US, Mexico set for new post-NAFTA trade era

The United States-Mexico-Canada Agreement (USMCA) came into effect on Wednesday in a political and diplomatic environment radically different from the one that brought the three countries together under the North American Free Trade Agreement (NAFTA) in 1994.

Unlike its predecessor, the USMCA will come into force four months before the U.S. presidential election, granting whomever prevails in November the power to enforce its novel labor, environmental, auto industry, digital commerce and dairy provisions.

The deal puts in new rules around digital trade, makes changes in point of origin rules that determine what products can be traded across borders without tariffs, and rewrites labor enforcement mechanisms. It is expected to boost the U.S. auto and agricultural industries, among others.

“I’m sure glad it was renegotiated,” Senate Finance Committee Chairman Chuck Grassley (R-Iowa) said Tuesday, referring to the NAFTA deal USMCA replaced. 

“I’m not sure that I agree with the president that it was the worst agreement ever, but it needed to be renegotiated, and part of it’s because things like digital economy was never an issue 30 years ago,” he added. 

President Trump made replacing NAFTA a central tenet of his 2016 presidential campaign. 

House Democrats saw updating the trade deal as a rare area of potential cooperation, and helped push it over the finish line after months of intensive negotiations to include stronger enforcement mechanisms and labor oversight. 

The trade deal won the rare support of the AFL-CIO, the country’s largest labor organization, though other labor groups dissented.

But Wednesday’s implementation is not the end of the road for the deal. 

“We must now monitor enforcement and compliance with both partners to ensure that they live up to their commitments. I’m sure they’re going to be monitoring the United States to make sure we live up to it,” Grassley said.

Industry lawyers in Washington are already preparing to file complaints through the updated dispute mechanisms in the coming months, setting up tests for how well the agreement will hold up.

Jeff Schott, a trade expert at the Peterson Institute for International Economics, and a critic of the deal, said the administration should have waited until the new year to pull the trigger on the deal. 

“They’ve dumped a lot of new rules in the Federal Register over the last month, and even over the last couple of days,” he said. 

Companies would have trouble digging into the technical rules to figure out which components in their supply chains qualify for the tariff exemptions, and what needs to be rejiggered.

“This all should have been done a lot sooner to give more time to digest them,” he said.

Implementing the deal in the middle of the COVID-19 pandemic has only complicated things further. Border closures have thrown in a wrench in trade, as has the general economic downturn. Many companies are already rethinking where they get their materials as a result of the pandemic.

“You have this scenario in which supply chains are being reconfigured around the world at the same time that there’s this higher content requirement through USMCA,” said Jason Marczak, director of the Atlantic Council’s Latin America division.

Whoever wins the presidency in November will have the power to retool the contours of the North American economy, in the wake of an economically stunting pandemic.

Progressives see the deal’s stricter enforcement measures as an opportunity, assuming the polls hold and former Vice President Joe Biden unseats Trump.

“A new Democratic administration needs to put climate change at the center of trade agreements, and then we need to re-envision what trade policy is for,” said Rep. Andy Levin (D-Mich.), a former labor organizer who lobbied for even more stringent labor provisions in the deal.

Levin said the economies of the three North American countries are inextricably linked, but that NAFTA didn’t raise real earnings for Mexican workers in its 25-year lifespan, ultimately driving down American wages.

“Let’s say that trade agreements should be about raising the floor of decency for American workers and workers all around the world, while reducing climate change and its effects,” said Levin, “and raising wages, so that we require living wages all around the world, which doesn’t mean the same wage in Poughkeepsie and Phuket.”

The new trade deal marks a high point in the relationship between Trump and Mexican President Andrés Manuel López Obrador, two populists who had railed against NAFTA.

López Obrador is due to meet with Trump in Washington as early as next week for a USMCA ceremony, marking the Mexican leader’s first foreign trip in 18 months in office.

A major novelty in USMCA is its labor chapter, negotiated after Mexico promised to end its practice of union protection contracts, which impose labor conditions on workers who have little to no say in negotiations between ownership and their unions.

“What people have to understand is the changes required by USMCA, if it’s to be real, are changing root and branch deeply entrenched systems of protection contracts and phony unions,” said Levin.

Levin raised the issue of Susana Prieto Terrazas, a labor lawyer who’s been under arrest without bail for three weeks in the Mexican border city of Matamoros on charges that include inciting riot, threats and coercion.

Prieto was working to form independent unions — as opposed to the protection unions censured by the USMCA — for workers in maquiladoras — manufacturing centers along Mexico’s northern border that generally complete the final assembly process for U.S. goods.

“She was trying to register an independent union to replace a corrupt protection union in Matamoros. This is exactly what USMCA was supposed to facilitate,” said Levin.

The López Obrador administration has said Prieto’s arrest is a local matter, conducted by the state of Tamaulipas, where Matamoros is located, but Labor Secretary Luisa María Alcalde has said the federal government is monitoring the case closely.

On Tuesday, 58 House Democrats wrote Secretary of State Mike Pompeo asking him to assist in securing Prieto’s release.

And López Obrador, who boasts large majorities in both chambers of the Mexican Congress, had trouble getting approval for secondary legislation necessary to enact the deal.

After intense wrangling, the country’s Senate approved the legislation Monday and the Chamber of Deputies was called into session Tuesday expecting to pass the measure.

While López Obrador and Trump apparently see eye-to-eye on the deal, the United States and Canada are grappling with a dispute over potential aluminum tariffs.

Trump agreed to cancel aluminum tariffs on both Canada and Mexico to pave the way for the USMCA, but has reportedly been considering reimposing the tariffs.

Critics such as Schott note that, labor provisions aside, the USMCA still largely conforms to the broad brushstrokes defined by its predecessor.

“Much of NAFTA still will live on in the new USMCA. The USMCA is not a brand new agreement, it is an old agreement with updates, much of which were borrowed from the Trans-Pacific Partnership,” he said. 

Trump scrapped the Trans-Pacific Partnership, an 12-country deal negotiated by Obama that included both Mexico and Canada, and was designed to set trade rules to counter China.

Regardless of who wins November’s elections, they will have to co-manage USMCA with López Obrador, who has more than once rattled investors during his short tenure.

López Obrador has pulled the rug from under foreign companies — including U.S.-based Constellation Brands — but he’s changed his tune somewhat ahead of the official announcement of his Washington trip.

Former Economy Secretary Ildefonso Guajardo, under whose tenure the bulk of the USMCA was negotiated, said USMCA is “the only light at the end of the tunnel,” as Mexico emerges from the crisis with at least 10 million more people in poverty.

“It’s a figure that will take us back at least a decade in terms of social development,” said Guajardo.