The free trading agreement between the United States, Mexico, and Canada has represented a crucial safety-net for investors since its inception in 1994. As we will elaborate, the USMCA consists of an effort to modernize the already existing NAFTA. Its main goal has always been to facilitate commerce between these three countries. As a result, business owners have been able to create or expand their businesses in North America.
As we mentioned in our last post, uncertainty is the biggest enemy for building in any foreign country with success. USMCA has been a decisive player to achieve protection, boosting confidence among investors. In this post, we will cover how this update impacts those wanting to expand operations to Mexico. Firstly, we will cover a brief historical reminder. Then we will go through the main differences and takeaways, and finally, we will set some thoughts on the impact of USMCA in investments and construction.
Overview
What is the USMCA?
The USMCA is an actualization of the Free Trading Agreement (NAFTA) signed by the United States, Mexico, and Canada in 1994. This review was made in 2018 to update the rules and regulations to best fit with the current socio-political environment and emerging technologies. In their own words, USMCA was created “to support trade mutually charity leading to freer and fairer markets and economic growth solid in the region.”
This version is 34 chapters long (12 more than its predecessor). Additionally, it includes 13 annexes, two modifying protocols, and 14 bilateral instruments between Mexico and the United States.
What are the differences between USMCA and NAFTA?
As we previously mentioned, the main differences rely on updates regarding new technologies, commercial regulations, and environmental care. Here are the main takeaways:
- Origin Rules: This subject states that for a product to receive a preferential tariff, a minimum of its components must be manufactured within the countries that participate in the USMCA.
- In the automotive industry, for a vehicle to be considered for the USMCA’s benefits, it must follow these points:
- 75% of the product must be regional.
- Seven main components must be manufactured in North America.
- 70% of the aluminum and steel components must come from North America.
- In the automotive industry, for a vehicle to be considered for the USMCA’s benefits, it must follow these points:
- Digital Commerce: There is an increase of protection and benefits for digital businesses and assets, like the prohibition of tariffs for software, video games, movies, music, or books. Additionally, it elevates the limit of shipments and allows businesses to export more products at a lower rate.
- Labor & Environment: Provides firm labor and environment obligations, making them fully subject to enforcement and dispute settlement.
SMEs: The TLCAN treatment did not consider them. Now, there is a whole chapter dedicated to supporting small businesses and regulations that aid the commercialization of their products internationally.
Impact on Investments
As stated, one of the most impactful perks of the treatment is the reinforcement of protection for investors interested in Mexico, working as an instrument to guarantee significant stability. In fact, chapter 14 covers this topic in its entirety and incorporates protections as well as mechanisms to settle disputes arising out of violations of such investment protections.
It includes two types of investments: General Investments and Covered Government Contracts. Here you can find a broader glimpse into this chapter.
Even though there is a dedicated chapter, you can find subsections among the treatment that will directly or indirectly impact investments. It could even come from the construction standing point.
Investments
We view USMCA as an instrument that focuses on the improvement of two main issues for investors. The first one being the security and state of law needed to invest. Secondly, Mexico’s internal affairs situation. Enhancements of transparency in the application of laws, regulations, or policies are a significant improvement. As a result, formalities run more smoothly, and as we know, having a clear vision of what you are doing and where you are going is crucial to achieving peace of mind.
The main takeaway for investors will be that USMCA gives certainty in the face of challenging economic ties experienced throughout the world. It will facilitate all-around commerce between the three-country members, given that exports of all kinds will take advantage of tariff benefits. Moreover, due to origin rules, a grand part of the products needed within the chain of supply have to come from America. As a result, many manufactures will have to find producers within the zone. This ends up as a big investment opportunity for transformative industries.
On another note, a lot of economic stability is expected. It is foreseen that USMCA will bring more solidity in exchange rates and overall more financial security. The treatment requires transparency on currency policies and addresses unfair currency practices. Resulting in more control at inflation costs and gradual reduction of tariff costs.
Construction
In the construction industry, these benefits will be reflected mainly in budgeting and assets. With more accurate currency policies, budgets will be far more precise. Moreover, the increased competitiveness of materials will result in more quality materials at a lower cost. It also means better technology at more affordable prices internationally.
Wrapping Up
Mexico is a country of opportunity and growth. It is well showcased on its assets, including location, infrastructure, and workforce. By seeking to boost investment, USMCA functions as an enhancer of those strengths. It gives certainty and protection to investors, forecasting a new horizon to safely initiate a new venture in Mexico.
We are confident that this will bring a whole new perspective to newcomers. At Hermosillo, we focus not only on world-class construction, but on providing strategic management of your project to have a soft landing in Mexico. When reflecting on the benefits the USMCA provides, think of Hermosillo as your trusted ally.
