By JOHN BURZAWA, SOPHIE EGAR and EARL ANTHONY WAYNE
Part of an ongoing series from the Wilson Center*
The United States-Mexico-Canada Agreement (USMCA) provides continent-wide rules, norms and problem-solving processes that can help the three-member countries to continue the trade and coproduction system established under its predecessor, the North American Free Trade Agreement (NAFTA). But if the USMCA is to maintain its credibility, the three governments must demonstrate that they can resolve evident differences.
Today, the USMCA is more important than ever for the prosperity of North America.
During the USMCA’s third year, North American trade has reached over $2.6 a minute and continues to grow by double-digit percentages. This growth significantly surpasses pre-pandemic levels. Moreover, Canada and Mexico remain the United States’ top trading partners.
The USMCA can also help the three North American partners to realize the benefits of reshoring and nearshoring from Asia. Many analysts have discussed the benefits of such North American cooperation in a post-pandemic world.
However, the three member governments must demonstrate that they can find workable solutions to pressing issues, including on vehicle rules of origin, energy sector management and biotech agriculture.
There are promising signs: In 2021, trade across North America rebounded 22 percent from 2020, reaching $1.26 trillion. A record 75 percent of Mexican and Canadian imports came from the United States. And both countries remain the United States’ largest trade partners in 2022, totaling over twice the volume of U.S. trade with China.
The three trade ministries are deeply engaged to resolve differences, to guide emerging cooperation on areas, such as digital trade, and to achieve progress on less-traditional USMCA objectives, such as better including groups that are currently underrepresented in continental trade. The USMCA has won kudos from the U.S. Congress for early successes of the new Rapid Response Mechanism for Labor Complaints to promote labor democracy in Mexico.
Other challenges that demand sustained efforts include ensuring changes in Mexico’s labor rights and union democracy, facilitating small and medium businesses’ cross-border trade, and workforce programs to teach the skills needed for tomorrow’s economy.
In the immediate future, USMCA’s credibility will be judged by how well it manages a handful of differences. First, the United States and Canada have requested consultations under USMCA over Mexico’s treatment of private sector investors and operators in the energy sector vis-à-vis Mexico’s state-owned electricity and oil and gas enterprises. The United States and Canada say Mexico is violating USMCA commitments but have not yet called for a dispute settlement panel. Consultations continue. Mexico’s new Economy Secretary Raquel Buenrostro has acknowledged that Mexico’s inward investment will be affected by the outcome of this dispute.
Second, Mexico and Canada initiated the dispute settlement process over the U.S. interpretation of the rules of origin for determining treatment vehicles under the USMCA, arguing that the U.S. interpretation is more restrictive than what had been agreed. The highly integrated auto sector is emblematic, and the United States touted the USMCA’s auto provisions as a major advance, so the outcome of the case will resound loudly. A panel decision is expected in the months ahead. Until then, Canada and Mexico are applying the stricter standards for cars entering from the United States.
Third, Mexico has announced its intention to ban the import of genetically modified (GM) corn (and potentially other biotech crops) by 2024. This policy threatens to disrupt a core sector of North American trade, with great potential harm for U.S. and Canadian farmers and for food costs and availability in Mexico, while allegedly violating USMCA provisions calling for science- and risked-based regulatory policies. A recent study argues that Mexican Gross Domestic Product would contract by $11 billion over 10 years as a result of this policy, and that corn prices in Mexico would rise by 19 percent. The cost for U.S. GDP is estimated at over $30 billion. U.S. farm groups and senators are asking the U.S. Trade Representative to intervene.
The effective use of the USMCA’s dispute resolution mechanisms is vital to resolving these tensions and demonstrating that the agreement is working. The three governments agreed to review the USMCA’s performance in its sixth year of operation (2025-26).
Beyond disputes, key areas for action include:
Digital Trade. Cooperation on digital trade is crucial, given the increasing use of digital technology and services across all sectors. The USMCA has one of the most comprehensive and liberal frameworks for governing digital trade, but the partners must show political will and allocate resources to bring commitments on digital trade to fruition. For example, the North American partners have yet to establish the “forum” that is called for by the USMCA. The creation of a North American Digital Trade Council could produce more effective communication, implementation and compliance surrounding digital commerce. Moreover, this forum could promote easier use of digital trade tools for expanding small and medium enterprises in cross-continental trade.
Labor Democracy. Labor democracy and workforce development are key for demonstrating the USMCA’s value and building public support. The three governments can do a better job of tracking labor reform progress from U.S. and Canadian assistance in support of those efforts. Regarding workforce development, the governments should identify and support pilot programs with public-private partnerships, adopt compatible real-time labor data collection practices and expand incentives for credentialing programs in key skill areas. Concerted efforts on these themes can help boost productivity and inclusion of diverse and under-represented groups.
Auto Sector. The auto sector will remain a fundamental engine of growth. Once the dispute panel over rules of origin concludes, the three governments should expedite implementation and work with suppliers and automakers to improve USMCA compliance and certification procedures, based on experiences to date. The three governments must collaborate also closely to support development of electric vehicles and components sourced in North America and examine if changes to USMCA requirements are needed. Canadian and Mexican experts are worried that U.S. battery production subsidies will tilt investment toward the United States.
Agricultural Trade. Agricultural trade is vital for all three countries. The United States should seek negotiated solutions to Mexico’s emerging GMO policy framework, but should also be ready to launch dispute settlement complaints. The longstanding disputes over fresh produce between the United States and Mexico and over softwood lumber (and perhaps dairy) can only be resolved through sustained and serious efforts by both countries.
Regulatory Cooperation. Enhanced regulatory cooperation should be another priority. Good regulatory practices (GRP) within the provisions of the USMCA can foster this growth, starting with new regulations necessitated by emerging technologies. The three governments should develop the GRP Committee called for in the USMCA and take action to standardize regulatory impact assessment (RIA) methodologies. Initial steps toward regulatory alignment include cooperation on data collection, transparency and identifying priority sectors for in-depth work. By the first USMCA review, robust collaboration should be well underway.
Environmental Issues. As one of the new sectors in the USMCA, solid work on environmental issues, including green energy, is important for the trade deal’s credibility. For example, the USMCA does not currently include the Paris Climate Agreement on its list of covered agreements. Although Mexico has exhibited comparatively less commitment than Canada and the United States on climate issues, Mexico did recently announce new climate commitments at the COP-27, jointly with the United States. This commitment may build momentum for the three governments to take up more climate-related work, building on current USMCA provisions.
Transparency. Transparency, stakeholder dialogues and public outreach are key for popular support of the USMCA. The three governments need to be increasingly transparent about how they are implementing the USMCA, in order to create more opportunities for serious dialogue with stakeholders and find creative ways to educate the public about the USMCA. All three governments should invest in more of a whole-of-government approach that improves outreach. For example, they could create a standing committee on public outreach to help prepare for the USMCA’s first “sunset” review during 2025-26.
Emergency Coordination. Emergency Coordination should be a priority, especially given the repercussions from the covid-19 pandemic, the war in Ukraine and unexpected border disruptions from anti-vaccination protests in Canada and Texas government actions tied to migration. In July, USMCA ministers designed a mechanism under the Competitiveness Committee to improve coordination in efforts to maintain trade flows in emergency situations. This advance should be reinforced by assurances from the emergency mechanism’s inclusion of the government agencies that are required to respond well to unexpected disruptions.
The successful implementation of the USMCA is an arduous task that demands “whole-of-government” efforts, as well as complementary bilateral and trilateral collaboration. This multilateral collaboration can build on the initiatives of the North American Leaders Summit, the U.S.-Mexico High Level Economic Dialogue and the Roadmap for a Renewed United States-Canada Partnership.
Progress to date offers hope. However, the three governments must resolve current disputes and simultaneously build a more competitive North America.
JOHN BURZAWA is a staff assistant intern at the Wilson Center, working closely with both the Mexico and Canada Institutes. SOPHIR EGAR is a graduate student of international relations at Johns Hopkins School of Advanced International Studies. She has previously worked at the Center for Latin American and Latino Studies, the Center for International Policy, the Cipher Brief and on Capitol Hill for U.S. Senator Sherrod Brown. EARL ANTHONY WAYNE is a Distinguished Diplomat at American University’s School of International Service, advisory board co-chair of the Wilson Center’s Mexico Institute, and a retired U.S. career diplomat who served as ambassador to Mexico from 2011 to 2015.
* The Wilson Center is offering a series of articles to take a deeper look at the potential gains of more effective collaboration across North America. Drafted and coordinated by former U.S. Ambassador to Mexico Earl Anthony Wayne, the series includes articles by experts from the three countries making the case for why such cooperation across the continent is worthwhile, despite its complexity and difficulties. This is part of that series, which is being published in Pulse News Mexico with express prior permission from the Wilson Center.