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Conference Proceedings: Forging a New Path in North American Trade and Immigration
Plenary Session

A Conversation: The Path to the USMCA Trade Agreement

Ildefonso Guajardo Villarreal, Former Secretary of the Economy of Mexico, Mexico’s USMCA representative

Back when NAFTA (the North American Free Trade Agreement) was proposed, the political scene was highly challenged. You have to remember that when NAFTA (which took effect in January 1994) was first discussed, even President Clinton was opposed to it.

Finding Political Support NAFTA Lacked

The main element that we have to acknowledge in order to defend USMCA (the United States–Mexico–Canada Agreement) vis-à-vis NAFTA is the fact that during 20 years, we let it (NAFTA) work by itself without really giving the political support it required. Even U.S. governments that were very much in favor of NAFTA didn’t bother to defend NAFTA in the political arena.

I met several times, as Mexico’s secretary of the economy, with President Obama and his team. During those meetings, they made it very clear that in public statements from both administrations, we should not use the word “NAFTA.” They asked instead to call it the North American Competitiveness Agreement because NAFTA was a bad word in opinion polls.

So, “Is USMCA better than the original NAFTA?” How can you answer that if NAFTA was already damaged? That is a false debate.

Rules of Origin, the $16 Wage Requirement

USMCA incorporates labor rights formally and not as a side agreement. That is, under USMCA, any labor rights violation will be subject to trade sanctions. Mexico passed a labor reform revamping its federal labor law in order to be closer to the labor standards of its North American partners. Among other things, union power was transferred to the actual workers, ensuring freedom of association and bargaining power. Currently, Mexico has a 40-hour workweek, with hourly wages ranging between $4 (U.S.) and $5.

Wages are considerably lower in Mexico compared with Canada and the U.S. partly because there is no labor mobility in North America like there is in the European Union. Wage differences are addressed indirectly and only in the automotive sector under the USMCA via new rules of origin. Under the new agreement, the North American component in automotive production goes up from 62.5 percent to 75 percent, and it will require that workers making at least $16 an hour produce 40 percent of such content.

The wage requirement for the auto sector under USMCA is another way to say that 40 percent of the automobile should be produced in Canada or U.S., while 60 percent could be produced in Mexico. That is an indirect way to try to address the demand by the current U.S. administration (of Donald Trump) originally requiring 50 percent of the content of an automobile to be produced only in the U.S. You know, there is no trade agreement in the world that requires such high domestic content.

The overall wage difference between countries will eventually be solved with economic growth and obviously labor demand. But that is something that happens through time and through the process of economic development.

Bringing NAFTA Up to Date

The principal updates to NAFTA under USMCA were the strengthening of intellectual property rights and the inclusion of new chapters dealing with new technologies that did not exist 25 years ago, such as cellphones and digital trade.

There is also an update of the dispute-resolutions mechanism. The process was a hard one since at the beginning of the negotiations, the position of the U.S. administration was nothing beyond U.S. laws. However, if you say nothing above U.S. laws, then you are saying that you are going to impose your own views on any trade or investment dispute.

The challenge was to preserve the essence of NAFTA’s Chapter 11, covering disputes between investors and the state; Chapter 19, which is trade disputes; and Chapter 20, which is government-to-government disputes. We did it.

However, we still have to revisit the selection process for the arbitration panel. The example to follow in that regard should be the panel selection process currently in the TPP (Trans-Pacific Partnership). I think that we can solve that problem without the need to open the negotiation process to respond to the criticism that the new USMCA lacks a modern selection process for the arbitration panels.

Negotiating Rules of Origin

Another point of discussion had to do with rules of origin. At the beginning of the renegotiation, the current U.S. administration wanted 100 percent North American content in order to qualify for USMCA benefits. We were able to narrow the content to 75 percent already discussed for the auto industry, for example, and limit content requirements to only five industries: autos, steel, fiberglass, petrochemicals and fiber optics.

Of those five industries, the two that mattered the most to the current administration were autos and steel, which are essential to their international trade strategy.

Another issue had to do basically with inclusion of environmental and labor issues as part of the agreement and not only as side chapters or notes.

Labor Provisions Cemented Bipartisan U.S. Support

The way labor is included in the new agreement is definitely a dream come true for pro-union Democrats. Even presidents from their own party were not able to make this happen in the past. The labor provision is thanks to one of the players within the Trump team who knows the U.S. Congress and knows Democrats. That’s why today, (U.S. Trade Representative) Robert Lighthizer is saying openly that he believes that the USMCA is going to get through Congress because the elements are there for bipartisan support. (Final approval of the USMCA occurred in January 2020.)

Reshaping Mexico’s Auto Manufacturing

For Mexico, it was a tremendous challenge to address the redesign of the auto sector. When the U.S. originally made the request, they wanted half of the North American content be made in the U.S. That was not viable for Canada and Mexico.

So, we basically looked at what were the ideas behind President Trump’s positioning vis-à-vis Japan, vis-à-vis Korea, vis-à-vis Europe, and how manufacturing jobs and the auto industry were the main concerns for him.

What we basically said is: “OK, today, Mexico’s export of sedans to the U.S. is 1.8 million sedans, of which 70 percent are made by the three big American companies and two other companies that are very close to meeting the new rules of origin.” For those companies, the production requirement was not very tough. On the other hand, for the other 30 percent—the Audis, the BMWs—to adapt to the new rules of origin would be a very big challenge. Remember, today, when you make an Audi, you are basically outsourcing steel globally.

So, we told the other companies that the new rules would be adopted gradually—they would get four years to meet the new rules. And, if after four years they are still not able to meet the 75 percent content requirement, they would be able to pay the most-favored nation tariff (MFN), which is 2.5 percent, to enter into the North American market. What they have to face is, “if I cannot meet the new rules in four years, I have to pay MFN.”

Ongoing Threat of Article 232

There is one potential problem with this scenario. There is still the risk that the U.S. will insist on using Article 232 (under the Trade Expansion Act of 1962), which cites national security concerns, to impose a special tariff on the import of cars, as they have threatened to do with Germany and other countries. That means companies would have to pay a special tariff of 25 percent rather than the MFN tariff of 2.5 percent. This possibility will generate uncertainty, in addition to the implementation of the USMCA rules of origin.

Ildefonso Guajardo Villarreal presented at the conference "Forging a New Path in North American Trade and Immigration" held Sept. 26–27, 2019, at the Dallas Fed.