The USMCA and Integration with North America

What a Free Trade Agreement Is

A tariff is a tax charged on a product when it crosses the border. If a country puts a tariff on your products, they become more expensive there and are harder to sell.

Mexico has agreements with dozens of countries. The most important is the USMCA (the United States-Mexico-Canada Agreement, known in Mexico as the T-MEC), which went into effect in 2020 and replaced NAFTA from 1994. The three countries form a region where most products move without tariffs.

The advantage for a Mexican factory is clear: it can sell to a market of more than 400 million people without a tariff making its product more expensive than local competitors'. In return, products from those countries also enter Mexico, and Mexican companies compete with them.

Examples: Mexico exports (sells abroad) cars, trucks, computers, avocados, tomatoes, beer, and tequila. It imports (buys from abroad) gasoline, yellow corn, parts and machinery, and electronic circuits.

The Trade Balance

The trade balance compares what a country sells with what it buys from abroad:

Rules of Origin

If there were no controls, a company from another continent could ship a product to Mexico, put a label on it, and send it to the United States with no tariff. To prevent this, rules of origin exist.

In the automotive sector, the USMCA requires that a high percentage of a vehicle's value be manufactured in the region, and that part of the work be paid with high wages. This is meant to ensure that the agreement's advantages benefit the partners and not third countries.

For automakers, this means choosing North American suppliers instead of cheaper ones in Asia, or accepting the tariff. Many decide to buy parts in the region and open supplier plants in Mexico.

Nearshoring

Nearshoring happens when a company moves its production to a country close to its main market. Many companies that used to manufacture in Asia are looking to set up in Mexico to supply the United States.

Mexico's advantages:

• Geography: a border of more than 3,000 km with the United States; a truck arrives in days, not a ship in weeks. Lower transportation costs and less risk of delays.

• USMCA: producing here allows selling without tariffs in the United States and Canada, with clear and stable rules.

• In addition: skilled labor at competitive costs and similar time zones.

Monterrey, Saltillo, Querétaro, Guanajuato, and Tijuana have received industrial buildings and parks because of this phenomenon. The challenges are water, energy, security, and infrastructure.

Depending on a Single Partner

Around 80% of Mexican exports go to the United States.

Advantages: a huge and nearby market, integrated production chains, foreign investment, and jobs in manufacturing.

Risks: if the United States enters a recession, our sales fall; if it imposes tariffs or changes the rules, thousands of jobs are affected; and Mexico has little bargaining power (this is dependence and it limits economic sovereignty).

One way to reduce dependence is to diversify markets: take advantage of other agreements (the European Union, the CPTPP with Pacific countries) with support from trade promotion, financing, and streamlined customs procedures so that MSMEs can export to other countries. That way, a crisis in one partner affects the country less.

Summary

• An FTA eliminates tariffs between countries; the USMCA unites Mexico, the United States, and Canada.

• Trade balance = exports − imports: positive is a surplus, negative is a deficit.

• Rules of origin require regional content so that a product pays zero tariffs.

• Nearshoring attracts factories to Mexico because of its proximity to the U.S. and because of the USMCA.

• About 80% of exports go to the United States: a great advantage, but a risk of dependence.

• Diversifying markets and suppliers reduces that risk.