Two years of the USMCA - How has it affected trade in North America?

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How has the new USMCA trade agreement performed in its first two years of operation?

This summer marked the second anniversary of the introduction of the US-Mexico-Canada trade agreement (USMCA). The wide-ranging deal replaced the previous North American Free Trade Agreement (NAFTA) and came into effect on July 1st 2020 following three years of negotiations.

So how has the agreement affected trade on the continent over the last two years, and what challenges and disagreements still remain to be sorted out?

Trade volumes on the rise

Going by the numbers alone, the USMCA can be seen as a success, as trade between the three participating nations have continued to rise. Canada and Mexico remain the US' two largest international trade partners, ahead of China, and despite a slowdown in 2020 as a result of COVID-19, last year was a highly positive one for North American goods trade.

Overall, trade growth in the region has averaged a six percent increase across the region from 2019 to 2021. What's more, in 2021, three-quarters of Canadian and Mexican imports (75 percent) came from the US, which marked a new record.

Last year, total trade flows between the three countries reached $1.3 trillion and 2022 is on a similar trajectory. In the first five months of this year, trade in the region reached $642.6 billion. This represents an increase of more than 23 percent compared with the same period 12 months earlier, making it likely that the totals for the year as a whole will exceed 2021.

Reviewing the progress made in the last two years, former US ambassador to Mexico Earl Anthony Wayne said that in general, it's clear that USMCA is "playing a positive role" in boosting trade flows, as well as improving bilateral and trilateral relations between the participants.

New dispute mechanisms come into force

As with any trade agreement, there will always be disputes and differences of opinion, but this is an area that has been a key focus of the USMCA, with the signatories seeking to learn from the lessons of the past. 

Under NAFTA, processes for resolving issues were slow. Reuters noted that just three disagreements were settled through NAFTA's dispute settlement mechanism during its first six years of existence. For instance, one dispute in 2000 about Mexican access to US sugar markets showed how the mechanisms lacked effective rules to appoint panelists in cases of disagreement and that it was easy for one party to block the process. 

To address this, USMCA contains a new dispute mechanism that maintains a roster of panelists and allows disputing parties to appoint them if they are not able to agree or if one party refuses to participate in the process.

So far, this arrangement has been used three times, with panels established to address issues on Canadian dairy tariffs, US solar panel duties and, most recently, rules of origin for vehicles.

The panels have already made judgments in the first two, determining that Canada's system for allocating dairy tariff rate quotas is inconsistent with USMCA, as are US solar safeguards. A decision on the vehicle rules of origin case is expected in November.

This indicates that the revised dispute mechanisms are meeting their intended goals of speeding up the process and avoiding any deadlocks and delaying tactics. While issues remain ongoing in all cases, progress is faster compared to NAFTA. 

Elsewhere, the Wilson Center noted that the agreement's Rapid Response Mechanism (RRM) has also aided in labor disputes, and has already shown promising initial results in favor of collective bargaining rights in Mexico. 

Bigger tests yet to come

However, the most difficult days for the trade agreement may still be ahead. In July, the US and Canada filed a request for consultations on new energy policies in Mexico that will favor domestic firms - a move the other signatories argue will harm their own energy companies and go against the terms of the USMCA.

Reuters noted this has generated much more attention than the previous disputes as it revolves around a flagship policy of the Mexican government, with the issue becoming highly politicized in the country.

Writing for The Hill, Mr Wayne said this could prove to be the "acid test" for the USMCA. While he said it is positive that the US and Canada are sticking to the agreed dispute resolution provisions as outlined in the agreement, after raising concerns about Mexico's energy policies for months, the real question will be how the Mexican government responds. 

"The way in which these consultations and a potential dispute settlement panel proceed will send strong signals about how the three countries can manage sensitive problems," he stated. While a negotiated settlement is impossible, the outcome of the dispute will be watched closely by politicians and investors to see how the USMCA copes with such a disagreement.