While the United States emerges from the pandemic, the economy is still feeling its effects. Luckily, the recently passed United States-Mexico-Canada Agreement (USMCA) is likely to play a big role in facilitating the recovery of not just the United States’ economy, but that of North America as a whole.

The USMCA

The USMCA, the United States-Mexico-Canada Agreement, took effect July 1, 2020, as an update to the North American Free Trade Agreement (NAFTA) and with the goal of fixing imbalances found in NAFTA and leveling the playing field for workers and businesses in all three countries. Some key highlights include:

• Promoting North American auto manufacturing by requiring 70% of auto parts be manufactured in one of the three countries
• Expanding Mexican labor laws
• Implementing more extensive intellectual property rights laws
• Increased de minimis level to make cross-border trading easier for small and medium-sized enterprises

The USMCA after COVID-19

The USMCA is essentially a modern version of NAFTA, so under normal circumstances, companies may not feel the effects of the changes. However, as a result of the economic disruption caused by the pandemic, the USMCA will likely have a notable impact as businesses return to normal operations and search for new ways to become more resilient.

Business opening

With businesses opening up, cross-border commerce can quickly pick up again and bring North America back to a more profitable state as a result of the provisions set out in the USMCA. With the elimination or decrease in taxes and tariffs, companies are more likely to see an increase in profit while prices for consumers are driven down.

These changes also promote investment and innovation by incentivizing businesses to trade with Canada and Mexico if they weren’t already doing so, helping to strengthen North American supply chains.

Much of the new USMCA provisions also directly benefit small manufacturing businesses, which may be struggling the most to recover upon reopening. The increased de minimis value, the threshold above which duties and tariffs are applied, means businesses that may not have had the resources to pay for customs under NAFTA can now more easily access Canadian and Mexican markets.

 

Supply chain shortages

As countries slowly return to normalcy following the pandemic, many manufacturers have been panic-buying more material and supplies than they need in order to prepare for what they see as high demand. This has caused supply chains to seize and has created concern that the world will soon see extremely high inflation rates.

The USMCA has the potential to ease this pressure in North America, particularly in relation to the automotive manufacturing industry. The agreement incentivizes auto manufacturing in Mexico, and as the pandemic eases and Mexico can export more and more cars, the USMCA facilitates their transportation to the United States.

This need for supplies from Mexico is not limited to the automotive industry. Prior to the pandemic, Mexico had already become a leader in various manufacturing sectors, making the flow of products into the United States and Canada all the more important.

 

Manufacturing and sourcing moving away from China

COVID-19 has highlighted the importance of a resilient supply chain, and as doing business in China becomes more expensive and more complicated due to the current political environment between the U.S. and China, many are turning to Mexico as a solution. In addition to Mexico’s cheaper labor and logistical advantages, the USMCA assists manufacturers moving to Mexico post-COVID.

The trade war between the United States and China elevated trade tariffs, which have continued to rise since the trade war’s start in 2018 and driven up costs for manufacturers and prices for consumers. By bringing their business back to North America, manufacturers can cut costs, diversify their supply chain, and they no longer have to operate under the uncertain political climate between the United States and China. As more manufacturers move from China to Mexico, the volume of goods coming from Mexico will naturally increase as well, making the USMCA even more beneficial to keeping supply chains strong and operational during a time of economic downturn.