A year and a half since the United States' revamped trade agreement with Canada and Mexico went into effect, changes in the North American auto industry have created some of the greatest tests of the new deal.
That was on display this week as thousands of workers at a General Motors Co. plant in Silao, Mexico, voted to join an independent union that might help them secure better wages and working conditions. The vote came after decades spent organized with a traditional Mexican labor union with a reputation for corruption.
The election was closely watched by U.S. officials, who view it as one of the first trials of new labor dispute channels guaranteed by the United States-Mexico-Canada Agreement. U.S. trade officials had threatened to put tariffs on exports of the profitable Chevy Silverado and GMC Sierra pickup trucks built at the factory if the company didn't safeguard workers' votes in a previous union election.
In other early challenges, Mexico and Canada have bristled at the Biden administration's interpretation of new content requirements and support for EV tax credits that would advantage American automakers. Biden's push to build up auto production in the United States — not just North America — has become a flashpoint with the allied countries, which argue the U.S. may violate the agreement.
Experts say that the trade agreement will likely stand up to these tests, but that it hasn't solved all the problems the countries aimed to iron out when they abandoned the North American Free Trade Agreement.
"I think what (these challenges) show is that USMCA didn't put any of these issues to rest. They're still very much on the table," said Edward Alden, a senior fellow and trade expert at the Council on Foreign Relations, a U.S. nonprofit think tank.
"The three partners are going to have to continue to work through them and see if they can come up with compromises that respect both the desire of Canada and Mexico to have full access to the U.S. market and Biden's desire to pursue more of a 'Buy America' agenda."
Change for workers
It's no surprise that USMCA's earliest tests have revolved around the auto industry: Free trade in North America centers on automobiles, Alden said. "Almost everything else is gravy."
It all started with autos — USMCA has its roots in a pact between the U.S. and Canada made in 1965 that integrated the Canadian and U.S. auto industries in the hopes of creating a more efficient and profitable manufacturing sector. The two countries made a broader free trade agreement in the 1980s and Mexico was added on through NAFTA in 1994.
Under the trade agreement, the three countries agreed not to put tariffs on certain goods flowing between them. It created an explosion of trade within North America, adding several billion dollars of growth to the U.S. economy every year.
But while other factors contributed to off-shoring — namely the rise of trade with China after it joined the World Trade Organization in 2001 — the deal helped push manufacturing jobs out of the U.S. to lower-wage countries including Mexico.
NAFTA created hundreds of thousands of auto manufacturing jobs in Mexico, but it did not significantly close the wage gap between Mexican and U.S. workers. When officials agreed to end NAFTA in 2018, the average hourly wage in auto manufacturing in the U.S. was around $23, according to the Bureau of Labor Statistics. In Mexico, it was just over $3 per hour.
Former President Donald Trump, aiming to get Democrats on board with the new trade deal, agreed to include new provisions in USMCA dictating that at least 40% of components in a new car come from factories where the average wage is at least $16 per hour. USMCA also significantly strengthened other labor protections, including creating an independent panel that can investigate and punish facilities accused of labor violations.
Mexico made big changes to its own labor laws in 2019 when the new agreement was signed, making it easier for workers to elect independent unions to compete with traditional Mexican unions known for their coziness with management.
These labor provisions were put to the test at GM's plant in Silao, where U.S. trade officials got word early last year that the then-entrenched union was destroying unfavorable ballots in an election determining whether it would retain control of the plant's labor contract. The existing union, CTM, was reported to have long negotiated "protection contracts" guaranteeing low wages for its members; such contracts are estimated to account for around 80% of all union agreements in Mexico.
The Biden administration asked Mexico to investigate under the terms of USMCA, and Mexico agreed to a new election with independent monitors. The U.S. threatened to add up to 25% tariffs on GM trucks produced at the plant if the automaker didn't protect the workers' rights.
The workers voted against a collective bargaining agreement with CTM in a vote in August and chose a new union supported by international labor advocates, SINTTIA, to represent them this week in an election observed by more than 100 independent officials, academics and union representatives "ensuring that it was carried out in a personal, free, confidential and direct manner," according to a Thursday statement from GM de Mexico.
Experts say the Silao plant's story represents a victory for USMCA's new labor provisions, but that it is no guarantee of major changes for most Mexican workers. Harley Shaiken, a professor at the University of California, Berkeley, specializing in labor and the global economy, said it might have been easier for the three countries to ensure accountability because in this case, "the corruption was truly inept" with the destruction of ballots.
"The major question mark that remains is will this be able to transfer to other automakers? The fact that they had a breakthrough here doesn't guarantee success, but it's a step in the right direction," he said, adding that there are limits to what a trade agreement can address and real reform must come from within the Mexican government.
"This indicates change is possible," Shaiken said. "Not that change is inevitable."
More big tests
To prevent companies from taking advantage of the original NAFTA agreement by outsourcing most of the production of new vehicles, policymakers agreed to set a content requirement for how many components must be produced in the member countries to qualify.
That requirement for North American production was 62.5%, but it was bumped up under USMCA to 75% with the goal of pushing more jobs into the continent's manufacturing sector.
Now, Biden is at odds with his Mexican and Canadian counterparts over how that new threshold should be interpreted. Mexico and Canada say USMCA allows more regionally produced parts to count toward tax-free shipping than the U.S. does.
The two countries formally asked for a dispute settlement panel under USMCA last month. Both Autos Drive America, the leading advocacy group for internationally based automakers producing cars in the U.S., and the American Automotive Policy Council, representing the Detroit Three, said they agree with Canada and Mexico that the U.S. is deviating from the agreed-upon rules.
"Our companies made investment decisions based on the understanding that was conveyed to them by all three governments," said Matt Blunt, president of the AAPC. "It's clearly challenging when one of the three governments has a different position."
Another flashpoint has been a proposal championed by Biden from Rep. Dan Kildee, D-Flint Township, and Sen. Debbie Stabenow, D-Lansing, that would give consumers up to $12,500 off the cost of a new electric vehicle, including special incentives for vehicles assembled in a unionized factory, in the U.S., and with a U.S.-made battery.
Canada has fiercely opposed the plan, throwing all its diplomatic weight behind killing it over the course of bilateral and trilateral meetings in Washington in November. If the tax credits pass as written, "Canada will have no choice but to forcefully respond by launching a dispute settlement process under the USMCA and applying retaliatory tariffs on U.S. exports," Canadian embassy spokeswoman Michele Anderson said.
Mexico has also opposed it, with both countries saying it would be a violation of the new North American trade agreement.
"It would be a massive, egregious violation that would undermine both the letter and the spirit of the USMCA rules," Alden said. "That said, the Biden administration is perfectly prepared to do it anyway."
Both issues highlight a rare line of continuity between Biden and his predecessor, former President Donald Trump, who negotiated the new agreement: Both have strived to keep as much of the work of auto manufacturing in the U.S. as possible, not just in North America.
The Biden administration sees the North American auto industry on the precipice of explosive growth in electric vehicles and hopes to put a thumb on the scales, pushing automakers to concentrate EV production in unionized U.S. facilities rather than across the three countries. The Canadians are particularly concerned about the implications because of the relative cost parity between the U.S. and Canada.
But there's a conflict inherent in Biden's trade policy compared with Trump's, Alden said.
"He wants to make up with allies in a way that Trump didn't — Trump was happy to fight with the Europeans and the Canadians and the Mexicans and everybody else," he said.
"Biden really wants to improve relationships with those countries. But many of the policies he's pursuing broadly under the umbrella of 'Buy American' are really antithetical to the interests of U.S. trading partners."
The White House did not respond to a question as to how the president balances the administration's interest in promoting U.S. manufacturing with the risk of alienating Canada and Mexico.
Despite these challenges, experts said USMCA is unlikely to buckle under the pressure. The dispute resolution processes have been working — and the three countries' economies are now so linked that it would be mutually assured destruction to walk away from the deal.
"If any of the three countries receive an adverse decision by a (dispute resolution) panel and decide not to comply, it'll create just a lot of uncertainty within an already uncertain environment," said Antonio Ortiz-Mena, a trade expert and senior vice president at Albright Stonebridge Group.
"And it would be extremely bad to foster investment in jobs, which is what the three countries are trying to do."
