Is the USMCA Contributing to Nearshoring?
By EARL ANTHONY WAYNE, former U.S. ambassador to Mexico
The United States-Mexico-Canada Agreement (USMCA) it celebrated its third anniversary on Saturday, July 1, and is contributing strongly to nearshoring and reshoring to North America.
Since coming into force on July 1, 2020, the USMCA has provided a clear set of rules and norms that function well across a well-developed and continent-wide commercial network developed under its predecessor, the North American Free Trade Agreement (NAFTA). A well- implemented USMCA provides certainty, which is very important for investors looking to move manufacturing closer to the massive U.S. marketplace, especially seeking more resilient and diverse supply chains.
The USMCA’s contribution is importantly reinforced by the United States, Canada and Mexico working to make the continent more competitive through trilateral and bilateral initiatives, as well as through the very significant U.S. domestic investments via the CHIPS and Science Act, the Inflation Reduction Act and the Infrastructure Act.
Ministers from the three countries gathered in May, for example, to agree on steps aimed at boosting North America’s semiconductor supply chains, and, importantly, they launched a new committee on North America’s economic competitiveness.
In 2022, trade between the United States, Mexico and Canada amounted to over $1.5 trillion, or close to $3 million per minute. The trade figures showed a remarkable double-digit growth over the past two-plus years. So far in 2023, Mexico and Canada remain the United States¿ top trading partners, with Mexico currently in the Number One slot.
Canada and Mexico accounted for over 30 percent of U.S. trade with the world in April, and trade with the United States remains vital for Mexican and Canadian exports. The three countries also account for almost a third of global GDP. China remains the United States’ third trading partner, but with a 25 percent year-on-year drop in U.S. imports.
The three partners remain focused on implementing the USMCA agreement well and trade ministers plan to meet again on Thursday, July 6, and Friday, July 7, in Mexico.
Several bigger disputes remain on the table, however, for resolution. USMCA implementation is aligned well with the other North American work to boost nearshoring.
Mexico is attracting significant nearshoring and Foreign Direct Investment (FDI), fueled in part by booming exports to the United States, good supply chain connections and relatively lower labor costs in the North American marketplace. Canada is starting to see some successes in attracting EV battery production and is trying to build upon its potentially key role as a supplier of critical minerals.
The United States is also pulling in substantial new investments. U.S. officials, however, have made a point of arguing that the new U.S. laws attracting these investments also offer opportunities for its two neighbors. Regarding the United States, the private “Reshoring Initiative” reports that reshoring and FDI jobs in the United States rose 11 percent year-on-year in the first quarter of 2023, and cite significant large investments in electric vehicle battery production over the last two years standing out as a source of job creation.
Regarding Mexico, many news reports highlight increased FDI in northern Mexico’s industrial parks and announcements of significant new manufacturing investment in the auto sector, including a new Tesla plant in Nuevo León. Mexico’s government says that FDI figures for the first quarter of 2023 were 48 percent higher than a year earlier, with U.S. investment providing $6.4 billion of the $18.6 billion reported. A recent survey by Mexico’s Central Bank found that 27 percent of companies queried said that they are already increasing their productive capacity, either by expanding existing plants or building new ones.
The InterAmerican Development Bank has highlighted Mexico’s great nearshoring potential, but a range of analysts also highlight Mexico’s problem areas, which include serious public security problems, questions about sufficient energy supplies (including green energy), insufficient water in certain regions, important weaknesses in rule of law, including government policies leading to USMCA disputes, and insufficient government investment in infrastructure. These and other factors are negatives for many considering reshoring to Mexico.
EARL ANTHONY WAYNE is a Distinguished Diplomat in Residence at American University, co-chair of the Wilson Center’s Mexico Institute Board and former U.S. ambassador to Mexico.