January 26, 2020
As the United States Mexico Canada Agreement (USMCA) nears final approval, governments and companies in Arizona and its neighbor to the south Sonora, Mexico are evaluating how changes to the original NAFTA agreement may affect them.
Initial impressions are that Arizona businesses will benefit from the trade deal, where it will have some potential downside for businesses and employers in Sonora.
Impetus behind changes
President Trump initiated updates to the 25-year-old NAFTA pact with goals of reducing the US trade deficit with Mexico and encouraging US companies with a presence in Mexico, especially automobile manufacturers, to relocate their manufacturing operations to the United States.
Trump has referred to NAFTA as “our country’s worst trade deal,” and promised USMCA to be the “best and most important trade deal ever made by the USA.”
However, as analysts have noted, the two agreements are more similar than they are different. So, the good news for Arizona and Sonora is that a tri-lateral agreement will continue forward to facilitate cross-border trade.
Differences
There are several areas where USMCA differs from NAFTA. New and revised agreement chapter areas include digital trade, biologic medications, financial services and environmental protections.
Potential impact on Arizona business
The main goals of USMCA are to continue the flow of trade between the three countries and give the United States a competitive edge.
So it likely follows that Arizona will continue to hold a competitive edge in international trade. The treaty is an all-around win for Arizona.
In addition to a favorable trade environment for the state, the new trade pact may offer upside for financial institutions that want to do more business in Mexico.
Companies that are currently required to have data servers in Mexico can now store and distribute data from a data center located in the U.S.
The state may see a gain in business from producers of automobile parts moving operations to the state so that carmakers can meet their new tariff-avoidance quota of vehicle components.
And businesses with an international online presence will benefit from the loosening of restrictions on internet websites and digital data.
Potential impact on Sonora business
Automotive industry
Sonora enterprises will continue to enjoy the benefits of tariff-free access to the US market, but with some new caveats.
The state may see a decline in vehicle component production as companies relocate operations to north of the border to meet minimum wage requirements.
And although it is unlikely, Ford may alter the operations of its Hermosillo plant in order to meet new supplier and employee wage requirements.
Labor requirements
The biggest impact of USMCA on Sonora will be the new labor requirements. They will not happen immediately, because the agreement requires the Mexican Senate to first codify them into federal laws.
But once the laws are enacted Mexican factories must allow their employees to join a union and participate in collective bargaining.
In addition, employers must ensure that their manufacturing facilities meet standards for labor conditions. If a factory is the source of consistent union complaints about labor conditions, panels of labor experts from the US or Canada will investigate them.
Mexico will also have a reciprocal right to investigate labor complaints in the US and Canada, but the new requirements are mainly aimed at Mexican production facilities.
Environmental protections
And finally, environmental protections have been strengthened somewhat, for reporting of environmental violations. Previously a complaint was required to show that an environmental violation had an impact on international business, and that requirement has been removed.
Conclusion
In general, USMCA will be good for both Arizona and Sonora.
Arizona is the big winner with only upside potential for the state’s international business sectors.
And Sonora will continue to have access to US and Canadian markets, although the impacts of new labor, auto manufacturing and environmental requirements are yet to be seen.