USMCA is Just the Start

By Shawn DuBravac, IPC Chief Economist

Key Summary

• USMCA modernizes North American trade and reinforces $1.3 trillion in regional commerce
• Manufacturing is expected to see the strongest gains in production, wages, and exports
• COVID-19 and trade tensions exposed vulnerabilities in global supply chains
• Regional trade agreements and pandemic pressures are accelerating a shift toward regionalization
• A North American Manufacturing Initiative is needed to strengthen shared supply chain resilience

The United States-Mexico-Canada Agreement (USMCA) went into effect on July 1, replacing and modernizing the 26-year-old North America Free Trade Agreement (NAFTA). In many ways, the USMCA reinforces our continent-wide commitment to some $1.3 trillion in trilateral trade flows, while adding key provisions to bring the agreement into the 21st century.

The pact will be a net positive for America increasing both the size of the economy and U.S. employment. Diverse industries are likely to benefit, while manufacturing is expected to see the largest percent gains in production, wages, employment and exports.

The USMCA comes at a time when many companies are rethinking thin, globally dispersed supply chains amid rising trade tensions and COVID-19-induced disruptions. Both ongoing trade wars and COVID-19 have revealed the fragility embedded in modern manufacturing philosophies.

The USMCA also comes at a time when regional trade agreements are taking a larger role in defining the course of global commerce and the cost of doing business in the years to come. There are 303 regional trade agreements in place today, and that number is likely to rise in the aftermath of COVID-19.

The USMCA and other regional trade agreements are strengthening the economics of regionalization, and COVID-19 is accelerating the move towards a new equilibrium. Strengthening domestic production capabilities in the 21st century requires strengthening regional supply chains. It isn’t enough to focus solely on domestic capacity. COVID-19 revealed life-or-death shortcomings in our supply chains. If we are serious about revitalizing U.S. manufacturing, we must also be serious about manufacturing in Canada and Mexico.

This commitment requires a North American Manufacturing Initiative to focus on coordinating pandemic response and strengthening the region’s manufacturing competitiveness. Specifically, the three North American governments should grow regional capacity for manufacturing and create systems to measure and monitor industrial base resiliency. They also should determine a regional definition of “essential activity,” which would help drive the production of crucial materials, parts or products across multiple borders.

Now is the time for all nations to work with their neighbors to ensure the strength and resiliency of regional supply chains for critical industries, and in so doing, to strengthen each country individually. Greater coordination across regions will help ensure our supply lines can bounce back from further disruptions in the decades to come.