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Will the USMCA Change Mexico for the Better?

The new United States-Mexico-Canada Agreement may well succeed in marginally improving America’s position regarding jobs, investment, labor, the environment, and dispute settlement. But if the pact is intended to boost Mexico’s economic growth and welfare, and bolster the rule of law, it will not achieve these goals any time soon.

MEXICO CITY – By approving the United States-Mexico-Canada Agreement (USMCA), the US House of Representatives has removed a major potential obstacle to the trade pact. The Mexican Senate has already approved the deal, and the US Senate and the Canadian Parliament are expected to do so early next year. Once it enters into force, the USMCA – which will replace the North American Free Trade Agreement (NAFTA) – will have far-reaching consequences for Mexico in particular.

The House vote came more than a year after the three countries’ leaders signed the USMCA in Buenos Aires in November 2018 – a longer wait than many had anticipated, but shorter than others had expected after the Republicans lost their House majority in last year’s midterm elections. Officials and analysts in the three countries had been hopeful that Congress would approve the agreement, given the important concessions on jobs, labor, the environment, dispute settlement, dairy products, and intellectual property that US President Donald Trump had wrested from the Mexican and Canadian governments. They were right to be optimistic.

Yet, as recently as the US Thanksgiving holiday in late November, the Trump administration had not even sent the USMCA bill to House Speaker Nancy Pelosi – raising the prospect of the deal being postponed until after the 2020 US presidential election.

There were both political and substantive reasons for the apparent impasse. The political issue was obvious: if Pelosi supported the USMCA (thereby showing that the Democrats could “do the people’s business”), she would give Trump a win at the same time that the House was impeaching him. But if she opposed the pact on the grounds that it failed to meet the demands of US labor organizations, she would expose the Democrats to Trump’s charge that they are interested only in overturning the result of the 2016 election. In the end, Pelosi came down squarely in favor of reaching a deal, calculating that the benefits of a constructive approach outweighed the drawbacks of giving Trump something to crow about.

The substantive difficulties, meanwhile, related mainly to the enforcement of the USMCA’s labor, environmental, intellectual-property, and dispute-settlement provisions. In particular, American labor unions (notably the AFL-CIO) and many congressional Democrats demanded that the agreement be revised to allow US officials to conduct unannounced in situ inspections of plants and companies in Mexico. Such checks, they argued, would determine whether Mexico was actually fulfilling the pact’s provisions regarding collective bargaining and contracts, working conditions, union elections and leadership, and other issues. After Mexican negotiators initially rejected this demand, further talks eventually resulted on December 10 in an agreement acceptable to everyone: Trump, House Democrats, the AFL-CIO, and the Mexican and Canadian governments.

Like NAFTA, the USMCA is far more important for Mexico’s economy than it is for America’s. Moreover, the labor and environmental provisions in the new agreement are essentially directed at Mexico. But although these additional measures are welcome, they come at a difficult time for the country’s economy.

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When NAFTA was finally approved in the US back in 1993, it included only side agreements on labor and the environment, with practically no enforcement mechanisms, let alone sanctions for non-compliance. By 2017, when Trump forced Mexico into renegotiating NAFTA, US Democrats, labor unions, and environmental activists were complaining that Mexico had taken the US for a ride over the previous quarter-century by failing to improve its labor practices and environmental regulation. These critics may have exaggerated their case – Mexico’s new president, Andrés Manuel López Obrador, had already persuaded the country’s congress to approve wide-ranging labor reforms – but they had a point, and in the USMCA negotiations, they and others focused on enforcement of such provisions.

As a result, the revised USMCA contains a series of much-needed enforcement mechanisms. For starters, the pact shifts the burden of proof regarding alleged violations of labor or environmental provisions from the accuser (in most cases the US) to the accused (usually Mexico). It also establishes a rapid-response system of independent panels to receive complaints and determine whether labor rights were violated, and to impose sanctions if they were. Finally, eight American attachés (five of them focusing on labor issues, and three on environmental matters) will be sent to Mexico under the pact to “monitor and enforce” the country’s compliance with its obligations in these areas.

The labor attachés will report to an Interagency Labor Committee every three months, and in principle will be entitled to hear complaints – including via a 24-hour telephone hotline – and investigate alleged violations of Mexican labor laws. The Mexican authorities have questioned whether these provisions were in fact agreed upon in Mexico City on December 10, while the country’s business community was blindsided by the measures and is uncomfortable with them. But they probably will remain in place, because it was these Mexican concessions that persuaded US unions and Democrats to back Trump’s deal.

At the same time, it will be difficult to eliminate overnight some of Mexico’s most significant, though embarrassing, competitive advantages. Low wages, deplorable working conditions, tame labor unions, and utter disregard for the environment have all been crucial ingredients of the country’s export boom over the last quarter-century.

It is likely, and certainly desirable, that the USMCA, by effectively introducing a labor and environmental protectorate, will force Mexico to abandon these shameful practices. But doing so at a time when Mexico’s economy is stagnant or falling into recession may make matters worse. Similarly, the new labor and environmental provisions will surely make the private sector – both foreign and domestic – even more reluctant to invest in a country governed by an erratic and ideological president.

The USMCA may well succeed in marginally improving America’s position regarding jobs, investment, labor, the environment, and dispute settlement. But if the pact is intended to boost Mexico’s economic growth and welfare, and bolster the rule of law, it will not achieve these goals any time soon.

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