USMCA Enters Into Force Amid Pandemic-Related Uncertainties

The United States-Mexico-Canada Agreement (USMCA) trade pact goes into effect Wednesday, bringing new regulations aimed at boosting North American economies.

President Donald Trump signed the USMCA trade pact into law on Jan. 29, replacing the 26-year-old North American Free Trade Agreement (NAFTA). The USMCA overhauls rules for trade in agriculture, manufacturing, and services with Mexico and Canada.

Key parts of the new trade deal include requiring 75% of a vehicle's components be made in the U.S., Canada or Mexico, to receive tariff-free access to the three countries; and creating higher wages by requiring that 40%-45% of auto content be made by workers earning at least $16 per hour.

The USMCA enters into force during an unforeseen coronavirus pandemic, noted Jeffrey Pratt, supply chain leader at BDO.

"USMCA's upcoming implementation will serve as a bright spot of certainty for the industry amidst broader disruption," Pratt said.

Regions along the U.S.-Mexico border could be the biggest winners under the pact, said Nelson Balido, an international trade consultant based in San Antonio.

"What you find in Mexico's northern states like Tamaulipas, Nuevo Leon, Coahuila, Chihuahua, Baja California Norte, there's hundreds of maquiladoras owned by U.S. companies, foreign companies, and some Mexican companies, that stand to win because of the harmonization of the entire program that didn't exist before," Balido said. "Texas, New Mexico, Arizona, California — these states are closely tied to Mexico, and when Mexico's economy is strong, it affects them as well."

Mexico ranked No. 1 in total trade value with the U.S. from January to April at $176.13 billion. Exports totaled $72.81 billion and imports totaled $103.33 billion, according to census data analyzed by WorldCity.

Canada ranked No. 2, with a total of $173.84 billion. Exports totaled $84.01 billion and imports totaled $89.83 billion.

The USMCA could also influence more U.S. manufacturers, such as carmakers, to nearshore operations back to North America, instead of China or Asia, according to Pratt.

"We are seeing a number of manufacturers, both U.S. and non-U.S. based, move operations to North America for a number of reasons, including to be closer to their customer base, to reduce their tariff liability, to comply with security requirements, and to meet the North American content targets established by USMCA," Pratt said. 

Balido said implementing the new agreement could be complicated if factories across Mexico were curtailed again if the Mexican government declares another health emergency.

"Right now, there is a big fear among maquiladoras along the border, that they will get rolled back, in other words, the [Mexican] federal government might come in and start curtailing or putting restrictions on them again," Balido said. "Which statistically makes no sense; maquila workers are actually safer at work than at home or in the streets."

Pratt said he has also heard from clients that it has been a challenge keeping operations on track during the pandemic.

"Many manufacturers have experienced supply shortages, fulfillment delays, and heightened costs for high-demand goods and transportation, among other disruptions to their supply chains and operations," Pratt said. "Though it's been a challenging experience for many of our clients, they have been able to take action to navigate these changes." 

Pratt added that it is difficult to predict if manufacturing, especially auto production, will rebound in 2021.

"There are so many unknowns with the pandemic — the reopening of states, the upcoming election, and now a recession. At BDO, we've outlined four general phases that companies in all industries will have to navigate on their road to recovery: persevere, maintain, recover, and thrive," Pratt said. "I do believe there will be some pent-up demand among customers that may benefit automakers in the near term and allow for more predictability and growth potential in the future."

Click for more FreightWaves articles by Noi Mahoney.

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