By Vaibhav Tandon

Every time I hear the popular disco-era song “YMCA” by American disco group The Village People, I cannot help but hum to the tune.  Last time when I tried to listen, I accidently hit play on a parody version by a group calling themselves “The Farming People.”  The five-year old video featured the group urging members of the U.S. Congress “to pass the USMCA,” lyrically lobbying for the U.S.-Mexico-Canada Agreement and how it was going to help American farmers. 

Last month, the Trump administration's overhaul of the Clinton-era North American Free Trade Agreement (NAFTA) reached its fourth anniversary.  (Though announced in 2018, the agreement was not fully ratified until 2020.)  However, the jury is still out as to whether it has delivered the desired benefits to its orchestrator, the United States. 

USMCA retained most of NAFTA’s chapters but made notable changes to market access provisions for autos and agriculture products, rules on investment, intellectual property, labor and the environment.  The expanded market access has led to an increase in trade and investment across the region.  

Total nominal North American trade has soared 50% since the agreement took effect in July 2020.  Last year, the exchange of goods among the three member countries reached a milestone of $1.88 trillion – about the size of the Mexican economy.  The double-digit growth in commerce has helped Mexico and Canada displace China as the top trading partners of the United States for the first time in over two decades.  American agricultural exports to Canada grew from $20 billion in 2020 to $28 billion in the last three years thanks to increased access to latter’s dairy, poultry, wheat and alcohol markets.

The automotive industry has been at the center of the regional trade and investment boom.  The continent is the number two producer of automobiles in the world, producing over 16 million units in 2023.  Of these, Mexico produced 24.8% and the United States 65.6%.  NAFTA, which phased out tariffs on motor vehicle trade among the three countries, was instrumental in realigning the region’s auto industry to reduce costs.  The increase in the regional value content requirement from 62.5% to 75% under the USMCA has further incentivized manufacturers to invest in the region.  That said, there is growing concern among American policymakers over Chinese electric vehicles potentially making their way into America, bypassing tariffs via Mexico.

Intra-regional investment has increased, with capital investment growing 134% to $219 billion since the implementation of USMCA.  America remained the primary source of foreign direct investment (FDI) in Canada, reaching $618 billion (46% of total FDI) in 2023.  Of the $37 billion in inflows to Mexico, about half came from its two regional partners.  While the combined USMCA investment stock is growing, it is still far smaller than the total U.S.-European Union FDI stock of $5 trillion.

USMCA has been a boon for job growth.  Intra-regional trade in goods and services supported nearly 17 million jobs in 2022, a 32% increase compared to 2020, according to the Brookings Institute.  Most of these gains have accrued to Mexico, where 9 million jobs were supported by USMCA in 2022.  The figure is double that of the United States and almost triple that of Canada.

This suggests that the USMCA did not alter the popular suspicion of free trade agreements and their role in the decline of the U.S. manufacturing sector.  According to the Peterson Institute for International Economics, during the 25-year NAFTA era, the U.S. auto sector lost 350,000 jobs while employment in the Mexican auto industry had surged by over 400,000. 

Mexico’s auto sector is flourishing, rising to become the seventh-largest manufacturer of cars globally.  The decades-old commercial ties have been vital to the country’s growth, employment and industrial evolution.  Geopolitical tensions are also working in Mexico’s favor.  The nation is increasingly seen as an optimal partner in a “China Plus One” strategy that offers duty-free access to the vast American market.  

While trade and investment have flourished, the revamped NAFTA was never expected to deliver outsized gains to U.S. gross domestic product (GDP).  According to a 2019 report by the United States International Trade Commission, the USMCA was likely to boost real GDP by only 0.35% over six years.  Researchers at the C.D. Howe Institute had estimated a -0.10% hit to the U.S. real GDP relative to NAFTA-era norms.

While the USMCA addressed multiple trade issues and reduced supply chain bottlenecks, compliance and dispute resolution have emerged as major issues.  Mexico’s nationalist energy policies have limited potential exports from the U.S., while protectionist motor industry rules are keeping Mexican trucks off U.S. roads.  The U.S. has failed to comply with a recent Dispute Panel decision that ruled in favor of Mexican and Canadian car manufacturers over the way America assesses regional content required for tariff-free access under the trade pact.

The USMCA is scheduled for a joint review in 2026, and there is a growing concern among investors that America will push to renegotiate parts of it, especially rules for auto manufacturing.  While Washington is seeking to reduce trade with Beijing and bring supply chains closer to home, this alone may not be a strong enough reason for the next U.S. administration to rubber stamp the deal.  A lingering threat of a veto by any of the three governments leaves the future of this deal in a state of uncertainty. 

After three decades of free trade, a full dissolution of USMCA would be costly and disruptive.  However, trade skepticism is on the rise, especially within both U.S. political parties.  The song “YMCA” tells the story of an inclusive destination for those who are adrift.  North American nations must now ensure that trade is structured with benefits that include as many people as possible.  Creative negotiators will find there are many ways to have a good time.