5 years of Tmec: 3 keys to understanding the mega-free trade agreement between Mexico, Canada, and the USA.
North America, the world largest trading bloc, faces its biggest challenge in 30 years of decisive existence under the Trump presidency.
It is the largest free trade agreement in the world. It pioneered a scheme that changed the global economy. It had political, cultural, and social effects.
The United States-Mexico-Canada Agreement (USMCA) is probably one of the most important economic developments in the recent history of the global economy.
Its first version, known as NAFTA, came into force in 1994. An initiative from the 1980s that was negotiated for years and responded to the needs of each country at the time and to a favorable international context. It was one of the main triggers of the globalized and liberal economy led by the United States that operated in the world during the last three decades.
“We are going to need the support of Congress to end that agreement, which is the worst in our history,” adds the president, who holds it responsible for the closure of up to 90,000 plants in his country.
And although it was he who signed its renewal in his first term, Trump seems determined at least to renegotiate with an iron fist the guidelines of the agreement, which is scheduled for review in 2026, although everything indicates that it will be brought forward.
“In terms of job creation, investment promotion and economic growth, the USMCA was very successful, but the parties failed to create complementary public policies to cushion its effects and that made it become a lightning rod for all the problems, especially in the US,” says Antonio Ortiz Mena, an economist and former Mexican official who He gives lectures, consultancies and a course on the subject at Georgetown University in Washington.
In the midst of the tariff war promoted by Trump, Of which Mexico and Canada have been the least affected thanks to the agreement, the USMCA is once again the protagonist of a story with global implications.
These are three keys to understanding it.
1. What were its effects?
Free trade agreements are a mechanism for granting preferential market access between parties by eliminating tariffs and non-tariff barriers that impede the free trade of products.
In theory, this increases the diversity of consumer goods available in the markets involved, contains prices, expands sources of employment for all, and consolidates a significant trading bloc to compete with the rest of the world.
The USMCA achieved much of that from the beginning: trade between the countries increased sixfold, and 12 million jobs were created in Mexico, 14 million in the US, and 17 million in Canada, according to official figures.
But from the early years, the agreement was viewed with skepticism by many because, among other things, it threatened local industries, created conditions for labor exploitation, had an impact on the environment, and promoted inequality.
And some of that happened.
“Complementary policies were needed,” says Ortiz.
“In Mexico, there were no rules on energy policy, regulation, or social policy, and that generated a lot of uncertainty; and in the U.S., too much was left to the market and there was a lack of state cooperation on infrastructure, social support, and labor issues.”
2. Why does Trump hate it?
When the renewal was signed in 2018, 70% of Americans and 80% of Mexicans supported the treaty, according to polls. But that figure has been declining in the United States.
“In the US, the agreement coincides with the rise of automation and the entry of China into the global economy, things that did generate a job relocation, not by reducing manufacturing, but by reducing employment in manufacturing, and that made the middle class feel that their prospects were not attractive.”
“Many fell into a kind of poverty, the pandemic worsened the situation, and for politicians—both Republicans and Democrats—an easy target to explain this process was the USMCA,” says Ortiz.
One of those politicians is Trump, an enemy not only of the USMCA, but of free trade; A precursor to protectionism and a supporter of tariffs since the 1980s.
But he is not alone: ??his opponent in the elections, Kamala Harris, for example, was one of the 10 senators who voted against the treaty in 2020 and during the campaign she used it to attack Trump—who had renewed it—because it made it “very easy to relocate jobs abroad” and “affects the environment.”
Although for decades the treaty enjoyed majority bipartisan support, in recent years it has become a source of tension and an explanation, for many arbitrary, for the increase in inequality, the weakening of unions and the US industrial crisis.
In this rhetorical fight, Trump had the most effective message.
3. How did it benefit Mexico (and the other two partners)?
The protectionist model of the Mexican economy entered into crisis in 1982, when the default on the debt coincided with the fall in the price of oil, the country's largest source of income. Inflation soared, the peso devalued.
But attempts to open the economy, enter the world's free market systems, and relax controls proved fruitless because the world's largest market, the United States, remained inaccessible.
At the same time, for the United States and Canada, which already had a treaty in force, Mexico proved to be an attractive market for exports and a less expensive investment space that could improve the competitiveness of their companies.
On January 1, 1994, the treaty went into effect, and with that, Mexico, in these 30 years, tripled its agricultural exports, millions of jobs were created in the automotive industry, and inflation was reduced.
Northern Mexico was transformed: factories opened, thousands of migrants arrived in search of work, the economic structure changed, and its cities developed.
This allowed the central government to reduce its debt, strengthen its fiscal regulations, stabilize inflation, and increase foreign reserves.
But that didn't prevent—although causality in this is the subject of countless debates—inequality from rising. And gross economic growth never took off.
The results for the US are also subject to much controversy, especially regarding job creation, wage stagnation, and the crisis in industries in the north of the country.
But economists agree that the treaty, by allowing for fluid supply chains, reduced product costs, increased productivity, and improved the competitiveness of the US—and the North American bloc—in the face of a rising China.
Canada also shifted its economy toward trade with its partners, so that manufacturing employment remained stable for decades. However, the productivity gap with the US remained, the economy neither diversified nor grew much, and dependence on the US deepened.
The question now, with the emergence of Trumpist protectionism, is whether the North American bloc will strengthen itself: if it doesn't, there could be a deep crisis; and if it does, there are two options: North America may end up strengthening itself in the face of the world, or it may become isolated and weakened by the rise of China.
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