Commentary: The US-Mexico-Canada (USMCA), which replaced the North American Free Trade Agreement (NAFTA), is approximately one year and two months old, having entered force on July 1, 2020. A major change in the agreement raises North American content in automobile manufacturing from 62.5 percent to 75 percent. Also in this industry, 45 percent of the content in pickup trucks, and 40 percent of the content of light trucks must be made with labor earning more than $16 per hour. Stricter provisions for intellectual property, stronger protection for drug patents, and easing the flow of digital trade are other areas highlighted in the USMCA. Under the agreement, a dialogue for environmental and labor standards also was established.
In the past year, there has been a lot of discussion about whether the rocky relations and sometimes heated vitriol behind the negotiations of the USMCA really resulted in a substantially different agreement rather than a simple tune-up. During this period of time, I have been monitoring the roll-out of the new agreement, and have been seeking the opinions of general managers, operation managers, and supply chain managers who are at the front lines of North American trade. I have interviewed and sought feedback from companies involved in the automotive, electronics, and consumer goods markets.
One automotive company executive told me that the hardest part of adhering to the new USMCA policies was being in the middle of a supply chain that was subject to the mandated $16 per hour wage for trucks and light trucks production. He says that it has been a headache trying to make other associated companies in the supply chain understand that his company does not have to provide specific employees’ pay rates, rather he simply has to declare that he does or does not meet the criteria. He eventually had to develop his own forms so that affiliates would quickly know the answers pertaining to his compliance.
Some companies in the automotive industry were frank that they were not going to be able to meet the $16 per hour minimum mandated under the USMCA anytime in the near future. They are simply going to pay whatever tariff penalty they will incur. This tariff will then be passed on to customers in their supply chain, and eventually to the end consumer. This shows how difficult supply chains and their labor are to manipulate in a relatively quick time. It also demonstrates how intertwined the economies and companies of North America are, as products such as vehicles may have components made in Canada and Mexico, and then assembled with Mexican labor south of the border. It would be disruptive, if not impossible, in local economies to immediately raise wages to $16 hour to meet the minimum wage mandate.
There was consensus that when the USMCA was implemented, a scramble occurred to get everybody on the same page in terms of compliance. There are many areas in the agreement for which actual policy steps needed to be developed. Other areas were vague and required a back-and-forth dialogue with Customs officials to figure things out. As one company official told me, “Initially, the USMCA was a little staunch on requirements. Everything has to fit into a box when it comes to the government. However, not even the government anticipated certain areas in which vagaries would exist.”
Most companies I spoke to conceded that after initial periods of confusion and uncertainty in terms of procedures, things seem to have settled down. After a learning process at the beginning, issues were ironed out and not a single company that I spoke to stated that they are continuing to have problems complying with the USMCA.
The recent feedback I obtained from companies is very similar to what I remember happened in 1994, when NAFTA was implemented. The actual NAFTA text was more than 1,700 pages long, including 619 pages of footnotes and explanations, and 348 pages of annexes. Despite its girth, it was impossible for NAFTA to codify protocol and procedures for every situation that would arise. In many instances, these had to be created after the agreement was in place. Companies simply want to comply with the terms of the game and will quickly adjust in order to avoid problems. As with NAFTA, this is what appears to have occurred with the USMCA.