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As USMCA Moves Toward Ratification, Uncertainty Looms

Over the past two years ago, the United States has steadily turned inward, with President Donald Trump promoting a more unilateral and protectionist view of the world. U.S. foreign policy has centered around an “America First” doctrine. Border security and immigration have focused on building a border wall and implementing more restrictive migration measures. While on trade, the administration has erected tariffs and engaged in a high-profile trade spat with China, leading global forecasts to be less optimistic on the country's economic future. Amid this backdrop the Trump administration and its counterparts from across Mexico and Canada set out over a year ago to renegotiate the 25-year old NAFTA agreement. The negotiations—while at times tumultuous—were ultimately a success. On November 31st, President Trump joined then-Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau to sign the new U.S.-Mexico-Canada Trade Agreement (USMCA). The celebratory event marked the biggest achievement to date in the Trump administration’s trade agenda. In its new form, the USCMA promises to reshape the economic frameworks for the $1 trillion in annual trade criss-crossing the three neighbors every year. The USMCA includes many of the same elements as NAFTA but differs in important areas. Many of the most significant changes are for the North American automotive industry. To qualify for tariff exemptions, cars must now prove that 75 percent of their parts were manufactured in Canada, the United States, or Mexico—up from 62.5 percent in NAFTA. While in a new shift, 40 percent of these vehicles’ parts need to be created by workers who make at least US$16 per hour by 2023. Additionally, the USMCA includes greater intellectual property rights, increased U.S. access to Canada’s dairy market, and a 16 year “sunset clause” to end the agreement if not revisited. Yet while the trilateral signing event officially ended the negotiating phase, it ushered in the more challenging stage of passing the agreement through each country’s legislature. In the United States, the government shutdown pushed the USMCA out of the national agenda. It has also slowed down the publication of the USMCA’s congressional assessment report, which is the next step in the ratification process. Since the U.S. Congress won't move forward without the report's publication, the delays are only pushing back the entire ratification timetable. Once the process begins, the USMCA has to pass through both congressional bodies with a majority vote. While the agreement will face strong debate in both legislative spaces, it will undoubtedly hit more challenges in the Democrat-controlled House of Representatives. Since the agreement’s signing, Democrat party leadership has signaled its desire for greater enforcement mechanisms for the environmental and labor standards. Meanwhile, a group of Republicans has also voiced concerns regarding the agreement’s workplace protections for LGBTQ individuals. The Trump administration too is poised to add additional complications to the ratification process. On December 1, 2018, Trump announced that he was planning on formally beginning the six-month process of withdrawing from NAFTA. This measure would apply pressure to Congress by removing the status-quo option of keeping NAFTA and would instead force a vote between the prospect of no regional trade structure and the USMCA. By any measure, this would be a risky strategy. Since if Congress rejected the USMCA or if it could not come up with sufficient votes before the six-month expiration period, tariffs would hit U.S. goods right in the lead up to the 2020 presidential election. Similarly, in Mexico City and Ottawa, lawmakers are also navigating their own legislative processes and challenges. In Mexico, there is no timeframe on when USMCA may come up for a vote and lawmakers will likely wait for a U.S. confirmation. Yet before any voting can take place, the country's Congress must first pass reforms to enshrine the new agreement’s provisions into law, including greater labor protections and the right of Mexican workers to form unions. In late December, the president’s party introduced legislation to achieve these goals, but it has not yet been debated. Instead, the USMCA provision has been pushed aside as the government prioritizes the battle against fuel theft—with recent government decisions sparking fears of gasoline shortages across the country and garnering more urgency after a recent gasoline explosion killed more than 90 people.

When the USMCA debates kick off in Mexico's Congress, lawmakers are likely to raise a variety of concerns. Already, parts of the new agreement have been flagged in the Senate, particularly regarding industrial property, rules of origin, and the increased cost of medicine. However, these debates will almost certainly be quelled, as current President Andrés Manuel López Obrador controls majorities in both Mexico's Senate and Lower House. So far, López Obrador has backed the new agreement and with his support, USCMA's passage is unlikely to face any significant obstacles. Canada has also not yet moved forward on ratifying the USMCA. Similar to Mexico, the country's Parliament is unlikely to vote on the agreement until after it passes through the U.S. Congress. And given the upcoming fights in Washington, this likely means that it may not come up for parliamentary approval until late Spring or Fall. Complicating matters further, this vote would then come around the same time as Canada’s October 21st federal elections. While the USMCA has slipped out of the political spotlight for the moment, it will soon return for what are likely to be a dramatic next few months. The shutdown provided a potential blueprint for what to expect: a U.S. administration out to score a victory and a Democrat-led House that is unlikely to cede any easy wins. The most probable outcome increasingly seems to be the agreement's passage in the second half of 2019, with the risk that it gets pushed into early 2020. However, one thing is certain: until USMCA passes through all three legislative bodies, North America's countries can expect to live with continued uncertainty weighing on an already cautious economic outlook.


Antonio Garza formerly served as U.S. Ambassador to Mexico (2002-2009) and is now Counsel to White & Case in Mexico City. Mr. Garza is currently a Director to both Kansas City Southern (NYSE:KSU), where he is member of the Executive Committee and Chairman of the company’s subsidiary, Kansas City Southern de Mexico, and MoneyGram (NYSE:MGI) where he serves as Chairman of the company’s Committee on Compliance and Ethics. You can reach the Ambassador through and follow him on Twitter @aogarza.

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