USMCA What is it and what's next?

A Free Trade Agreement (FTA) is an international accord established between two or more countries or regions, whose primary purpose is to set specific rules and provisions to regulate commercial relations among the involved parties. These rules encompass areas such as trade in goods and services, investment, intellectual property, trade defense, and labor and environmental aspects (COMEX, 2003).

The United States-Mexico-Canada Agreement (USMCA, or T-MEC in Spanish) is a free trade agreement connecting the three countries of North America. It came into effect on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA), which had been in force for 26 years (BBC News Mundo, 2020; Grande, 2020). This new agreement is structured into a preamble and 34 chapters with their respective appendices, along with four annexes. Among these chapters, one focuses on rules of origin, aiming to define the criteria a good must meet to be considered originating and thus benefit from the agreement's tariff preferences (Bilmes, 2019; Armijo de la Garza, 2018).

The USMCA not only seeks to strengthen economic integration in North America but also aims to promote social welfare and preserve free trade for originating goods previously established under NAFTA (Mexican Ministry of Foreign Affairs, 2020; Silva, 2018). This research paper aims to analyze the impact of the USMCA, exploring the characteristics of the new agreement, the conditions it establishes, the paradigmatic changes it introduces, and the implications it has for trade and economic relations in Latin America. Through this analysis, the paper intends to assess the treaty's consequences for the region and its role in the global dynamics of international trade.

Challenges and Opportunities for Consolidating the USMCA

The consolidation of the USMCA faces challenges and opportunities stemming from the new policies implemented by Mexico, the United States, and Canada. These policies, responding to national priorities and changes in the global context, have the potential to either strengthen or weaken economic integration in North America. Below are the possible implications:

1. Industrial Policies and Rules of Origin

New industrial policies in the three countries, such as boosting domestic production in strategic sectors (e.g., the transition to clean energy and semiconductor manufacturing), could strain the USMCA's provisions, particularly the chapter on rules of origin. The United States has adopted measures to strengthen its automotive industry with incentives favoring local components, potentially causing friction with Mexico and Canada over regional content requirements.

2. Energy Transition and Environmental Policies

The USMCA includes environmental provisions reflecting a commitment to sustainable development. However, differences in energy policies among the three countries could complicate cooperation. For example, Mexico has prioritized its state-run energy sector, while Canada and the United States push for a transition to renewable energy. These divergences could lead to disputes under the treaty's dispute resolution mechanisms.

3. Labor Policies

Labor reforms in Mexico and enforcement measures in the United States, driven by the USMCA, are transforming trade and investment dynamics in the region. While these policies aim to protect workers' rights, their uneven implementation could create tensions among the countries, particularly in highly competitive sectors like manufacturing and agriculture.

4. Resilient Supply Chain Policies

The pandemic and geopolitical tensions have led the three countries to implement policies ensuring resilient supply chains. While this could strengthen regional integration, there is also a risk of protectionist policies that contradict the USMCA's free trade principles.

5. Innovation and Digital Economy

The USMCA's digital economy chapter is key to the agreement's future. However, differences in data regulation, cybersecurity, and e-commerce among the three countries could slow its implementation and affect the region's competitiveness compared to other trade blocs.

Conclusion

The USMCA's consolidation will depend on the three countries' ability to align their domestic policies with the treaty's commitments. Effective coordination and strategic use of dialogue and dispute resolution mechanisms will be essential to overcome tensions and ensure that the agreement continues to serve as a platform for economic and social development in North America.

Probability of Stability

The likelihood of the USMCA remaining unchanged over the next six years is relatively low, given the political, economic, and social factors affecting the three countries. While the treaty includes mechanisms designed to ensure stability and continuity, its periodic review and the region's political dynamics suggest that adjustments or renegotiations are likely before 2030.

Factors Affecting Stability:

1. Sunset Clause: The USMCA includes a provision for reviews every six years, during which modifications can be proposed. Although the agreement has a 16-year lifespan, its stability will depend on the evaluations conducted during these reviews and the political will of the parties involved.
2. Political Context in the United States: Trade policies often shift with presidential or congressional transitions. With the 2024 presidential election in the U.S., a change in administration could pressure renegotiations on certain aspects, particularly labor rules, energy, or strategic sectors.
3. Trade Disputes in the Region: Current disputes, such as those related to Mexico's energy policy or rules of origin in the automotive industry, have led to the activation of dispute resolution mechanisms. Persistent or escalating tensions could necessitate treaty modifications.
4. Economic and Technological Evolution: Rapid technological advancements and changes in global supply chains may require adjustments in key areas like the digital economy, environmental sustainability, or trade rules for strategic goods (e.g., semiconductors).
5. Pressure from Interest Groups: Industrial sectors, labor unions, and environmental organizations in the three countries exert considerable influence on trade policies. Their demands could push governments to renegotiate aspects of the USMCA to address new priorities.

General Outlook

It is reasonable to estimate a 30-40% probability that the USMCA will remain without significant modifications over the next six years. However, minor adjustments or reinterpretations of its provisions through dispute resolution mechanisms are likely, reflecting the need to adapt the agreement to a constantly evolving environment.

The treaty's stability will hinge on the three countries' ability to manage political and economic differences within the established framework, avoiding structural renegotiations while maintaining competitiveness in international trade.