A storm is coming for Mexico under USMCA

In Washington, Ottawa and Mexico City, there is a celebratory mood as the governments of the three North American partners prepare for the coming into force of the United States-Mexico-Canada Agreement (USMCA) on July 1. By the same token, businesses are heralding not only the continuation of free trade in North America but the modernization of an existing relationship that goes back to the implementation of the North American Free Trade Agreement (NAFTA) in 1994. 

This enthusiasm is not unwarranted. We know that the economic relationship between the USMCA partners is worth an astonishing $1.2 trillion and supports 14 million jobs. The modernization of NAFTA in the form of the USMCA protects those jobs and seeks to deepen the competitiveness and prosperity of all three countries. 

But this may be just the calm before the storm. Let us not forget that the Trump administration has been pursuing an aggressive international trade strategy based on principles of economic nationalism since President Trump took office in January 2017. Figures such as Peter Navarro, Wilbur Ross and the president himself have spoken repeatedly about the need to use the United States’s extensive power resources to bring fairness to bilateral and multilateral trading relationships. 

On June 17, U.S. Trade Representative Robert Lighthizer testified before Congress that the  government is willing to take action “early and often” to challenge violations of the new agreement when it takes effect. Speaking with reference to Canada, Lighthizer said the issue of dairy trade will be closely monitored and that the United States is ready to punish Canada if it does not fully implement its side of the deal. For Mexico, Lighthizer pointed to existing disputes and specifically mentioned what he called Mexico’s failure to approve new “biotech” imports from the United States for the past two years. Upon further questioning, personnel from his office clarified that this referred to GMO exports from the United States. 

But the agricultural sector is only one of a number of fronts that experts expect to be opened in the trading relationship between the United States and Mexico after this week. Mexico’s failure to fully implement and execute its new labor laws — one of the requirements for ratification of the agreement — is drawing attention from government unions and some businesses on this side of the border. The fact that Lighthizer, after intensive conversations with House Speaker Nancy Pelosi (D-Calif.) and other leading Democrats, insisted on the inclusion of labor attaches in the U.S. embassy in Mexico City to monitor the implementation of Mexico’s new, more stringent labor laws show how important this issue is to both the Trump administration and to Democrats in Congress. 

To further complicate the outlook for Mexico, other sectors in the United States are beginning to pile on the pressure. The pharmaceutical industry is seeking assistance from Lighthizer’s office to put pressure on the Mexican government to improve and speed up the regulatory and permitting process for new drugs. Under President Andrés Manuel López Obrador (AMLO), the permitting process has been abysmally slow and inefficient. Whereas it used to take a matter of days to get paperwork processed, with the AMLO administration that bureaucracy has taken months. 

Similar actions are being prepared by major companies in the digital economy space, seeking protection of their interests in Mexico through U.S. government action. Both pharmaceutical companies and internet giants are deeply concerned about one thing in particular. The Mexican Congress is considering an intellectual property law to bring Mexico into line with the United States, but the content of that law appears to be harmful to the interests of foreign firms and to violate basic principles of the USMCA, including patent linkage and the Bolar clause. The energy industry has taken the dramatic step of appealing to President Trump to help with their travails in Mexico.

If anybody questions the seriousness of Lighthizer’s intent, all they have to do is take a look at his record as a trade lawyer and, specifically, at his many successful litigations at the World Trade Organization. Put simply, Lighthizer loves a good trade conflict and is especially expert at using the rules of international trade to his advantage. In the case of the USMCA, he has the added advantage of being the author of the trade rules. There should be little doubt that Lighthizer feels confident that he and the U.S. government can win trade disputes against its North American partners, especially against a Mexican government that has severely trimmed its international trade negotiation team and appears reluctant to spend public resources on hiring top trade lawyers for international disputes. 

While the leadership at both the foreign affairs ministry and the ministry of the economy are undoubtedly talented individuals, the bench is not very deep. In the past, the Mexican government recognized the importance of having top talent in depth in international trade. The current administration would do well to prepare itself appropriately for what is on its way. To survive the coming storm, Mexico needs to begin to spend more on both human capital and on ensuring that its legal and regulatory frameworks are consistent with the demands of the new North American trading regime.  

Duncan Wood is the director of the Wilson Center’s Mexico Institute.