On July 1st, the US-Mexico-Canada Trade (USMCA)agreement finally went into effect across North America. This was after three years of trilateral negotiations, trade disputes and amendments by the US Congress.
The trade agreement creates new opportunities for the post-pandemic economic recovery, but companies are struggling to determine how the transition from NAFTA to the USMCA will affect their business.
What Is New in the USMCA
While USMCA has improved both standards and enforcement of labor investigations, intellectual property rights, digital trade, reduction of barriers for cross-border shipments and environmental provisions, there are changes in the Rules of Origin (ROO) requirements for duty preference that will affect companies particularly in high-tech manufacturing and auto manufacturing. But the most significant changes have been to the automotive ROO which are more stringent and complex under USMCA than NAFTA and could have a critical effect on where a company has operations.
The Insecurity of a Sunset Clause
Another very critical change is the addition of a Sunset Clause of 16 years for the agreement. Unlike NAFTA which could have remained in effect indefinitely, USMCA will terminate automatically in June of 2036 unless all three countries agree to extend the agreement by another 16 years. This decision would be made during a joint review conducted in 2026 and then if renewed every six years after that. This Sunset Clause could create a great deal of uncertainty for a company that is considering restructuring their supply chain to take advantage of USMCA
The Impact of North American Trade
There is no debating the impact that North American trade and investment has had on the United States. The Business Roundtable which is an association of the CEO’s of America’s leading companies, has published an interactive map which shows the benefits of trade with both Canada and Mexico on each individual US state: https://www.businessroundtable.org/policy-perspectives/trade-international/trade-with-canada-and-mexico. The Rountable estimates that trade with Canada and Mexico supports over 12 million American jobs.
Critical Decisions to Made
If the USMCA agreement were going into effect in what we used to consider “normal times”, it would have been much easier for companies to make a decision about taking advantage of USMCA. But, with the effect of the pandemic weighing heavily on corporate decisions and companies looking to diversify their supply chains amid the on-going trade concerns with China, companies will have to weigh their choices of the cost of reshoring or nearshoring operations versus just absorbing the tariffs into their cost of doing business.