourage private sector investment in key sectors for future-oriented growth.

This should include government investment in physical infrastructure, in building workforce skills and capacities, as well as effective rule of law, providing good public security, and steps that help assure affordable and ample energy provision, along with policies to encourage modern, safe ICT networks. The certainty provided by the USMCA’s commitments and reliable rule of law practices will be very important for attracting more new private-sector investments.

Taken together, good domestic policies and investments, vigorous implementation of the USMCA and well-designed complimentary cooperation among Mexico, the United States and Canada can boost North American prosperity, strengthen resilience midst international disruption and greatly enhance the continent’s ability to compete with China and others in global markets.

The initial two years of USMCA’s implementation and the last year of bilateral and trilateral cooperation that build out from the USMCA’s framework are promising and have already achieved much progress. However, much work needs to continue to realize the potential for boosting the prosperity, well-being, and global competitiveness of all three North American partner countries.

EARL ANTHONY WAYNE, a former U.S. ambassador to Mexico and assistant secretary of state for economic and business affairs, is board co-chair of the Wilson Center’s Mexico Institute and a Distinguished Diplomat at American University’s School of International Service.