the winners

Early reports on the new trade agreement between the US, Mexico and Canada – known as the USMCA – suggest that the US is getting the better end of the deal. But what are the implications of the new rules of origin?

The United States, Mexico, Canada Agreement (USMCA) has finally been hammered into place. And ‘hammered’ may be how Canadian and Mexican representatives felt when the final details of this broad-ranging trade deal were nailed down, since there is wide agreement among experts that the US came out the winner.

“It was not so much about what we could gain, as about what we could safeguard,” says Julie Adès, senior economist at the Conference Board of Canada.

More uncertainty

The ratification ends a long period of uncertainty that began in August 2017, when negotiations to replace the North American Free Trade Agreement (Nafta) started. But it introduces fresh uncertainties about effective access to the US market for foreign investors.

New rules of origin require that, to preserve duty-free access, cars – including many components – must have a 75% ‘regional value content’: meaning they must be made in North America. So must 70% of the car’s steel and aluminium content. In addition, parts imported from outside the region for final assembly in North America will no longer be ‘deemed’ to originate there.

Furthermore, a new requirement that 40% of the ‘labour value content’ of a car must be produced by workers earning at least $16 an hour is intended to weaken Mexico’s low-cost advantage. At the Democrats’ insistence, USMCA now mandates new Mexican labour protections including independent labour unions, and the US has allocated $27m to aid enforcement by Mexico. 

A US Trade Representative factsheet says: “The changes are designed to incentivise new US investments… and encourage automakers and suppliers to locate the future production of new energy and autonomous vehicles in the US.”

Unintended consequences

Ironically, experts say tightening rules of origin – a key goal of US president Donald Trump’s administration – will also raise costs for consumers and reduce car sales. “This could make cars made in North America less competitive than cars made elsewhere,” says Ms Adès.

These factors now add to the usual FDI considerations in deciding whether and where to locate in North America, or whether simply to ignore the rules of origin and pay the 2.5% World Trade Organisation ‘most favoured nation’ duty. A sunset clause, by which USMCA can be reviewed every six years and terminated after 16, adds fresh uncertainty.

Some Mexican economists see a bright side. While the minimum wage in Mexico is $6.50 a day, Gabriel Martínez, professor at the Instituto Tecnológico Autónomo de México in Mexico City, says manufacturing and auto workers earn significantly more.

However, he adds: “The agreement is not that auto workers are going to earn $16 an hour, only that a fraction of exports will be produced by workers earning that.” Most large multinationals already comply, he continues.

Mexican optimism 

Mr Martinez believes the rules of origin regarding domestic content could benefit Mexico. Since it will become more difficult to import parts from abroad, manufacturers have an incentive to establish plants in North America, with Mexico a strong contender, continuing a trend that started under Nafta.

He also anticipates more investment in services, a view shared by Alex Covarrubias, a researcher at the College of Sonora in Hermosillo, Mexico. He says Mexico is already seeing a new wave of FDI flows, especially from China and other Asian countries. “The Chinese are announcing big projects, not just in the automotive sector but in the new mobility sectors, such as electric and autonomous vehicles and ride-sharing options,” says Mr Covarrubias. 

The discovery of what could be the world’s largest deposit of lithium near Sonora is another cause for optimism, he adds. He welcomes the new labour protections in USMCA, which he says have already produced changes in Mexico’s laws and institutions. “Before, Mexico competed by depressing wages and downgrading labour conditions to gain competitive advantage,” says Mr Covarrubias. “Now it will have to review everything, which is a massive change in the system. At first it will be difficult, but in the medium and long term it will be a win-win for all.”

Foreign investors already in Mexico are likely to stay put. For example, Audi is encouraging its suppliers to expand. “We have the clear goal to be ready for USMCA,” plant director Thomas Slupik has said. “The basis is not so bad, 75% of local content. We are not starting from zero, but with a strong basis.”

Overall, a paper by Dan Ciuriak – a senior fellow with the Centre for International Governance Innovation in Canada – and his colleagues concluded that, in the context of a growing North American economy, the effects of USMCA are likely to show up as less robust growth instead of outright declines in trade and economic output.

Resolving disputes

The contentious issue of dispute resolution was also addressed in the USMCA, according to David A Gantz, the Will Clayton fellow of the Mexico Center at Rice University’s Baker Institute in Texas. Under Nafta, disputes between foreign investors and a host government were resolved primarily through binding third-party international arbitration called investor-state dispute resolution. Under USMCA, after three years any disputes between Canada and the US will be tried in the domestic courts of the host country, not through arbitration.

Investor-state dispute settlements will continue to govern disputes involving the US and Mexico in key energy and infrastructure sectors – vital to reassure long-term FDI involving huge sums, says Mr Gantz.

In other sectors of Mexico’s economy, for the first time in any US trade agreement, Mr Gantz notes that foreign investors have to exhaust local legal remedies, and demonstrate that government actions have restricted their ability to remain in business.

Digital definitions

The USMCA is the first trade treaty to include a chapter on digital trade. Digital products are defined as “a computer program, text, video, image, sound recording, or other product that is digitally encoded, produced for commercial sale or distribution, and that can be transmitted electronically”. 

USMCA enables the duty-free flow of data across borders. It bars data localisation rules that require tech companies to store their data in the country in which it originated. And it means tech companies cannot be forced to disclose their source code and algorithms as a condition of doing business in any of the three countries.

“I think the USMCA represents the gold standard for thinking about crossborder trade and the digital economy,” says Anupam Chander, a professor at Georgetown Law School in Washington, DC. “Most importantly, it could serve as the digital trade model for future agreements across the world.”

Another uncertainty about USMCA now exists, however. If Bernie Sanders becomes US president, he has promised a renegotiation for tougher environmental and labour rules.

This article is sourced from fDi Magazine
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