How the USMCA Has Shaped the Manufacturing Industry

Free trade agreements (FTAs) connect manufacturers on a global scale by reducing trade barriers among countries to strengthen production. Mexico has maintained a strong manufacturing presence, upholding 13 FTAs with 50 countries, including the European Free Trade Area, the Comprehensive and Progress Agreement for Trans-Pacific Partnership, and the United States-Mexico-Canada Agreement (USMCA), formerly known as the North American Free Trade Agreement (NAFTA).

Mexico has more FTAs than any other country, which has facilitated economic gains and innovation across various manufacturing sectors around the world. The USMSCA encourages foreign direct investment in Mexico’s manufacturing industry, specifically, and since its enactment, Mexico has become the top trading partner of the U.S. with nearly $798 billion in goods and services exchanged between the two countries.

Each FTA lays out specific terms regarding agreed-upon benefits and requirements. The USMCA focuses on furthering the manufacturing activity within North America’s trade bloc. And, as more U.S. companies consider nearshoring to Mexico, it’s valuable to reassess the benefits the USMCA provides.

Strengths of the USMCA

For years, the United States, Mexico, and Canada operated under NAFTA before the USMCA officially replaced it in 2020. This enactment was intended to strengthen reciprocal trade practices across North America by including provisions relevant to modern production needs, such as digital trade and intellectual property (IP).

For instance, the trade agreement solidifies commitments to enforce penalties for IP violations to protect manufacturers from patent and copyright infringements. Another key provision of the USMCA is the Rule of Origin.

This requires that 75% of automotive content must be made in North America to qualify for tariff benefits. Per the Office of the United States Trade Representative, this rule:

• Helps to preserve and re-shore vehicle parts and production in the United States
• Transforms supply chains to use more United States content
• Close gaps in the former NAFTA agreement that incentivized low wages in automobile and parts production

Furthermore, the USMCA contains a provision regarding labor value and protection. Trade rules require 40-45% of auto content be made by workers earning at least $16 per hour. These rules are intended to encourage more investment by auto companies in research and development in the region.

Also, The Rapid Response Labor Mechanism, an agreement between Mexico and the U.S. only,  allows “enforcement actions against individual factories if they fail to comply with domestic freedom of association and collective bargaining laws.”

Maintaining trade compliance with shelter services

Though much of what was originally included in NAFTA is still part of the USMCA, there are updates that have created more balanced trade and support the growth of North American economies.

Trade compliance is challenging to navigate when manufacturing in any foreign country. The smallest misstep can result in fines, project delays, or other penalties. To maintain compliance amidst changing FTA regulations, working with a Mexico shelter company helps to minimize risk and liability.

The shelter model protects U.S. and other foreign manufacturers from being legally exposed to Mexico’s authorities. It also maintains the proper permits and certifications to comply with local laws and regulations.

If you’re considering manufacturing in Mexico as a strategy in the coming year, contact IVEMSA to discuss how our shelter services can make the transition seamless.

Sources:

https://www.trade.gov/country-commercial-guides/mexico-trade-agreements

https://www.dol.gov/agencies/ilab/our-work/trade/labor-rights-usmca

https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/31-Dispute-Settlement.pdf

https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement