OPINION

PART 4

Fourth in a seven-part series

By AMBASSADOR EARL ANTHONY WAYNE

The fourth anniversary of the United States-Mexico-Canada Agreement (USMCA) will arrive just after Mexicans elect their new president and Congress and four months before Americans do the same. The USMCA should continue to be an essential framework and tool to enhance prosperity and economic competitiveness. However, the three countries must work hard to develop its potential and reinforce its credibility.

Mexico’s new president and government should prioritize continued progress. The certainty provided by USMCA’s rules and the persistent efforts of the United States, Mexico and Canada to implement the agreement well since its July 2020 start date have been important in North America’s impressive trade growth.

The USMCA has much potential still to develop, however. Member countries have important disputes to resolve, and the outcomes will reinforce or undermine the USMCA’s credibility. Importantly, in 2026, the three countries will review the USMCA’s performance, consider changes and debate the agreement’s longevity.

Following the 2024 elections, Mexico, the United States and Canada should supercharge engagement to realize the USMCA’s potential. Mexico, the United States and Canada should begin discussing how to improve the USMCA and deepen collaboration, what, if any, changes might be needed, and if the USMCA should be opened to participation by others in the hemisphere. This work should be fueled by expanded input from the millions of stakeholders and better inform the public about the USMCA’s benefits.

The USMCA is not an all-encompassing solution to North America’s prosperity, however. The three North American neighbors are acting and must continue to act individually, bilaterally and trilaterally beyond the USMCA in, for example, the ambitious North American Leaders Summit Action Agenda (NALS) and the U.S.-Mexico High Level Economic Dialogue (HLED).

The vast agenda pursued by the three governments includes strengthening and diversifying supply chains, promoting development of cutting-edge technologies, securing critical minerals, attracting job-creating nearshoring and reshoring, upskilling workers and making North America’s physical and digital infrastructure, including borders, as modern as possible to build the continent’s competitiveness.

The United States has made major investments via legislation with substantial funding. It has encouraged Canada and Mexico to undertake their own initiatives to supplement bilateral and trilateral collaboration. The most evident trilateral and bilateral initiatives promote semi-conductor production, which if successful will bolster economic security and prosperity, as well as upskill workforces.

The USMCA’s role is vital. New presidents in the United States and Mexico and the possibility of elections in Canada provide a great opportunity to add new ambition and energy to the USMCA’s work.

Impressive Trade Growth

In 2022, the total value of trade within North America exceeded $1.5 trillion, equivalent to nearly $3 million per minute in goods and services and the result of double-digit growth in trade over the past plus two years. A joint Brookings-Wilson Center analysis of “USMCA at 3” underscores how impressive trade growth has made Mexico and Canada the United States’ top trading partners. Total 2022 trade volumes were 44 percent higher than total U.S. goods trade with China.

Trade grew well over 30 percent from July 2020 to July 2023. Combined, the three countries account for almost a third of global GDP. Intra-regional trade supports an estimated 9.5 to 13 million jobs across North America.

Mexico took over as the United States’ top trade partner in 2023, with Canada in the number two slot. As part of this growth, Mexico achieved an all-time high for investment in heavy machinery in early 2023, while capital investment has jumped across USMCA countries. Both partners accounted for 31 percent of U.S. total goods trade as of July 2023.

All three governments are using the USMCA, NALS and bilateral initiatives to support trade growth and build more resilient supply chains, an electric vehicle industry, expand semiconductor production, develop other emerging technologies, renew infrastructure and confront environmental challenges. Sustaining and deepening such policies and investments will encourage the private sector to increase nearshoring and reshoring to North America. Many observers see significant room for improvement in Mexico’s actions in these areas.

The United States is pursuing domestic investments and is attracting significant new manufacturing investments with work under the Bipartisan Infrastructure Bill, the CHIPS and Science Act, and the Inflation Reduction Act (IRA). U.S. National Security Advisor Jake Sullivan argues these efforts could generate $3.5 trillion in investment for the United States over the next decade.

The ambitious North America action agenda and bilateral initiatives are designed to work in harmony with these massive U.S. investment programs. Canada has taken some modest domestic policy steps but faces calls for more action. While Mexico is attracting foreign direct investment (FDI), Mexico’s government is criticized for failing to implement policies to capitalize on the great potential for much more FDI.

The USMCA is essential to these efforts by offering clear, reliable and efficient rules, norms and mechanisms that build certainty and confidence across North America’s marketplace. But the range of individual country actions and bilateral and trilateral initiatives are needed to significantly enhance global competitiveness.

The 2026 USMCA Review and Energizing the Agreement’s Potential

Mexico, Canada and the United States are obligated to review the USMCA’s performance in 2026. The 2026 review will discuss the operation of the USMCA, assess recommendations submitted by the governments and decide on any needed appropriate actions, which could include an extension of the agreement for another 16 years. This review will discuss how well differences over the treaty’s implementation have been resolved. It also should include assessing how well the governments are taking advantage of the USMCA’s provisions to improve and facilitate trade and investment.

In preparation, the governments and the agreement’s stakeholders must grapple with how to measure the USMCA’s success. Each government should have carefully tracked progress and problems, engaged seriously with their publics and legislatures, and established government-wide objectives and strategies. This should include plans to respond if one country says it does not want to confirm the extension of the USMCA.

The USMCA’s competitiveness committee has a broad mandate to identify projects and policies, including infrastructure, that will improve trade of goods and services and thus should play a key role in all of this work.

USMCA Dispute Settlement

All governments have utilized the USMCA dispute settlement mechanisms, including state-to-state disputes and the labor chapter’s rapid response mechanism (RRM). Disputes are expected. Channeling trade into dispute settlement processes that work is essential for the USMCA’s credibility. Failure to use the mechanisms, to achieve workable solutions in a timely fashion, or to achieve compliance with findings of dispute settlement panels will reduce confidence in the USMCA and introduce uncertainty for the private sector.

Before the review, Mexico, the United States and Canada should act boldly to resolve the biggest disputes underway. These relate to a) Mexico’s energy policies, treatment of investors and use of regulation; b) Mexico’s policy and regulatory approach to genetically modified corn; c) the failure of the United States to respond to a USMCA dispute panel finding that it must alter its method of calculating the rules of origin for vehicles; and d) Canada’s dairy policies.

Solutions will bolster the USMCA’s standing. Not doing so will harm stakeholders’ assessment of the agreement’s value and, depending on the issue, significantly impacting private sector calculations about the cost of doing business. Mexico has much to gain from outcomes that build confidence before the 2026 review.

Labor

The USMCA’s labor chapter and rapid response mechanism (RRM) are key innovations the U.S. Congress supported by appropriating significant assistance to Mexico to boost Mexico’s labor reform and creating an independent U.S. monitoring board. The Joe Biden administration regularly highlights their worker-centric trade policy. The RRM has successfully resolved most U.S. complaints, but recently, U.S.-Mexico disagreements led the United States to seek a dispute panel over a long-standing labor complaint at a Mexican mine. Demonstrating that the RRM and U.S. assistance can deliver results supporting labor rights in Mexico will be important for how U.S. congressional and union stakeholders assess the USMCA.

Digital Trade

Cooperation on digital trade policies has enormous potential for all three countries, given the increasing use of digital technology and services across all economic sectors. This potential should only grow, with artificial intelligence (AI) deployment. The USMCA has one of the most comprehensive sets of commitments governing digital trade. As the U.S. International Trade Commission wrote, “The Commission estimates that the USMCA is likely to have a significant, positive impact on the many U.S. industries that rely on cross-border data flows and digitally enabled trade, including e-commerce.” To date, however, there has not been notable progress, and reports flag U.S. internal debates over digital policy. The USMCA countries, however, should double down on using the USMCA as a foundation to create the world’s most advanced digital marketplace.

Progress could be pursued under the USMCA’s Competitiveness Committee.

Small and Medium Enterprises (SMEs)

Fostering additional SME participation in the USMCA should remain a priority because of the enormous economic and job potential that tens of thousands of additional SMEs would bring to USMCA commerce. The second USMCA SME Dialogue in September 2023 covered such important topics as the experiences of women-owned businesses in North American trade; digitalization of SMEs and e-commerce; SME financial inclusion in export financing; and processes and procedures for exporting within the USMCA’s region. Expanding SME participation will help grow commerce and understanding of the USMCA.

Regulatory Alignment

Enhanced regulatory cooperation should be a high priority. As USTR puts, “good regulatory practices are fundamental to transparent governance and fair trade.” In USMCA, however, not much progress is evident under Chapters 12 and 28, which address regulatory issues. The three governments are not actively using the Committee on Good Regulatory Practices (Chapter 28) that could serve as a central coordinating body for enhancing dialogue, collaborating on Regulatory Impact Assessments (RIAs), improving transparency and setting priorities for collaboration. The agreement’s Chapter 12 contains sectoral annexes covering chemical substances, cosmetic products, ICT, energy performance standards, medical devices and pharmaceuticals. In these areas, “enhancing regulatory compatibility” could bring many benefits over the next few years.

Workforce Development

Support for workforce development is a priority for the USMCA’s implementation, the U.S.-Mexico HLED and the NALS agenda. The North American workforce suffers from serious skills gaps, which weigh heavily on efforts to build resilient supply chains, deploy new technologies and meet the challenges of global competition. The USMCA’s Ministers and Competitiveness Committee have organized a series of workforce development events in 2021-23. The tripartite semi-conductor ministerial meetings in May 2023 agreed on collaborative workforce development efforts in the semi-conductor sector as did the recent HLED meeting. But projections suggest a shortfall of needed workers without more concerted efforts. Within the USMCA, ministers could lead efforts to:

Identify and track successful examples of private and public collaboration to strengthen the USMCA value chains, highlighting how companies invest in worker reskilling and upskilling;

Identify successful approaches that encourage companies to collaborate with educational institutions, trade unions, sub-federal governments and others to align curricula with the evolving labor market needs;

Create tri-national spaces to share best practices that better train and skill workers facing technological change.

Emergency Planning

In February 2023, the USMCA partners established a special subcommittee to enable timely cooperation during emergencies, recognizing the serious disruptions that arose during the covid-19 pandemic. Officials should agree on proposed areas for action and implement them before 2026. This should be done by complementing investments and bilateral work to modernize border infrastructure (physical, digital and communications).

Environment

Solid work on environmental issues will be important for the trade deal’s credibility during the 2026 review. The USMCA’s environmental chapter does not cover climate change commitments, and the committee has not produced impressive results to date, except for pressuring Mexico to protect the endangered vaquita porpoise. Most work on promoting clean/green energy and conservation is taking place bilaterally or in the NALS work agenda. There will be scrutiny from U.S. stakeholders about how effective the USMCA’s new environmental chapter has been. The 2026 review should consider whether the USMCA needs to better support climate goals. Mexico’s failure to decarbonize its electricity supply at pace with the United States and Canada could well generate significant criticism.

Transparency and Outreach

In preparation for the 2026 review, the three governments together and individually should more regularly seek stakeholder and public input and be more transparent about the ongoing USMCA implementation. The three governments should better coordinate outreach efforts to educate their publics about the progress under the USMCA. The three governments must keep improving messaging that explains the connections and synergies between the USMCA and the other bilateral and trilateral work streams supporting economic competitiveness. They might establish a tripartite public outreach committee.

Broadening the USMCA

The three parties should consider opening the USMCA to ascension by other regional countries that are ready to adopt its high standards. Several members of the U.S. Congress have raised this idea. Advocates argue that such an effort could ignite a regional race to the top and reinforce efforts to build resilient supply chains and enhance competitiveness based on the USMCA’s norms and practices. While many will be wary about this path, the pros and cons of broadening should be explored in the context of the 2026 review, as should other potential paths for expanding trade and commercial inclusion of others in the Americas.

RECOMMENDATIONS

Use the time between now and the USMCA review to double down on solving problems and developing the potential evident in the USMCA, especially energizing work following 2024.

Start preparing soonest for the 2026 review, identifying how to measure success, engaging with stakeholders and legislatures, and beginning to establish national objectives and strategies.

Resolve outstanding disputes using the USMCA procedures in and respect any dispute settlement.

Demonstrate good progress in respect for labor rights in Mexico, using the USMCA mechanisms and supplementary cooperation.

Energize work to use the USMCA’s digital trade chapter to build the world’s most advanced digital marketplace.

Greatly expand dialogue with SMEs and their participation in the USMCA commerce.

Supercharge public-private-academic efforts to upskill and reskill workers focusing on key USMCA sectors and in coordination with HLED and NALS workforce initiatives.

Complete and practice emergency action procedures to deal with cross-border emergencies in coordination with efforts to modernize physical, digital and communications infrastructure around the border.

Demonstrate significant achievements under the USMCA’s environmental chapter and consider how to better address climate-related conflicts.

Expand outreach to stakeholders and the public, addressing misunderstandings, educating on the USMCA’s importance and partnering in preparation for the 2026 review.

Prepare for discussion in the run-up to 2026 of potential broadening of the USMCA or other ways to better include other countries in the agreement.

The above article is part of a seven-part series first published by the Wilson Center Mexico Institute and is being republished in Pulse News Mexico with express prior permission.