The USMCA Trade Pact Can Ensure North America’s Success, if We Settle a Few Disputes

In 2022, trade between the United States, Mexico and Canada amounted to over $1.5 trillion, or close to $3 million per minute. This milestone underscores a remarkable double-digit growth over the past two years, and so far, Mexico and Canada remain the U.S.’s top trading partners. Moreover, the three countries currently account for almost a third of global GDP, with intra-regional goods commerce alone supporting a staggering 9.5 million or more jobs across North America.

Nevertheless, to sustain the track record of this vibrant partnership within the bounds of the new United States-Mexico-Canada Agreement (USMCA), the three countries must showcase their ability to swiftly resolve existing disputes, particularly those observed in the agriculture, automotive and energy sectors; these areas remain vital building blocks of the region’s long-term economic success. By proactively tackling these issues, the trilateral partnership can ensure continued growth and opportunities for all, as the USMCA enters its third year in operation.

The trade agreement, which replaced the North American Free Trade Agreement (NAFTA) in 2020, lays out a robust framework for promoting trade and investment between the three countries. To date, all parties maintain active involvement in implementing the USMCA, with regular discussions occurring across the many covered sectors. Notably, the United States and Mexico emphasize progress made in resolving eight labor disputes in multiple Mexican facilities, in accordance with the USMCA’s labor provisions.  

Importantly, building on the foundation of expanded commerce, the three governments are forging new avenues for collaboration to enhance North America’s long-term global competitiveness. Through the North American Leaders Summit, the U.S.-Mexico High-Level Economic Dialogue (HLED), and the U.S.-Canada road map, the “three amigos” are providing incentives for private companies to engage in reshoring and nearshoring efforts. They are also prioritizing the strengthening of strategic supply chains, including critical minerals and semiconductor chips, while promoting sustainable investments in electric-vehicle value chains.

Nonetheless, an underlying concern is the need for all three governments to effectively utilize the established processes of the USMCA to address significant differences that arise. This is critical in order to solidify the basis for ongoing collaboration and enhance North America’s competitiveness and resilience in comparison to other global competitors, particularly China.

If left unresolved, disputes have the potential to generate uncertainty around the region’s continued ascendant trajectory and cast doubt on the agreement’s sunset clause and the required performance review in 2026. Some business groups are privately expressing worry about the forthcoming review, particularly given the time it takes for new investments to yield results and the significance of having a well-functioning framework of trade rules and norms.

For starters, Mexico is widely thought to have a generational opportunity to attract new investment as governments and corporations aim to diversify key supply chains from China, among others. The Inter-American Development Bank (IDB) estimates that Mexico potentially could add up to $35 billion in exports of goods and services through nearshoring, particularly in sectors such as the auto industry, textiles, pharmaceuticals and renewable energy.

While Mexico is indeed attracting investment, the consensus among experts is that these opportunities may not reach their full potential unless Mexico successfully resolves major differences with the United States and Canada over its energy and agricultural policies. U.S. and Canadian companies, farm groups and officials maintain that Mexican policies and practices violate USMCA commitments, potentially risking billions of dollars in trade and investment. Consultations on both issues have been underway for over a year. On June 1, for example, the U.S. Trade Representative requested USMCA dispute-settlement consultations with Mexico over Mexico's agricultural biotechnology measures, after months of discussions. The announcement followed a letter from 62 members of Congress, which asked the Trade Representative to act.

This request opens the door for a formal panel of experts to review the U.S. complaint, but the U.S. said it would continue to work with Mexico to resolve its concerns.

Neither the United States nor Canada seems inclined to initiate a dispute settlement panel on energy differences soon, but the step on agriculture is a welcome signal of using the USMCA to find solutions.

The unresolved disputes serve as a litmus test of commitment to the rules- and science-based principles of the USMCA. With each passing day without resolution, uncertainty may lead businesses to seek investment opportunities outside of Mexico, especially when compounded with other worries about Mexico’s investment environment, including public security.

The unresolved USMCA disputes also include issues between Canada and the United States. The United States has requested a second dispute panel over Canadian dairy policies, alleging that Canada did not abide by the findings of the initial USMCA dispute settlement panel. The second panel is scheduled to issue its findings in October.

Finally, the United States' inaction after losing a USMCA panel decision also sends a worrisome signal. More than 150 days have passed since the United States lost a panel initiated by Mexico and Canada, which concluded that the United States was not adhering to the USMCA in its application of rules of origin to North American vehicles. U.S. inaction is especially important since the auto trade represents the largest component of USMCA commerce, over 20%. 

Thus far, USMCA has provided an excellent framework within which trade across North America has grown impressively. However, if this positive trend is to continue in the years ahead, all three countries need to demonstrate real commitment to fully implementing the agreement and to solving problems such as the ones mentioned above.

While finding solutions through negotiations is the preferred course, delaying the use of dispute settlement can result in significant losses and generate uncertainty regarding the effectiveness of the USMCA itself. Similarly, when a party loses a dispute settlement case, the credibility of the agreement is called into question if the losing party does not implement the panel’s findings. 

These issues will be important in determining whether the USMCA’s review period in 2026 becomes an opportunity to improve the current situation or opens the door to a Pandora’s Box of uncertainty about the agreement’s future in a rapidly changing global landscape.

On the one hand, the USMCA holds immense potential to drive good outcomes, particularly when combined with other avenues for economic cooperation among Canada, the United States and Mexico. It promises to bolster North America’s competitiveness on a global scale and contribute to job creation and prosperity. On the other hand, failures to abide by the agreement’s commitments will harm political support for the USMCA in the longer term, even if action requires making tough decisions in the near term.  

Amidst the challenges posed by the COVID-19 pandemic, U.S.-China tensions, and Russia’s invasion of Ukraine, the USMCA has provided North America with a significant step forward. To fully capitalize on this momentum, it is imperative that the “three amigos” jump in with both feet and fully engage on the trilateral trade and competitiveness agendas, including effectively addressing disputes. Through such concerted efforts, North America will position itself for success in the years ahead.

Earl Anthony Wayne is a Distinguished Diplomat in Residence at American University, co-chair of the Wilson Center’s Mexico Institute Board, and former U.S. ambassador to Mexico.