July 1 marked the third anniversary of the entry into force of the United States-Mexico-Canada Agreement (USMCA). It is an appropriate time to count our chips and assess, through additional data and experience with USMCA dispute settlement mechanisms, whether to let our “winning bet” ride.
The trade data over the past two years shows steady growth, even in the midst of recovery from a pandemic and the global tumult caused by the Russian invasion of Ukraine. Total U.S. trade with Canada and Mexico was a record $1.78 trillion in 2022, an increase of 27 percent over 2019 levels. For comparison, total U.S. trade with China in 2022 increased by just 20 percent over the 2019 level.
The investment picture is less clear. North American nearshoring/reshoring is on the rise as measured by the 2022 Kearney Nearshoring Index, which found a 78 percent increase from 2021 to 2022 in the number of CEOs evaluating reshoring their operations, moving to reshore, or having already reshored production. The Kearney index found that geopolitical risk was the leading factor in the surveyed CEO’s reshoring decisions. And shifting U.S. supply chains away from China to friendly countries has been broadly popular, with 7 in 10 respondents to a 2022 survey by the Chicago Council on Global Affairs supporting “friendshoring.” This has translated to bipartisan support for the concept.
Yet private sector foreign direct investment in the three USMCA countries is still lower than the OECD average. It is public sector investments in incentives that are fueling decarbonization and energy transition trends today, which makes the fact that the Biden administration has worked to give Canadian and Mexican firms access to the investment incentives of the Inflation Reduction Act and the CHIPS and Science Act, a strong indicator of United States support for North American production and supply chains.
Economically, the USMCA has come a long way in just three years. Though the North American Free Trade Agreement (NAFTA) remained politically controversial in all three countries throughout its lifespan; USMCA has proven far less divisive, even in today’s polarized political environments. Since USMCA was ratified, national, legislative and/or executive elections have been held in all three countries — Mexico in 2021, the U.S. in 2020 and 2022 and Canada in 2021). In none of these elections was trade a major issue. In our country, support for USMCA hit 80 percent in 2021 according to a Chicago Council on Global Affairs Survey, a dramatic improvement since the 45 percent who supported the NAFTA in 2008.
This should be a good sign that the three countries can agree to add new provisions and enhance the USMCA during the mandated six-year review in 2026. However, a small number of current disputes could undermine support for extending the agreement.
Since the agreement’s entry into force, disputes have arisen over the automotive rules of origin, Mexico’s energy policies, Mexico’s ban on GMO corn and Canada’s implementation of dairy market access commitments. Though USMCA’s dispute settlement mechanisms are more limited than those found in NAFTA, their application and stakeholder perceptions of their efficacy remain a critically important metric of success.
One important test has been a USMCA panel convened to settle a dispute over the U.S. interpretation of the automotive rule or origin and the formula for calculating it. The U.S. position was more restrictive than either Canada or Mexico would accept, and a 2022 panel found that the U.S. position was wrong. Yet, neither Mexico nor Canada has demanded that the U.S. correct its erroneous interpretation of the agreement nor has either implemented retaliatory measures to which they would be entitled.
In energy, the U.S. and Canada sought formal consultations but have not requested a formal panel despite the lapsing of the required time period following the initiation of the formal consultations. The U.S. requested a formal panel against Mexico’s GMO corn ban only on June 2; Canada joined the request a week later.
A number of disputes under the USMCA’s innovative labor rapid response mechanism, which was designed to address substandard wages or worker rights protections (principally in Mexico), have been initiated. The vast majority of the cases relate to the auto industry — one of the most important sectors in North America and a major beneficiary of North American integration. While the labor rapid response mechanism has seemingly addressed labor concerns in the automotive sector, its utility outside the auto industry remains to be seen.
Disputes and the way in which they are managed could eventually erode the strong support for the USMCA. Agreements are, at the end of the day, only worthwhile if the signatories abide by their terms. The United States, Mexico and Canada risk undermining public support for the USMCA if disputes remain unresolved, or if the finding of a USMCA panel is ignored.
After three years, the USMCA continues to pay off for all three countries at a time of global economic uncertainty and geopolitical stress. There are issues and areas of concern that, if left unaddressed, could sour leaders or voters in the three countries on the USMCA. For now, however, we continue to see the USMCA as a winning bet for North American competitiveness and productivity.
Andrew I. Rudman is the director of the Mexico Institute at the Woodrow Wilson International Center for Scholars. A former foreign service officer and director of the Office of NAFTA and Inter-American Affairs at the Commerce Department, he has worked on Mexico and U.S.-Mexican relations throughout his public and private sector careers.
Christopher Sands is the director of the Canada Institute at the Woodrow Wilson International Center for Scholars and an adjunct professor at Johns Hopkins University’s School of Advanced International Studies.