Supply Chain Problems: Protectionism Undermines USMCA Trade Potential

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An American flag flies on a ferry passing container ships in the Port of Los Angeles on November 24, 2021 in San Pedro, California.

Mario Tama / Getty Images

About the Author: Christophe S. Tang is a Distinguished University Professor and Edward W. Carter Chair in Business Administration at UCLA Anderson School of Management.

President Biden’s November 18 summit with Canadian Prime Minister Justin Trudeau and Mexican President Andrés Manuel López Obrador was cordial. But then the discussion turned cold.

It is concerning that the protectionist policies to which the three countries have now subscribed could hamper economic development and supply chain resilience in North America.

Instead of focusing on how much of the pie each country can get from the United States-Mexico-Canada trade deal known as the USMCA, the three leaders had better develop big visions that can create a pie. much bigger. The value to North America would be transformative, going beyond trade.

As a reminder, the USMCA signed by President Donald Trump is different from its predecessor NAFTA, signed by President Bill Clinton in 1993. Here’s how.

In relation to NAFTA, the USMCA seeks to raise standards for workers in North America, including those related to freedom of union education and the right to collective bargaining. The new agreement gives American farmers access to the Canadian dairy market. It also adds provisions on digital commerce to reflect the big economic changes since the 1990s.

The thorny part of the USMCA is about making cars and trucks. To get zero tariffs, imported vehicles must have 75% of their components made in the United States, Mexico or Canada. Additionally, 40-45% of automotive content must be made by workers earning at least $ 16 an hour. Because auto workers in Mexico earn much less than their US and Canadian counterparts, this new deal puts pressure on wage increases in Mexico, negating Mexico’s low-cost advantage.

To complicate matters, Trudeau and López Obrador have expressed concerns over a protectionist-motivated proposal in Biden’s big social spending bill. This provision gives consumers a tax deduction of $ 12,500 when they purchase an electric vehicle, but only if it has been assembled by union workers using American-made batteries.

Canadian officials on Friday threatened to impose tariffs if the United States proceeds with the tax credit.

Instead of focusing solely on protecting unionized auto workers, the Biden administration should strive to unlock the hidden potential of the USMCA by increasing trade flows between the United States, Mexico and Canada.

How do you increase trade flows when the United States faces a crisis in the supply chain from congested ports to a shortage of workers and warehouse space?

Despite the best efforts of the Biden administration, Transportation Secretary Pete Buttigieg acknowledged that supply chain issues could take months to resolve. As short-term solutions, large retailers


Walmart

and Target have chartered their own freighters to unload their containers at less congested ports, while


Levi Strauss

and Lands’ End relied more on air freight to receive their shipments of goods from Asia.

In the long run, the partnership in the spirit of the USMCA can create unprecedented opportunities for the Three Leaders to seize.

First, the proposed tax deduction for the purchase of electric vehicles makes no sense to low-income consumers who are battling price inflation. Instead, we should be supporting auto factories in Mexico and Canada to produce affordable cars for American consumers.

We should also support the manufacture of toys and PPE in Mexico. Not only are manufacturing wages in Mexico lower than in China, proximity can also ensure long-term supply chain responsiveness and resilience.

Second, in Mexico, the economy is growing rapidly in the northern part of the country, in states like Baja California and Coahuila. But poor infrastructure has limited growth in Chiapas, Oaxaca and other parts of southern Mexico. President Lopez Obrador is expected to improve the necessary infrastructure in Mexico to attract more foreign direct investment to strengthen its economy.

Economic growth in the south could provide opportunities for migrants from Central or South America to find employment in Mexico, which would help resolve the border issue with the United States.

Third, the increased use of rail freight in North America could help reduce greenhouse gas emissions created by large container ships. Consider the fusion between


Canadian Pacific

and


Kansas City South

at the end of October, which will create the first single-line rail network connecting the United States, Mexico and Canada. Instead of shipping one container on each truck, a freight train can carry more than one. Significant reduction in greenhouse gas emissions.

In addition to rail freight, Mexico can further develop its ports of Ensenada and Larzaro Cárdenas. These ports can serve as alternatives on the West Coast where customs can be cleared under the USMCA. In addition, Mexican Gulf ports, such as Veracruz, can transport product to the US ports of Louisiana and Alabama, creating additional employment opportunities in these historically poorer states.

The USMCA can be a catalyst for three leaders to build a much stronger North America capable of creating transformative value for all three countries. After all, good neighbors are priceless.

Guest comments like this are written by authors outside of the Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit proposed comments and other comments to [email protected].


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