USMCA in the time of COVID
As we enter the summer, the COVID-19 pandemic and its economic consequences continue to shape our lives. Here at White & Case in Mexico City, we remain fully committed to serving our clients during these difficult times and helping manage any business impact and legal risks that may arise.
Tomorrow, July 1st, the U.S.-Mexico-Canada Agreement (USMCA) will enter into force. The agreement will replace the North American Free Trade Agreement (NAFTA) as North America’s guiding trade framework, governing the movement of hundreds of billions of dollars in goods and services. You can read more about what it promises for regional businesses here.
For the past three years, the USMCA's development and implementation was far from a foregone conclusion. Rather, the agreement was only made possible by dedicated teams of people across each country, who persisted through tough negotiations, bureaucratic processes, and eventual votes in each country's legislative body.
The USMCA is a major regional achievement, but it won’t necessarily lead to a seamless economic or regional relationship. Just last week, the Trump administration once again threatened Canada with aluminum tariffs amid an increase in imports. If the U.S. administration moves forward with the threat, Canada will also impose retaliatory tariffs on aluminum and potentially on a range of other products.
These types of threats and economic sanctions will continue to play out, even with the USMCA in place. Since entering office, the Trump administration has wielded tariffs in its foreign policy to extract economic and other concessions from countries globally. And the USMCA’s implementation, while important for the region, is unlikely to fundamentally change this dynamic.
The USMCA’s implementation also comes amid the COVID-19 pandemic, which is reshaping how companies think about their supply chains and resilience. For more than two decades, North American businesses steadily expanded their supply chains across the continent and the world.
COVID-19 laid bare the risks associated with these geographically dispersed supply chains, as each country’s response to the pandemic had the potential to affect companies operations globally. In North America, this dynamic played out in dramatic fashion, with U.S. companies pushing Mexican factories to reopen during the pandemic in order to spur production in American factories.
These disruptions will only continue as COVID-19 spreads across the region. Mexico and the United States have not managed to control the outbreaks, with new case numbers quickly ticking upwards across many U.S. and Mexican states. Yet, in both countries, there has also been a push to open the economy and reduce the economic pain.
This week, Mexico City will begin to reopen shops, markets, hotels, and restaurants at a limited capacity. This will allow for some economic life to breathe back in, but it will also further spread the virus throughout the metropolitan area, with Mexico City and Mexico State already reporting more than 70,000 cases combined and 9,000 deaths.
The USMCA also enters into force as North America’s economic outlook has reached one of its most challenging moments. Mexico’s GDP is poised to contract by 10 percent this year and there will likely be a slow recovery in 2021.
Mexican President López Obrador's decision to respond to the public health and economic crises with government austerity will contribute to the slow recovery. It also be compounded by the president’s strategy of making Pemex the engine of the country’s economic growth. This strategy has been challenging from the start, with bottomed out oil prices, Pemex's mounting debt, and a "junk" rating.
Across the United States, these past few weeks have also been an important moment for racial reckoning, amid disturbing incidents of police brutality and the Black Lives Matter movement.
While my newsletters tend to focus more on Mexico and trade, racial injustice has shaped our region's history and ongoing regional interactions. For centuries, race has been the subtext to America’s day to day reality—ever present, shaping all aspects of our society, and forcing Black Americans to the margins.
The recent protests will be historic in bringing national attention to our country's ongoing structural issues. But it will be up to all of us to reflect on our own practices and cement this moment into lasting change, to ensure that, today and every day, Black lives matter.
I hope you are all staying safe and healthy.