The (Likely) Execution of the USMCA

16 May 2019 Blog
Author(s): Alejandro N Gomez-Strozzi
Published To: Dashboard Insights Manufacturing Industry Advisor

The USMCA, signed on November 2018, is making its way through the legislative processes in the United States, Mexico, and Canada.  Both Mexico and Canada will be closely looking at the eventual progress in the United States before moving forward on their own.

The biggest hurdle in the United States is, in general, the reticence to provide a "victory" to the Trump administration and, in particular, the requirements of the Democrat-controlled House of Representatives to (i) wait and see how the recently-passed labor reform in Mexico is actually enforced, as well as (ii) seek still undisclosed modifications regarding environmental provisions.  We do not anticipate that such requirements would amount to reopening the negotiations among the three countries, as Congress may utilize U.S. domestic implementing provisions to strengthen the parts that are seen as insufficient.

Time wise, there is a slim chance of ratification before the U.S. Congress August 2019 recess, after which a full swing electoral mode should be kicking in with the office of the President, all seats in the House, and one third of the Senate up for grabs in 2020.

Also, the Trump administration has threatened to start the six-months NAFTA withdrawal process to pressure Congress to vote on the USMCA as is, or risk having no treaty at all. If the withdrawal actually occurs, trade within North America would go back to “ordinary” (this is, no preferential commercial treatment) status under World Trade Organization (WTO) standards, creating a serious disruption of numerous production chains.

We believe, though, that USMCA will be ratified as NAFTA clearly allowed the three countries - particularly the United States and Mexico - to benefit from a seamless workshop that clearly made the pie larger. 

We should not lose sight as well that Mexico´s economic relevance to the United States is frequently overlooked. The 11th largest economy in the world, Mexico has a population (126 million) roughly 40 percent that of the United States and is close to three times the size of Texas. The country has a network of 12 Free Trade Agreements (FTAs) with 46 countries, and seven additional ones will be added with the renewed Trans-Pacific Partnership, from which the United States withdrew under the Trump administration.

Mexico was, in 2018, either the first or second largest export market for more than 50 percent of States in the Union. (It was first for six states – Arizona, California, Kansas, Nebraska, New Mexico and Texas -, and second for 22 states - Colorado, Georgia, Illinois, Indiana, Iowa, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, and Wisconsin-.) It is also the third-largest source of imports in the United States; has an expanding middle class that has grown accustomed to purchasing American goods and services; has demonstrated to be a near-shore, reliable manufacturing partner; as well as will benefit from a demographic bonus during the next several years that will help neutralize the dwindling U.S. population (and necessarily its workforce).

Regardless of where companies are located in any given production chain, in the short term (read this as “right now”) it would be wise to evaluate how the USMCA´s provisions - or lack thereof if the withdrawal process is initiated - will impact their current activities, and design a common strategy with their up- and downstream- business partners.

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