Understanding and impact of the new USMCA

The new Agreement between the United States, Mexico, and Canada (USMCA) entered into force on July 1st, 2020. To enrich its understanding and impact, we discussed with Mr Carlos G. Enriquez Montes, Minister Representative to the EU and WCO at the Mission of Mexico to the EU, who shared with us his personal insightsThe views expressed are those of the author and do not necessarily reflect the official policy or position of the employer, any other agency, organization or company.

1. What the USMCA brings new compared to NAFTA?

First, it is important to acknowledge that USMCA is not starting from square one; rather, it is updating, modernising, and improving its predecessor, the quarter century old North American Free Trade Agreement (NAFTA).

The world today is significantly different from the one in 1994 when the NAFTA entered into force. Back then, the NAFTA turned into a real game changer for many people, businesses and institutions in the three countries. It brought political, economic and social challenges that the countries had to address, but it also led to a better understanding of each other’s interests, sensitivities, limits, ideas and ways of doing business, thus opening wide business and development opportunities and accelerating regional integration. As a result, the three countries have consolidated some of the world’s most competitive industries in a variety of sectors through the creation of global value chains (GVCs) and have built a very competitive North America, which as a block, represents almost 20% of the global GDP ($26 trillion USD), the first FDI recipient in the world ($323 billion USD) and a strategic player in international trade whose total trade accounts for around $6 trillion USD (20% intra-region).

But the region also has pending tasks that need to be addressed, one of these being to democratize opportunities to participate in international trade and derive benefits for all. As an example, international trade, and NAFTA in particular, has been a major driver for economic growth in Mexico, to the point of allowing the country to become the United States’ top trading partner in 2019.  However, in spite of the fact that more than 99% of the businesses in Mexico are SMEs that produce almost 74% of the jobs, their participation in international trade is still marginal, accounting for just about 5% of the country’s total exports. In addition, there are other legitimate concerns and demands from the different sectors of the society that require more attention, including to make trade more inclusive, sustainable, and responsible.

In this context, USMCA compared to its predecessor, presents itself as a more comprehensive and modern, high-standard agreement that will support the three countries’ strategies to better meet the society’s expectations; to address the challenges of a dynamic and rapidly changing environment; and to fully exploit the opportunities of the 21st century global economy, largely characterised by the Fourth Industrial Revolution.

So, in concrete, USMCA firstly maintains free trade in the region and provides a clear set of rules that will govern this new phase of integration in North America, thus providing certainty and predictability for businesses and for investors, in an increasingly complex, uncertain and challenging world. In this regard, USMCA comprises 34 chapters, out of which 10 are new, and the other 24 were modernised from the NAFTA. The new chapters provide disciplines in the areas of SMEs, trade facilitation, sector-specific provisions, digital trade, competitiveness, environment, labour, anti-corruption, good regulatory practices, and macroeconomic policies and exchange rate matters.

Overall, USMCA seeks to support a more robust, sustainable economic growth in North America, through enhanced free trade and investment, and a progressive and inclusive agenda that will deliver clear and meaningful outcomes that positively impact all sectors of the society, including those marginalised and disadvantaged.

2. What are the main implications for business, especially SMEs?

USMCA provides for a dedicated chapter (25) on SMEs, where it recognises the fundamental role of SMEs in maintaining dynamism and enhancing competitiveness of the economy and highlights the role of the private sector to enhance cooperation in this matter. In this regard, the Parties agreed to promote cooperation to increase opportunities for SMEs, including through collaboration on activities to promote SMEs owned by under-represented groups, including women, indigenous peoples, youth and minorities, as well as start-ups, agricultural and rural SMEs; establish free, publicly and easily accessible websites to share information that helps SMEs to better understand and make use of the Agreement; creates a Committee on SME; and establishes an SME Dialogue with stakeholders from the private sector, civil society and academia to enhance the use and benefits provided by the Agreement. Furthermore, USMCA contains cross-cutting provisions aiming at addressing critical issues that negatively affect productivity and that have an even larger impact on SMEs, hindering their ability to participate in international trade, such as corruption and burdensome regulations and procedures. Concrete examples include: expedited customs procedures for lower-value shipments under $2,500 USD; prohibition of customs duties, fees and charges on products transmitted electronically; support for the development of SME trade in services and SME-enabling business models, such as direct selling services; and consideration of the possible impact of new regulations on SMEs to minimise its adverse effects.

3. What does it mean in terms of the WTO?

In a context where the multilateral trading system of the WTO has been put under permanent pressure for reform, but is also being subject to constant threats and attacks that impede its proper functioning, and facing increasing temptations for protectionism, in my view, the entry into force of USMCA is a positive sign from one of the most important economic blocs, to highlight the relevance of the rules-based multilateral trading system and the importance of its modernisation. In this regard, USMCA’s disciplines are consistent with the WTO rules and principles and in some cases result even more ambitious, as is the case of disciplines related to trade facilitation. Moreover, USMCA could also pave the way to advance negotiations in crucial areas where the WTO is urged to deliver if it seeks to maintain its relevance and legitimacy, such as fisheries subsidies. Chapter 24 “Environment” includes, amongst others, provisions aimed at the conservation and the sustainable management of fisheries; recovery of overfished stocks, including the control, reduction, and eventual elimination of all subsidies that contribute to overfishing and overcapacity; cooperation in relevant international fora; and prohibition of shark finning and commercial whaling.

4. What are the implications for the EU-relations with the bloc?

The three North American countries are strategic partners for the European Union. Therefore major legal, economic and political decisions from the North American bloc, as the USMCA, certainly have different implications for the EU. For example, it can have direct implications for EU companies trading with or present in North America, firstly by providing certainty to their businesses and investments, but also with respect to their supply chain management decisions as they could face either stricter rules of origin, as in the case of the automotive and steel sectors, or more flexible ones like in the large majority of productive sectors. On a higher policy level, USMCA countries and the EU, being like-minded partners, could open new potential avenues for cooperation in advancing issues of common interest, including in the framework of the WTO. Also from a strategic perspective, and after the EU concluding its trade negotiations with Canada under CETA and with Mexico in the recently modernised Agreement, the EU and the US will most probably rethink the transatlantic relationship they want for the future.

5. Is there any impact of the implementation due to COVID-19?

The unprecedented global crisis triggered by the outbreak of COVID-19 pandemic brought additional challenges to those normally faced in the implementation of new trade agreements. Strictly from a procedural and technical perspective, the confinement measures and travel restrictions, required the legal and technical teams from the governments of the three countries to adapt to the new circumstances to fulfil the pending required steps, including the exchange of notifications of completion of the internal procedures required for the entry into force, negotiation of the Uniform Regulations, publication of legal instruments, or even in the case of Mexico, approval of several legal reforms by the Mexican Congress to comply with the provisions of USMCA. However, in my view, the greatest impact for the full implementation of USMCA, particularly by the traders, comes after the entry into force and whilst temporary restrictions such as the closure of borders for non-essential travels agreed by the three countries or the specific conditions established by each country for the economic re-opening are in place.

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