12 Dec 19

USMCA signed, a double-edged sword for Mexico

Following an original agreement made more than a year ago, the United States, Mexico, and Canada have signed an updated USMCA trade accord which includes a tighter definition of how steel and aluminum will be used in automobile production.

Although most of the agreement mirrors what was originally agreed to in November 2018, one of the main changes to USMCA (short for United States, Mexico, Canada) was clarifying the rule that 70% of the metals used in North American vehicle production would need to come from North America.

The agreement, which previously did not specify production methods, now stipulates that metal needs to be “melted and poured” in North America. The previous wording, according to a Reuters report, opened the door to the use of semi-finished metals from China and elsewhere.

Mexico and Canada have agreed to a seven-year phase-in of the new standard for steel. The demand was dropped for aluminum but with the caveat that it would be reconsidered in 10 years, the report said.

USMCA signing ceremony (source: Reuters/Henry Romero)

Another change to the agreement is the application of stricter rules on labor rights aimed at reducing Mexico’s low-wage advantage. The deal includes procedures to verify the compliance of union rights for factory workers in Mexico by independent labor experts. 

Also under the agreement, to qualify for tariff-free trade, the percentage of vehicle components which must be manufactured in North America has been increased to 75% from 62.5% previously defined by the North America Free Trade Agreement (NAFTA).

Moreover, 40-45% must be manufactured by workers earning at least US$16 per hour, well above the average salary for Mexican autoworkers.

As for Mexico, the updated USMCA is a double-edged sword. While the new stipulation on automobile metals will help stimulate production in the region and the minimum wage rule will improve autoworker salaries, the latter reduces Mexico’s production competitiveness and could also increase the price of vehicles.

Regardless, investments are usually tied to stability and a signed USMCA agreement does reduce uncertainties and increase stability in the region.  

With ratification unlikely to occur before the holidays, the new rules are expected to be put in place as from 2020 and with a gradual transition period until 2023. Trade between the three countries totals more than US$1 trillion annually. 

The signing ceremony, which took place on Tuesday (10 December) at Mexico’s Presidential Palace in Mexico City, was attended by Mexico President Andres Manuel Lopez Obrador, Canadian Deputy Prime Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer, and U.S. White House adviser Jared Kushner.

Authored by: Daniel Bland