USMCA Offers Stability for North American Trade
Amid uncertainty surrounding COVID-19, NAFTA’s successor pact provides continuity and opportunity for the region.
The United States-Mexico-Canada Agreement (USMCA) has the nickname NAFTA 2.0 for a reason. Most experts describe USMCA as an evolution rather than a revolution compared to its predecessor free trade agreement. But in this unusual business year, continued stability for the North American trade relationship has its benefits.
“For North America as a block, USMCA provides an updated framework for the U.S., Canada and Mexico to go into the future,” said Raul Freyre Porro, J.P. Morgan’s Head of International Banking in Mexico. “Given the current global business uncertainty posed by COVID-19, it represents continuity and opportunity for the region.”
Jim Glassman, Head Economist for Commercial Banking, J.P. Morgan
He adds that USMCA isn’t so much redefining the North American relationship as “following the reality” of business innovation—such as advances in robotic manufacturing—that increasingly play a greater role in how trade agreements evolve.
“We probably would have seen the North American region integrating like this anyway,” said Glassman, noting that advancements in technology and automation will create a more interdependent trade environment.
USMCA’s Key Provisions
The pact offers flexibility. That includes an expiration date.
Unlike NAFTA, USMCA passed with a sunset provision that requires joint review of the agreement every six years with the option to renegotiate and renew it for a new 16-year term.
USMCA is seen as a stable path forward at a critical time for the world economy and North America’s four most important industries: energy, automotive, agriculture and technology.
“It’s a new institutional framework, an umbrella of certainty for investors throughout North America,” said Gabriel Lozano, J.P. Morgan’s Chief Economist for Mexico and Central America.
The agreement is particularly critical for Mexico. The country saw the biggest economic transformation under NAFTA but was in a recession when COVID-19 hit.
- Country-of-origin changes for automobiles: USMCA will require that cars manufactured in North America have at least 75% of their components manufactured in the region to qualify for zero tariffs. Under NAFTA, the requirement was 62.5%.
- Higher wages and labor reforms: USMCA requires 40% to 45% of auto content be produced by workers making at least $16 an hour, a key provision sought by Democratic lawmakers in the United States.
- Widening agricultural trade between the US and Canada: US farmers can sell more butter, milk, cheese and cream to Canadian consumers while the U.S. allows Canadian growers new markets for their dairy, peanut and sugar products.
- New rules for intellectual property (IP) protection: USMCA’s IP rules have extended or strengthened copyright and trademark protection terms. The rules also prohibit duties on certain creative works throughout North America. Notably, the agreement did not secure a proposed 10-year sales exclusivity to biologics, which are advanced and expensive new medicines aimed at treating serious and life-threatening diseases.
- Resetting dispute management: The law eliminates a much-maligned arbitration system between the US and Canada. The U.S. and Mexico continue that system but now limit the industries that can participate in it.
USMCA’s Potential Impact
The pandemic’s economic fallout and the upcoming U.S. election are crowding out a detailed discussion about USMCA’s longer-term impact. However, it’s still important for businesses to assess how the pact can diversify and maximize their supply chains’ performance. It’s possible USMCA will support reshoring to North America over time—but selectively.
A 2020 global salary report1 from Korn Ferry shows that real wage levels are headed upward in Asia and other competing destinations, which could make North America’s reshoring potential more attractive over time, especially in Mexico.
Glassman believes such movement may be gradual. That’s because proximity to newly prosperous customers can deliver more value over time than lower production costs. He estimates that roughly 90% of J.P. Morgan’s Commercial Banking clients have some level of engagement in overseas markets, and that won’t change even if cheaper production emerges elsewhere.
Simply put, wages are only one piece of the reshoring puzzle. And future trade agreements—like the modern, renewable USMCA—will have to consider that ongoing reality as they’re renegotiated.
Shrewd business owners have already realized that, Glassman said.
“Businesses are global because they recognize market opportunities. That’s the fundamental driver of what will keep localization in overseas markets in place.”
Nevertheless, Porro adds that USMCA provides well-timed improvements to the North American trade relationship given turbulent times. “It gives the region a strong safety net for trade and investment,” he said. “Anything that provides certainty under current global circumstances is likely to be positive overall.”
1. Korn Ferry 2020 Global Salary Forecast, November 2019