Trump Administration for North American Trade

The Rebranded NAFTA:
Will USMCA Achieve the Goals of the
Trump Administration for North American Trade?
Robert A. Blecker*
Revised, October 2021
Abstract
The United States-Mexico-Canada Agreement (USMCA) was the product of a renegotiation of
the former North American Free Trade Agreement (NAFTA) that was intended by the Trump
administration to “put America first.” This paper analyzes the most important new provisions in
USMCA which that administration believed would inhibit foreign investment in Mexico and
reverse the offshoring of U.S. jobs. Some of the new provisions represent improvements over
NAFTA, especially the limitations on investor-state dispute settlement and strengthened
protections for labor rights. However, the new requirements for automobile production are likely
to backfire by making North American automotive production more expensive and less
competitive. On the whole, the formation of USMCA probably enhanced, rather than lessened,
the confidence of foreign investors in the Mexican economy. However, the agreement is unlikely
to bring about large gains in U.S. manufacturing employment or to boost the long-run growth of
the Mexican economy.
Keywords: USMCA, NAFTA renegotiation, Mexican economy, North American trade,
investor-state dispute settlement (ISDS), labor value content (LVC)
*Professor of Economics, American University, Washington, DC, USA, [email protected]
An earlier version of this article was presented at the conference, “Dark or Bright? The Future of
North America,” co-sponsored by Johns Hopkins University, Université de Québec à Montréal,
and El Colegio de México, Mexico City, Mexico, April 5, 2019. The author thanks participants
in that conference and two anonymous referees for helpful comments and suggestions.
1
Introduction
Former U.S. president Donald J. Trump famously called the North American Free Trade
Agreement (NAFTA) the “worst trade agreement ever” during his 2016 campaign. After he
threatened to withdraw the United States from NAFTA in April 2017, his more rational advisors
coaxed him into renegotiating it instead. Following a lengthy and often tumultuous negotiation
process, the newly baptized United States-Mexico-Canada Agreement (USMCA) went into
effect on July 1, 2020. Consistent with Trump’s “anti-globalism,” any mention of “North
America” or “free trade” was excised from the title; each country was free to put itself first.
Hence, the new agreement is known as CUSMA in Canada in English, ACÉUM in Canada in
French, and T-MEC in Mexico.1 But these convenient rearrangements of the order of the
countries’ names cannot conceal the fact that the rewrite of NAFTA was largely driven by the
Trump administration’s effort to inject its “America First” agenda into a trade agreement.
The Trump administration believed that NAFTA had given too much encouragement to
foreign investment in Mexico and the offshoring of U.S. jobs there. Former U.S. Trade
Representative (USTR) Robert Lighthizer, who led the NAFTA renegotiation, designed a
strategy for attempting to reverse the outflows of foreign investment and offshoring of jobs by
writing various kinds of obstacles and disincentives for such activities into the new agreement
(Miller, 2018; Ciuriak, 2019). Lighthizer pushed for three kinds of measures that he hoped would
achieve the administration’s objectives: instituting stronger regional (North American) and
national (U.S.) content rules for automobiles and other industries; fostering greater uncertainty
about the future of the agreement and the protection of property rights of foreign investors in
Mexico; and strengthening the enforcement of labor rights in that country. In some of these
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areas, Lighthizer won allies from groups that did not normally support Trump administration
policies, such as labor unions and environmental activists. To win the votes of Democrats in the
U.S. Congress, the USTR and the Mexican government agreed modify USMCA (as originally
negotiated) to strengthen the enforcement of labor rights and eliminate extended patent
protection for biologics. As a result, USMCA became the only major policy initiative that won
broad bipartisan support in the U.S. Congress during Trump’s term in office.
The entire negotiation of USMCA was carried out under continual threats by Trump,
including not only a possible U.S. withdrawal from NAFTA, but also a 35 percent tariff on all
imports from Mexico, a 25 percent “national security” tariff on automobiles, and closure of the
U.S.-Mexican border.2 Canada and Mexico had little choice but to participate and put the best
face on “modernizing NAFTA,” given the importance of the U.S. trade relationship for both of
their economies.3 For the Mexican and Canadian governments, the main objective was to limit
the damage and to ensure (as much as possible) the continuation of largely tariff-free trade in
North America. The USMCA was not an ideal rewrite of NAFTA for Canada or Mexico, but
rather the best “deal” they could salvage under the circumstances.
Leaving its bullying tactics aside, however, the Trump administration was not entirely
wrong in its diagnosis. Many studies have found that NAFTA—along with other trade
agreements, the rise of China, and globalization more broadly—contributed to some degree to
the decline of manufacturing employment and a more unequal distribution of income in the
United States. The relevant policy question, however, is whether the kinds of provisions that
Trump’s negotiators sought in the revised NAFTA can somehow turn the clock back and recreate
the U.S. industrial and wage structure of decades past—or even induce more increases in jobs
and wages for manufacturing U.S. workers.
3
This article will assess the new provisions in USMCA that the Trump administration
hoped would discourage foreign investment in Mexico and promote a revival of U.S.
manufacturing. To establish a baseline for this assessment, the next section will review the
evolution of North American trade and its impact on the member economies since NAFTA went
into effect in 1994. The following section will analyze the changes in manufacturing output and
employment in the United States and Mexico and the evolution of Mexico’s real exchange rate
(RER) prior to the NAFTA renegotiation. The subsequent section will discuss the provisions in
USMCA that were most central to the Trump administration’s objectives. Given this focus, the
article will not attempt to provide a comprehensive account of all new provisions in the
agreement.
4 Finally, the concluding section argues that—even though it is too soon to reach a
definitive verdict, and even though USMCA does contain some positive features—this new
agreement is unlikely to achieve the Trump administration’s main goals.
Economic Impact of NAFTA: A Brief Retrospective
The value of total regional trade in North America increased almost four-fold, from US$ 290
billion in 1993 to over US$ 1.1 trillion in 2017 (Burfisher et al., 2019, p. 4). However, such data
can give an exaggerated impression of the quantitative impact of NAFTA for four reasons: the
use of nominal rather than real values of exports and imports; the measurement of each country’s
exports by gross value rather than value added; the double-counting of imported intermediate
goods used in export production; and the failure to consider how much North American trade
would have grown in the absence of NAFTA. Econometric estimates of the impact of NAFTA
tariff reductions on regional trade suggest a boost on the order of about 25 to 100 percent
4
(Romalis, 2007; Caliendo and Parro, 2015), that is, no more than a doubling—which, of course,
is still a very substantial increase.5 Artecona and Perrotti (2021: 18-19) observe that Mexico had
the largest cumulative market share gain in the United States (16 percentage points) of any Latin
American nation between 2002 and 2018, a performance that can plausibly be attributed (at least
in part) to NAFTA advantages.
6 Nevertheless, North American trade has diminished as a share
of total world trade in the post-NAFTA era, and all three countries diversified their import
sources away from NAFTA partners (especially toward China) after 2001 (Blecker, 2014, 2019).
However much regional trade has grown, NAFTA and associated neo-liberal reforms in
the 1990s did not bring about the hoped-for increase in Mexico’s long-run growth. Following the
peso crisis of 1994-1995, Mexico had a brief boom in the 1996-2000 period, but from 2001-2021
its real GDP grew at only a 1.6 percent average annual rate (0.3 percent per year in per capita
terms), much more slowly than the average of 5.2 percent (3.6 percent in per capita terms) for all
developing and emerging market nations during that period.7 As a result, Mexico’s per capita
income and labor productivity failed to converge with U.S. levels during the post-NAFTA period
(Blecker and Esquivel, 2013; Blecker, 2016; Blecker et al., 2021). Explanations for why the
gains in Mexican exports did not translate into more rapid overall growth are found in a large
literature, detailed discussion of which would be beyond the scope of this article (for various
points of view, see Moreno-Brid and Ros, 2009; Hanson, 2010; Ros Bosch, 2013; HernandezTrillo, 2018; Levy, 2018; López, 2018; González, 2019; Blecker, 2021; Huerta, 2021), but
clearly a free trade agreement with the United States did not prove to be the panacea that the
Mexican government originally claimed it would be. However, Mexico is not alone in
experiencing anemic growth in the last two decades: all three NAFTA members have had
average annual GDP growth rates of under 2 percent per year since 2001.8
5
Conventional estimates show extremely small (and not necessarily positive) net welfare
gains from the tariff reductions in NAFTA (see Romalis, 2007; Caliendo and Parro, 2015). For
Mexico, these estimates range from a net loss of 0.3 percent of GDP (mainly caused by trade
diversion) to a net gain of 1.3 percent (taking into account gains from trade in intermediate
goods). For Canada and the United States, the estimated net welfare effects found in these same
studies are minuscule—generally less than 0.1 percent of GDP in either direction (positive or
negative). Productivity has grown strongly in Mexico’s modern firms and export sectors, but
average productivity growth has been held down by low and stagnant (even falling) productivity
in small, domestically oriented, and informal firms (Bolio et al., 2014; Levy, 2018). Escaith
(2021) cites evidence from Díaz Bautista (2017) and others who have found positive effects of
Mexico’s trade opening on productivity in export-oriented manufacturing sectors, but concludes
that the gains were concentrated in the northern and west-central regions of the country.
Trade liberalization in North America has also had important distributional consequences
and imposed significant adjustment costs, although in the U.S. case these effects were much
smaller than the impact of what Autor et al. (2016) call the “China shock.” Hakobyan and
McLaren (2016) found that NAFTA tariff reductions resulted in significant wage losses for U.S.
workers in the local areas most impacted by those tariff reductions—not only for workers in the
directly affected manufacturing industries, but also other (mostly less-educated) workers in the
same localities. Hakobyan and McLaren (2016: 729) concluded that “the distributional effects of
NAFTA are large for a highly affected minority of workers.” Studies of adjustment costs suggest
that some of the productivity gains from trade liberalization come (at least in the short-tomedium run) at the cost of job losses in less efficient firms or plants, which cannot compete
without tariff protection. For example, Trefler (2004) found that the fall in Canadian
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manufacturing employment as a result of Canadian tariff reductions in the Canada-U.S. Free
Trade Agreement (CUSFTA) of 1989, which preceded NAFTA, was of a similar order of
magnitude to the productivity gains. On the Mexican side, Borraz and López-Córdova (2007)
showed that the gains from globalization were very uneven regionally, with workers in the
northern and border regions gaining more than in most other parts of Mexico.
Contrary to prior expectations, trade liberalization seems to have contributed to greater
wage inequality (a higher wage premium for more educated workers) in Mexico as well as the
United States (Feenstra and Hanson, 1997; Revenga and Montenegro, 1998; Hanson, 2004). This
outcome is generally explained by a shift to more skill-intensive production in Mexican export
industries (Esquivel and Rodríguez-López, 2003; Verhoogen, 2008). Overall, trade liberalization
brought consumer gains to Mexican households, but these gains were concentrated in upperincome households and the northern and border regions (Nicita, 2009). Although official data
show inequality at the household level falling in Mexico after the mid-1990s, estimates that
correct for missing data for the top income decile show inequality rising rather than falling
between 1994 and 2012 (Esquivel, 2015). In both Mexico and the United States, the labor share
of national income has been falling since the late 1990s or early 2000s (Ibarra and Ros, 2019).
Elsby et al. (2013: 1) attribute part of the decline in the U.S. labor share to “offshoring of the
labor-intensive component of the U.S. supply chain.” Trade agreements like NAFTA are often
argued to have contributed to these trends because they protected corporate property rights (but
not labor rights), facilitated offshoring of manufacturing jobs, and put U.S. workers into
competition with lower-paid foreign counterparts (Bivens, 2017).
7
Recent Growth of Mexico’s Manufacturing Industries and Employment
More context for the changes that the Trump administration sought in USMCA can be seen in
the rapid growth of Mexico’s manufacturing sector in the most recent period leading up to the
NAFTA renegotiation. Figure 1 traces the growth of Mexico’s total manufacturing output since
the formation of NAFTA in 1994, compared with a parallel measure for the United States. To
facilitate the comparison, the (seasonally adjusted) indexes of industrial production in the
manufacturing sector for both countries were re-based to equal 100 in 1994. Initially, Mexico’s
manufacturing production lagged behind that of the United States as a result of the 1994-1995
peso crisis, but then it recuperated and grew strongly up to 2000, aided by the NAFTA tariff
reductions, strong U.S. growth, and the competitive impact of the depreciated peso. After the
2001 recession, Mexican manufacturing output went through a prolonged period of stagnation
until 2007. As a result of renewed peso overvaluation and the penetration of China into North
American markets (Gallagher et al., 2008; Feenstra and Kee, 2009; Hanson and Robertson 2009;
Dussel Peters and Gallagher, 2013), Mexican manufacturing output recovered slowly in the early
2000s and as of 2007 only barely exceeded its previous peak from 2000.
[Insert Figure 1 here]
Both countries’ manufacturing output declined sharply during the financial crisis and
“Great Recession” of 2008-2009 and recovered thereafter. But the two series diverged after
2014, when U.S. manufacturing production flattened out and never reached its previous peak
from early 2008, while Mexican production grew rapidly right up until the covid pandemic crisis
of 2020. In the 2014-2019 period, Mexico benefited from a more competitive real exchange rate
and the long-term payoff to strong investments in key sectors, especially automobiles. Indeed, as
8
Figure 2 shows, the peso depreciated significantly in real terms around 2015, and during the
entire period from 2015 to early 2021 it remained about 20 percent lower compared to its 2007
real value. This coincides almost exactly with the improved performance of Mexican
manufacturing output shown in Figure 1.
[Insert Figure 2 here]
As a result of this strong increase in manufacturing production, Mexico finally achieved a
significant and sustained increase in formal-sector employment in manufactures, which had
eluded it in the first two decades of NAFTA (Blecker, 2014, 2016). As shown in Figure 3,
employment in large firms in the Mexican manufacturing sector rose by 670,000 between 2007
(the previous cyclical peak) and 2019 (the most recent peak, and the last year before the covid
crisis), representing a 20 percent increase over the 2007 level of about 3.3 million.9 In contrast,
total U.S. manufacturing employment fell by 1.1 million during the same period (Bureau of
Labor Statistics [BLS], 2021). The coincidence of these trends does not, of course, prove
causality, and most analyses concur that imports from China were quantitatively more important
than imports from Mexico in any displacement of U.S. jobs (see Autor et al., 2016).
[Insert Figure 3 here]
The increase in Mexican manufacturing employment in 2007-2019 was not even across
manufacturing sectors, but rather concentrated in just a few. The transportation equipment sector
(which consists primarily of automobiles and auto parts in Mexico) accounted for 475,000 of the
new jobs, or 71 percent of the increase. Other sectors that registered large increases included
computers, electronics, electrical equipment, and medical supplies and equipment, which
together accounted for almost 120,000, while the remaining job increases were scattered around
other industries. The fact that U.S. employment in motor vehicles remained flat (at about
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994,000) between 2007 and 2019 (BLS, 2021) while Mexican employment in that sector rose by
nearly a half million helps to explaining the strong focus that the Trump administration placed on
rewriting the rules for automobile trade in USMCA, as discussed in the next section.
New Provisions of the USMCA and Their Likely Impact
As noted earlier, the Trump administration’s effort to disrupt North American economic
integration and promote reinvestment in the U.S. economy led it to seek three main types of
provisions in USMCA, which are covered here in turn.
Stronger Content Rules for Automobiles
USMCA contains three new or revised requirements for automobiles to qualify for tariff-free
trade within North America (see U.S. International Trade Commission [USITC], 2019: 74-81).
First, the rule of origin for autos was raised to require 75 percent North American content, up
from the previous 62.5 percent. Second, 70 percent of the steel and aluminum used in
automobiles must be sourced from North American producers. Third, 40 percent of the value of a
passenger car (45 percent for a pickup truck or cargo vehicle) must be produced by labor earning
a minimum of US$ 16 per hour. This last provision, now known as a “labor value content”
(LVC) requirement, was a compromise reached after Canada and Mexico rejected Lighthizer’s
original proposal of an explicit U.S. content requirement for vehicles to be sold tariff-free in the
United States. Of course, the intention was the same: to induce automotive producers to relocate
parts of their production operations to the United States (or Canada), where autoworker wages
10
easily exceed that threshold. In addition, USMCA requires more stringent verification of the
ultimate national origins of all automotive inputs to ensure that “non-originating” (non-North
American) inputs are not included in the regional content calculations—a provision largely
aimed at imports from Mexico that might include parts or components sourced from China.
Although Trump’s team hoped that these provisions would induce a return of significant
automotive and related upstream production (especially steel) to the United States, the actual
impact may be very different from what they expected. The vast majority of cars produced in
Mexico already meet the 75 percent regional content threshold (Fickling and Trivedi, 2018) and
auto companies have several years to reach this target. The need to document the ultimate origins
of all imported inputs adds complications and costs, but firms have the option of producing some
inputs formerly imported from outside North America in Mexico rather than the United States in
order to satisfy the regional rule of origin (Asayama and Yumae, 2020). In regard to LVC, some
auto producers, including affiliates of Honda and Toyota, have decided to raise wages in Mexico
to meet the US$ 16 per hour target rather than abandon investments already made there
(Nakayama and Asayama, 2020). Alternatively, firms producing in Mexico could decide to
forego the USMCA tariff exemption and pay the U.S. most-favored-nation automobile tariff of
2.5 percent, if the costs of compliance with USMCA requirements exceed the cost of paying the
tariff. In addition, the LVC and other content requirements could induce greater automation of
labor-intensive activities in the automotive sector, rather than a shift of such activities to the
United States or Canada. For all these reasons, it seems unlikely that USMCA will instigate a
massive relocation of automotive employment from Mexico to the United States.
What seems much more likely is that costs will rise for labor, steel, and other automotive
inputs, which in turn will force auto producers to either raise prices for consumers or accept
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lower profit margins (or some combination of the two). In addition to the direct costs of meeting
the new USCMA requirements, auto firms will face significantly higher administrative costs for
verifying their compliance with the new rules—hence, the frequent complains of industry
sources about “more paperwork” (Garsten, 2020). To the extent that the cost increases are passed
on to consumers in higher prices, demand for vehicles produced in North America is likely to fall
to some extent (and some demand could shift to imports from Asia or Europe).
A few studies have tried to quantify the likely net impact of the higher costs and new
content requirements on automotive production in the three USMCA countries. Burfisher et al.
(2019) forecast that USMCA would cause decreases in Mexican output of 5.6 percent for motor
vehicles and 2.1 percent for vehicle parts, and somewhat smaller decreases for Canadian output
(1.3 and 0.9 percent, respectively), while failing to increase U.S. output (which they predicted
would fall by 0.03 percent for vehicles and 0.44 for parts). In contrast, Ciuriak et al. (2019)
forecast that USMCA would increase U.S. shipment of automotive products by 1.9 percent,
while reducing Canadian and Mexican shipments by about 0.6 percent each.
A more detailed picture emerges from the industry-specific model of “new light vehicles”
(three categories of passenger cars plus pickup trucks) in USITC (2019), which estimates the
effects of USMCA in the U.S. auto market at the “vehicle-model level” and then aggregates up
the results. USITC (2019: 85) predicts average price increases ranging “from 0.37 percent for
pickup trucks to 1.61 percent for small cars,” resulting in a total decline in U.S. consumption of
all light vehicles of 1.25 percent. Also, USITC (2019: 86) predicts decreases in U.S. production
ranging from 0.07 percent for pickup trucks to 2.96 percent for small cars. Nevertheless, USITC
(2019: 87) forecasts a rise of 5.5 percent in total industry employment (or about 28,000 jobs),
once the reshoring of a certain portion of auto parts is taken into account. This, of course, is a
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very small increase in the context of the U.S. economy or manufacturing sector as a whole.
All three studies (Burfisher et al., 2019; Ciuriak et al. 2019; USITC, 2019) predict that
U.S. automotive imports from Canada and Mexico will decrease, while U.S. imports from other
countries will increase but by less than imports from Canada and Mexico decrease. Of course,
the exact quantitative estimates in these studies should be taken with caution, but they generally
concur in the qualitative finding that any U.S. gains in automotive production or employment are
likely to be small at best, and to come at the expense of losses for Canada and Mexico.
As of mid-2021, there were still mixed signals for how USMCA will affect automobile
production and trade. On the one hand, Mexican exports of auto parts reached a historical record
level in the first four months of 2021 (Sánchez, 2021). On the other hand, Mexican and U.S.
officials were still wrangling over how to interpret the USMCA requirements for automobiles,
with the U.S. reportedly insisting on stricter interpretations (for example, of the LVC provisions)
than what Canada and Mexico believed they had agreed to (Morales, 2021). Since the full
USMCA requirements for autos do not go into effect until 2023 and their interpretation is still
being negotiated, the longer-term outlook for autos remains unsettled.
Increasing Uncertainty for Foreign Investors
Crowley and Ciuriak (2018) used the phrase “weaponizing uncertainty” to characterize the
Trump administration’s trade policy in general, including the numerous tariffs that were either
imposed or threatened and the undermining of the World Trade Organization (WTO), as well as
the renegotiation of NAFTA. The phrase surely describes several key new provisions that
Lighthizer pushed to include in USMCA, especially the weakening or elimination of investor-
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state dispute settlement (ISDS), the new sunset clause, and the U.S. refusal to exempt Canada
and Mexico from future national security tariffs.
ISDS was one of the most controversial features of the original NAFTA agreement.
Former NAFTA Chapter 11 gave broad protections for property rights of foreign investors, not
only by prohibiting actual expropriation of foreign firms’ assets, but also by allowing foreign
corporations to file complaints to NAFTA tribunals for any government policies that were
alleged to be “tantamount to expropriation.” Taking advantage of this broad definition, numerous
firms filed ISDS claims against governments (national, state/provincial, or local) in each of the
three countries about various types of regulations (for example, environmental laws) that could
reduce potential corporate profits even for investments not actually undertaken. This process
allowed foreign companies to claim compensation for property rights that were not recognized
for domestic business firms in the laws of any of the member countries. Critics long argued that
ISDS had a chilling effect on governments that wished to adopt socially beneficial health or
environmental regulations because of the constant threat of costly ISDS lawsuits, even if such
suits were not always successful (and sometimes they were—see Public Citizen, 2021).
The USTR made weakening ISDS a priority in the NAFTA renegotiation, not because the
Trump administration liked social or environmental regulations, but because Lighthizer viewed
ISDS as creating “political risk insurance for outsourcing” that implicitly subsidizes foreign
companies that invest in Mexico (Miller, 2018). Under USMCA, the existing ISDS process is
abolished entirely for the United States and Canada, since the latter chose to “opt out.” For the
United States and Mexico, USMCA severely weakens ISDS, leaving it as an option that can be
pursued only if litigants first attempt to use national courts, and only for actual expropriation (the
“tantamount to” loophole was eliminated). USMCA grants an exception to maintain full ISDS
14
protection for foreign firms that have invested in the Mexican energy and infrastructure sectors,
but this is a relatively limited exception.
One NGO that had long criticized ISDS described the changes in USMCA as follows:
The main U.S.-Mexico investment annex excludes the extreme investor rights relied on
for almost all ISDS payouts: Minimum Standard of Treatment, Indirect Expropriation,
Performance Requirements and Transfers. The pre-establishment “right to invest” is also
removed. A new process requires investors to use domestic courts or administrative
bodies and exhaust domestic remedies or try to for 30 months. Only then may a review be
filed and only for Direct Expropriation, defined as when “an investment is nationalized or
otherwise directly expropriated through formal transfer of title or outright seizure”…. The
new process bans lawyers from rotating in the system between “judging” cases and suing
governments for corporations, and forbids “inherently speculative” damages to counter
the outrage of corporations being awarded vast sums based on claims of lost future
expected profits. (Public Citizen, 2018)
These changes should eliminate the most egregious abuses of ISDS, but are unlikely to
inhibit normal foreign investment in Mexico. Mexico has already adopted intellectual property
laws and guarantees for foreign investors that meet NAFTA (and USMCA) standards, and
Mexico has kept those standards in place precisely to reassure foreign investors. Mexico also
renewed similar commitments when it joined the Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP), which was formed after Trump withdrew the U.S. from the
earlier TPP agreement. Indeed, the weakening of ISDS for Mexico could have a beneficial side
effect (unintended by Lighthizer): it could enable the Mexican government to take advantage of
greater “policy space” to enact social and industrial policies that would better promote the
country’s long-term development and foster green growth. In any case, the ability of Mexico to
15
attract foreign investment will depend much more on the country’s own government and
institutions than on the ISDS procedures.
Another way that Lighthizer tried to increase uncertainty in North American trade was by
including a sunset clause in USMCA. The new agreement has a term of 16 years, with a review
to be conducted after six years leading to a new renegotiation and potential renewal. This
represented a compromise over Lighhizer’s original demand that the agreement would face
abolition every five years unless it were renegotiated again and again; it was accepted by Canada
in exchange for the USTR giving up on the elimination of state-to-state trade dispute settlement
panels (former NAFTA Chapter 19). The 16-year term and six-year review process will surely
allow business firms to do more long-term planning for their North American operations
compared with the five-year sunset approach originally proposed by the USTR.
Instituting a process for periodically reviewing and revising USMCA is potentially a
positive change; one of the weaknesses of NAFTA was that it contained no procedures for
amendment or updating. However, a procedure for review and revision does not have to include
the threat of termination after a fixed period like 16 years. The 16-year sunset provision is one
that Mexico and Canada accepted only reluctantly. But the Mexican and Canadian governments
may welcome an opportunity to renegotiate USMCA starting in 2026, especially if the U.S.
administration in office at that time is less protectionist and belligerent than the Trump team was.
An additional effort to increase uncertainty was the U.S. refusal to exempt Canada and
Mexico from future applications of section 232 “national security” tariffs, such as the ones
Trump had imposed on imports of steel and aluminum. Trump’s advisors discovered that this
formerly obscure provision in U.S. trade law, which was rarely used by his predecessors, granted
him virtually unlimited discretion to protect any U.S. industry by claiming that domestic
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production is essential for the national interest. Canada and Mexico did obtain a waiver of
Trump’s 232 tariffs on steel and aluminum several months after USMCA was negotiated, in
exchange for which they rescinded their retaliatory tariffs on U.S. exports. They also obtained
“side letters” that would have exempted their auto exports (up to certain limits) if Trump had
implemented his threatened section 232 tariff on automobiles (Stuart, 2018). Still, Canada and
Mexico could be subject to other U.S. national security tariffs in the future, and USMCA grants
them no exemption.
Labor Rights
USMCA includes major improvements in the treatment of labor rights, not only in comparison to
the original NAFTA (where labor issues were relegated to a separate and unenforceable side
agreement) but also compared to later U.S. trade agreements (which, after 2000, generally did
include some labor rights provisions in the main text). USMCA requires the members to: adhere
to International Labour Organisation (ILO) standards; not to “derogate” (weaken) their labor
regulations in ways that would affect trade; to respect workers’ collective bargaining rights,
including by allowing workers “to organize, form, or join the union of their choice”; not to
import goods produced using forced labor; to address violence against workers; to afford
protections to migrant workers; and to maintain protections against workplace discrimination
(USITC, 2019: 215-217). An annex to the labor chapter specifically requires Mexico to establish
“an independent entity for conciliation and union collective bargaining agreement registration”
and “independent Labor Courts for the adjudication of labor disputes” (Inside US Trade, 2019).
After the original negotiation of USMCA in 2018, U.S. labor unions and Congressional
17
Democrats complained about weak enforceability of these provisions—especially collective
bargaining rights. In response, Lighthizer went back to the negotiating table and won stronger
enforcement mechanisms, which helped to persuade many unions and Democrats to support
approval of the final (modified) agreement. In particular, the parties agreed to create a Rapid
Response Mechanism (RRM), which would prevent the adjudication of complaints from
dragging on for many years through the regular trade dispute settlement mechanism. Labor
advocates especially hope that the new USMCA requirements, combined with enforcement
through the RRM, will impede the formation of “protection unions” (company-sponsored unions
that aren’t chosen by workers and don’t represent them) in Mexican exporting firms.
In 2021, two complaints were filed about alleged violations of workers’ rights in Mexico:
one at an auto parts plant at Tridonex (a subsidiary of a U.S. corporation) in Matamoros,
Tamaulipas, and another about an allegedly fraudulent election at a General Motors plant in
Silao, Guanajuato (Lynch, 2021; Saldaña, 2021). In response, Tridonex agreed to pay more than
US$ 600,000 in back pay to laid-off workers (El Financiero, 2021). Also, the U.S. and Mexican
governments agreed that a clean and internationally monitored election would be conducted at
the GM plant in Silao; the workers ultimately voted to reject the contract previously negotiated
by a union affiliated with the Confederación de Trabajadores de México (CTM) (Rodríguez,
2021). Also, the Mexican government filed a complaint about U.S. violations of the rights of
migrant workers, which the Biden administration promised to investigate (Saldaña, 2021).
These efforts provide some hope that USMCA could prove to be a valuable tool for
protecting workers’ rights on both sides of the U.S.-Mexican border, as long as both countries
have leadership that is committed to enforcing the new rules in a cooperative manner. If Mexican
workers can form independent unions and negotiate for better wages and working conditions,
18
this could help to alleviate inequality in Mexico. Nevertheless, it remains unclear how much the
push for enhanced labor rights will affect investment, production, employment, and wages in
Mexico’s export industries, or if it will have any appreciable impact on the U.S. labor market.
Even if all labor rights were fully and effectively enforced in Mexico, Mexican wages would
remain significantly lower than U.S. wages for the foreseeable future. In the end, the labor rights
provisions of USMCA may possibly do more to help Mexican workers than American ones.
Conclusions and Prospects
It is still too early to reach firm conclusions about the long-term impact of USMCA, and even the
short-run effects can be difficult to discern since the agreement went into effect in the midst of a
global pandemic and economic crisis in 2020. So far, however, the Trump administration’s
efforts to increase uncertainty have done little to inhibit foreign investment in Mexico. Before
the pandemic struck, in the first quarter of 2020—when USMCA had just been passed by the
U.S. Congress and while Trump was still in office—inflows of foreign direct investment into
Mexico reached their highest quarterly level in the previous decade at US$ 21.7 billion (IMF,
2021a). By mid-2021, Mexican officials were touting USMCA as increasing confidence in the
Mexican economy and crediting it with helping to boost the recovery from the covid crisis.
Mexico’s Secretary of the Economy Tantiana Clouthier has been described as saying that
“thanks to the agreement, dynamic trade has been maintained with clear rules, which generate
certainty in the commerce and investments that are realized in North America” (Usla, 2021,
author’s translation, emphasis added). Thus, the successful conclusion of the USMCA
negotiation may have done more to enhance confidence in Mexico than any of the supposedly
19
uncertainty-increasing features of the agreement will do to reduce it.
Overall, it appears very unlikely that USMCA will accomplish the goals that the Trump
administration intended to achieve when it launched the renegotiation of NAFTA. As of mid2021, there is no sign that the content rules for automobiles, weakening of ISDS, sunset clause,
and other new features of USMCA are leading to a massive exodus of firms from Mexico or
significant reshoring of jobs to the United States. At most, the new rules for automobiles could
increase U.S. employment by small amounts, but even that is uncertain, and any such small gains
would come at the expense of losses to Mexican and Canadian producers and consumers in all
three countries. Even without the extreme form of ISDS included in the original NAFTA,
USMCA still commits Mexico and the other parties not to engage in direct expropriation, and
hence protects the basic property rights of foreign investors. If U.S. trade tensions with China
persist—as they have, in the first nine months of Joe Biden’s presidency—Mexico stands to gain
from being seen as a less risky destination for foreign investment compared with China.
The specific new features in USMCA can only be described as a “mixed bag.” Positive
aspects include the reform of the ISDS regime for Mexico (and its elimination for Canada) and
the strengthening of protections for labor rights. The sunset clause, although intended to foster
greater uncertainty for investors, will provide a welcome opportunity to revisit the agreement and
modify it starting in 2026. The biggest negative is probably the automotive provisions, which are
likely to make North American automobile production more expensive and less competitive,
thereby potentially increasing imports from outside the region. Initially, however, firms that
engage in automobile production in North America appear to be designing strategies to cope with
the new regulations and are not announcing major changes in their investment plans. If USMCA
was supposed to “make America great again” by inducing a large-scale repatriation of
20
manufacturing production to the United States, it appears doomed to fail.
In the end, perhaps the most important thing about USMCA is simply that an agreement
was reached and went into effect, thereby preventing the far worse disruption that would have
resulted from a U.S. withdrawal from NAFTA. However, the formation of USMCA also
represents a huge missed opportunity. In spite of the modifications discussed here, USMCA
largely continues the NAFTA policy model, which as discussed earlier did not lead to
convergence of Mexico with its richer neighbors to the north. As Ciuriak and Fay (2021) have
written, “the NAFTA framework resulted in Mexico capturing the low-economic-rent industrial
activities, while the United States, which did have a KBE [knowledge-based economy] policy,
captured the high-economic-rent knowledge-based activities such as R&D and design/branding
of products” (p. 13). Nothing in USMCA would alter this trajectory, and some of the new
provisions for e-commerce (prohibitions on data localization) could worsen it by further
concentrating information technology and data collection in the U.S.-based internet giants like
Amazon and Google. In addition—with the notable exception of the labor rights provisions—
USMCA contains no commitment of the three member countries to cooperate in adopting
policies to make the whole region more competitive, prosperous, and equitable. The omission of
any provisions related to climate change is also a notable weakness. Progress on all of these
fronts will require new initiatives that go beyond the narrow framework of USMCA.
Notes
1 These acronyms stand for Canada-United States-Mexico Agreement, Accord Canada-États
Unis-Mexique and Tratado México-Estados Unidos-Canadá, respectively.
21
2 The threat of a border closure was directed at immigration, but could have severely affected
trade.
3 Estimates of the large damage that would have been done to the Mexican economy if the
United States had imposed high tariffs on Mexico (or exited from Mexico’s trade network) are
found in Walmsley and Minor (2017) and Boundi Chraki (2017); the former also cover Canada.
4 Some of the provisions not addressed here include those related to e-commerce, textile and
apparel production, currency manipulation, and limitations on Canada and Mexico’s ability to
sign trade agreements with non-market economies (a provision aimed at China). See USITC
(2019) for more extensive coverage of the new provisions in USMCA.
5 Most likely, the liberalization of foreign investment and protections for foreign investors’
property rights in NAFTA caused additional increases in trade, but such effects are difficult to
quantify and are not estimated in these studies.
6 Artecona and Perrotti (2021) also show, however, that two countries that did not have trade
agreements with the United States (Indonesia and Vietnam) had market share increases almost as
large as Mexico’s (15 and 13 percentage points, respectively), while the increase in China’s
market share dwarfed all others at 52 percentage points, over the same period (2002-2018).
7 Source: International Monetary Fund (IMF) (2021b) and author’s calculations; data for 2021
are IMF forecasts.
8 For the period 2001-2021 (using IMF forecasts for 2021), the average annual growth rate of
real GDP was 1.8 percent in Canada, 1.9 percent in the United States and 1.6 percent in Mexico.
Source: International Monetary Fund (2021b) and author’s calculations.
9 According to the 2019 Economic Census (INEGI, 2019) and author’s calculations, large firms
accounted for about 96 percent of the gross value produced in Mexican manufacturing in 2018.
22
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27
Figure 1
INDEXES OF INDUSTRIAL PRODUCTION, MANUFACTURING SECTORS, MEXICO
AND UNITED STATES, MONTHLY, JANUARY 1994 TO MAY 2021
(1994 average = 100, seasonally adjusted)
Sources: Author’s calculations using data for Mexico from INEGI, Indicadores económicos de
coyuntura, Actividad industrial, base 2013, total industrias manufactureras,
https://www.inegi.org.mx/app/indicadores/bie.html, and for the United States from Board of
Governors of the Federal Reserve System, G.17 – Industrial Production and Capacity Utilization
for June 15, 2021, base year 2017, industrial production index for manufacturing (NAICS),
https://www.federalreserve.gov/data.htm, both accessed 8 July, 2021. Data for both countries
were re-based to 1994 = 100 by the author.
80
100
120
140
160
180
Indexes, 1994 = 100
Mexico United States
28
Figure 2
REAL VALUE OF THE MEXICAN PESO, MONTHLY, JANUARY 2007 TO MAY 2021
(Index, December 2007 = 100)
Source: Real effective exchange rates for 178 countries: a new database, Last update: 15 June
2021, Darvas (2012), https://www.bruegel.org/publications/datasets/real-effective-exchangerates-for-178-countries-a-new-database/, accessed July, 11 2021.
Note: A higher value indicates a real appreciation.
50
60
70
80
90
100
110
120
130
Index, December 2007 = 100
29
Figure 3
INCREASES IN EMPLOYMENT IN MEXICAN MANUFACTURING, 2007-2019
(in thousands)
Source: Author’s calculations using data from INEGI, Encuesta mensual de la industria
manufacturera (EMIM), Base 2008 for 2007-2013 and Base 2013 for 2013-2019,
https://www.inegi.org.mx/app/indicadores/bie.html, accessed June 26, 2021. Averages of
monthly data (not seasonally adjusted) were used for each year; increases for 2007-2013 and
2013-2019 were calculated separately from the two different surveys and then added together.
Note: Transportation equipment is sector 336, Medical equipment and supplies is 3391,
Computers, electronics and electrical equipment is the sum of 334 and 335, and Other
manufacturing is all other industries in Manufacturing (31-33), using the North American
Industrial Classification System (NAICS).
0
100
200
300
400
500
600
700
Thousands
Other manufacturing
Computers, electronics
and electrical equipment
Medical equipment and
supplies
Transportation equipment

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