Building a more competitive, inclusive, and sustainable North American economy – Introduction

Less than two years ago, the United States, Mexico, and Canada signed a historic agreement to build a more competitive, inclusive, and sustainable North American economy. The United States-Mexico-Canada Agreement (USMCA) is arguably the most significant trade agreement that any of the partner countries has signed since the World Trade Organization was created in 1995. Beyond a traditional trade agreement, the USMCA provides an economic template to realize the potential of an integrated, competitive North American market while avoiding the political tensions that surrounded the now defunct North American Free Trade Agreement (NAFTA). Even though the USMCA received broad support from various stakeholders in all three countries, its success is not preordained.

Notably, implementation of the agreement will prove challenging. By tracking progress and proposing solutions to overcome obstacles, the Brookings USMCA initiative aims to contribute to the success of the agreement, including during the joint review and extension of USMCA in 2026. In this spirit, we are pleased to launch the inaugural flagship Brookings report “USMCA Forward 2022: Building a more competitive, inclusive, and sustainable North American economy.” This report identifies five main priority areas: Improving North American economic competitiveness; strengthening supply chains; expanding digital trade; improving labor conditions and wages; and supporting the transition to low-carbon economic growth.¹ With contributions from experts and thought leaders from Canada, Mexico, and the U.S., the five chapters capture the most pressing issues within these areas. These theme-based chapters are complemented by shorter policy-focused viewpoints of leaders from government, business, unions, and academia. This includes viewpoints from Canadian Trade Minister Mary Ng, Mexican Secretary of the Economy Tatiana Clouthier, United States Trade Representative Katherine Tai, AFL-CIO President Liz Shuler, Unifor President Jerry Dias, and business leaders from the Business Council of Canada, Business Roundtable of Mexico, and the U.S. Business Roundtable. We also feature perspectives from notable academics in this field and former lead trade negotiators for NAFTA.

These viewpoints, together with the chapter analyses, provide a comprehensive view of the potential benefit of the USMCA for the three countries. A common observation and starting point for thinking about USMCA opportunities is the strong political support it received in all three countries. In addition to the bipartisan support in U.S. Congress (89 to 10 in the Senate), the USMCA passed Canada’s House of Commons (275 to 28) and Mexico’s upper chamber (114 to 4) resoundingly. But as Brookings President John R. Allen, Brookings Trustee Paul Desmarais Jr, and Brookings International Advisory Council member Pablo Gonzalez note in the Forward to this report, realizing the agreement’s full potential will require sustained commitment and leadership across government, industry, and civil society.

The following themes emerge in this report: First, USMCA is a pathway towards even greater levels of cooperation and dialogue among the three countries to address pressing collective challenges such as the COVID-19 pandemic, climate change, and strengthening North American competitiveness. As former U.S. Trade Representative and lead U.S. trade negotiator for NAFTA Carla Hills points out in her viewpoint, NAFTA not only ushered in an era of increased trade and investment, through collective leadership of government, industry, and civil society, it also led to strengthened cooperation in areas such as border security, environmental protection, and intelligence sharing. The space that USMCA creates to deepen cooperation across a range of issues will require renewed commitments to a vision for what the three countries can achieve together. The meeting of President Biden, President Obrador, and Prime Minister Trudeau at the so-called “three amigos” summit in November 2021 – who had not met in five years – is an important first step to reinvigorating leader level contact and signaling the renewed importance and opportunities of North American cooperation and leadership. As the leaders stated, “we are closely bound by history, culture, a shared environment, and economic and family ties, and strongly believe that by strengthening our partnership we will be able to respond to a widening range of global challenges.”

All three trade representatives, in their respective viewpoints, also underscore the importance of cooperation and the USMCA in effectively addressing common challenges. Canadian Trade Minister Ng highlights how opportunities to utilize supply chains and manufacturing capacity across the U.S., Mexico, and Canada enabled the rapid development of an innovative air filtration system that reduces COVID particles using high heat. This is just one example of how trilateral cooperation enabled by USMCA can be used to address pressing common challenges. As Minister Ng notes, “We have the best shot at tackling even the most pressing global challenges when we engage our collective strength, resilience, and innovation.” Similarly, Mexico’s Secretary of Economy Tatiana Clouthier emphasizes the need for closer cooperation and deeper integration – and more coordination and more dialogue. Ambassador Tai calls USMCA “the cornerstone of North America’s economic future” and concludes with the observation that “it will be critical for the United States, Mexico, and Canada to continue our close cooperation to ensure that USMCA remains a living agreement that delivers inclusive economic growth and broadens our collective prosperity.”

The chapters on strengthening North American competitiveness and building more resilient supply chains provide additional contextual analyses to these viewpoints. Luis de la Calle in his chapter on competitiveness describes the two main drivers of economic integration in North America: The regulatory environment and technological advancement. De la Calle shows how implementation of USMCA can be a catalyst for improving competitiveness in the burgeoning field of health and medical innovation. This includes leveraging the region’s talent and collaborating with federal and state governments, academia, research centers, and the private sector. As he notes, North America´s competition with other regions of the world is for technological leadership, and success in this area requires the participation of many skilled players.

In the chapter on building more resilient supply chains, David Dollar offers insight into the extent in which Mexico can be an alternative destination for Chinese-based manufacturing and supply chains. He concludes that trade pacts like USMCA have the potential to improve the region’s investment climate; however, complimentary policies that address weaknesses in areas such as logistics and human capital will be crucial for Mexico to fulfill its potential as a manufacturing hub. In fact, Dollar notes that China has been an increasingly important source of inputs into North American supply chains. One suggestion here is that it may be more fruitful to focus on integrating North American manufacturing into Asian supply chains rather than displacing China.

Building a digital North America is another focus of the report that speaks to the opportunities USMCA presents. USMCA includes a set of commitments on digital trade that were largely absent in NAFTA and are the most comprehensive digital trade commitments globally. Patrick Leblond explains how the three North American countries can realize the full potential of digital technologies and ensure the region’s economy remains integrated as it digitalizes. For Leblond, cooperation on digital trade would allow North America to become a global leader in the digital economy, particularly in the development of new technologies like artificial intelligence, blockchain, and quantum computing.

A second key theme in the report is the importance of the USMCA’s labor and environment chapters. Indeed, this is one area where USMCA made important progress on NAFTA. Inclusion of these labor and environment chapters in USMCA was central to building bipartisan political support for the agreement. The agreement’s enforceable labor provisions and stronger labor standards were key reasons why the AFL-CIO, the largest federation of unions, supported USMCA – the first time the organization has supported a major trade agreement in 20 years. Jerry Dias, President of Unifor, Canada’s largest private-sector labor union, also emphasizes the importance of USMCA labor provisions for improving worker conditions. Demonstrating that these chapters can yield results will also be needed to ensure that USMCA can deliver more inclusive and sustainable outcomes from international trade and investment and sustain broad political support for USCMA going forward. In this respect, the U.S.’ use of the agreement’s rapid enforcement mechanism in 2021 to address breaches of USMCA labor standards at facilities in Mexico signaled a U.S. adherence to these new USMCA labor commitments. It particularly demonstrated the effectiveness of the innovative rapid enforcement mechanism. In the labor chapter, Santiago Levy provides an important analysis of the extent in which the USMCA labor commitments can help increase Mexican wages. He concludes that, in addition to the commitments, reform of Mexico’s labor market regulations will also be needed in order to significantly increase Mexican wages. In the absence of such reform, USMCA could lead to small wage increases in firms engaged in trade with the U.S., but with limited impact on overall wages in Mexico.

The opportunities for USMCA to help address climate change is the subject of the chapter by James Bacchus. Bacchus points out that the goals of increasing competitiveness and addressing climate change are not in conflict, but are in fact, complimentary. This includes leveraging USMCA to eliminate tariffs on environmental goods and services that can be used to address climate impacts. These policies would also increase the competitiveness of North American industry, enhance coordination of research and development in clean energy across the countries, and integrate better the North American energy market – while developing common standards and regulations that reduce emissions along supply chains.

A third theme that emerges from this report is the need for the three North American governments to fully implement and comply with their USMCA commitments. As the business leaders in their viewpoint note, “Full implementation and enforcement of USMCA will sustain broad political and stakeholder support for the agreement.” Ambassador Tai in her viewpoint also notes that “full implementation and enforcement of the USMCA are top priorities for the Biden-Harris Administration and a key component of a worker-centric trade policy.” Over the last year there were notable demonstrations of the effectiveness of USMCA dispute resolution mechanisms. This included success in using the agreement’s rapid enforcement mechanism to strengthen worker outcomes at plants in Mexico, and the U.S. won the first state-state dispute with respect to Canada’s allocation of dairy tariff-rate quotas. These positive outcomes are however, clouded by developments in Mexico and the U.S. that threaten to overshadow this otherwise positive momentum. Meghan O’ Sullivan and Lourdes Melgar in their viewpoints outline efforts by President Obrador to reform Mexico’s power sector in ways that are potentially inconsistent with Mexico’s USMCA commitments. They note that these reforms would lead to increased use of carbon intensive energy sources, undermining Mexico’s ability to meet its commitment under the Paris Climate Accords, a point that Bacchus also makes in his chapter. Prioritizing electricity from the state-run utility CFE over private sources of energy would also lead to less investment in Mexico, increased energy costs, and reduction in economic competitiveness. The second area of concern is the proposed U.S. tax credit for Electric Vehicles (EV) manufactured in the U.S. and with union labor. As Secretary Clouthier notes in her contribution to this report, such a tax would “reduce the ability of U.S. manufacturing to produce with its most important trading partners at a very high cost to the U.S., and to North America” In his viewpoint, John Weekes observes that the proposed EV tax credit, on top of the tariffs President Trump imposed on Canadian steel and aluminum imports for national security purposes, has shaken Canada’s trust in the stability of its North American partnership.

USMCA represents a new opportunity for Canada, Mexico, and the U.S. to build an economic partnership that addresses common challenges and improves worker outcomes. Success will require strong political leadership and sustained engagement by all stakeholders. The Brookings USMCA initiative stands ready to support these efforts with world class analyses and convenings. Over the course of the year, we will continue to monitor the USMCA, including through a new USMCA Tracker, forward-looking research, timely commentaries, and convenings.