Key points:

• • • USMCA at risk — Rising tariffs, political friction, and the potential 2026 review are creating uncertainty around rules of origin, market access, labor obligations, and dispute‑resolution mechanisms — areas that are central to legal and tax planning.

    • Economic impact — Mexico depends on USMCA for exports, investment, and employment; and any disruption would be problematic.

    • Water as a strategic resource — The conflict over the 1944 Treaty and the new law reflect the critical importance of water usage and water rights in the bilateral agenda.

For almost 25 years before the United State-Mexico-Canada AgreementĚý(USMCA), it was the North American Free Trade Agreement (NAFTA) that defined the region’s economic relationship. Enacted in 1994, NAFTA removed most tariffs, encouraged foreign investment, and integrated supply chains across North America, especially in manufacturing, automotive production, and agriculture. This integration helped transform Mexico into a major export platform and contributed to North America’s emergence as a competitive economic bloc.

Over time, however, NAFTA drew criticism, particularly in the US, where concerns grew about trade imbalances, worsening labor conditions, and the agreement’s ability to address modern challenges such as . These political pressures set the stage for renegotiation and ultimately produced the USMCA, a more modern but also more politically sensitive framework.

The current chaotic environment around tariffs and trade suggests that these rules in North America may again be subject to revision. Understanding how tariffs, political dynamics, and resource‑related tensions interact is essential for organizations and corporations as they try to plan for the legal and tax implications that may arise as the 2026 review approaches.

A year of trade tensions

From the beginnings of Donald Trump’s second administration in January 2025, , marking the start of a more protectionist trade policy.

In March, some of those tariffs were exempted for products that comply with USMCA provisions. However, in December, President Trump declared that the US would allow the treaty to expire or seek to renegotiate it in 2026, alleging that Canada and Mexico have gained advantages to the detriment of US interests.

Not surprisingly, throughout 2025 and saw President Trump accuse Mexico of failing to comply with the 1944 Water Treaty, a historic agreement that regulates the distribution of water resources from the Bravo, Colorado, and Tijuana rivers. According to the US government, Mexico had not delivered the agreed-upon volumes, generating friction amid a political context already marked by trade disputes.

Mexico argued that prolonged droughts between 2020 and 2025 made compliance with the treaty difficult, affecting water availability in its own agricultural and urban regions. However, President Trump warned that if water flow to the US did not increase, he would impose a 5% tariff on Mexican exports, adding pressure to the bilateral relationship. Finally, after negotiations, an agreement was reached: Mexico must supply the remaining amount before 2030, which represents a significant challenge for the country’s water management.

In this context, the Mexican government promoted a structural reform to ensure compliance with the treaty and guarantee efficient resource management. On December 11, 2025, the and came into force the following day. This regulation establishes a new legal framework with three fundamental pillars:

• • • comprehensive state responsibility for water management;
    • exclusive powers for Conagua in the allocation, supervision, modification, and revocation of concessions; and
    • prohibition of concession transfers between private parties, preventing speculation and resource hoarding.

The law directly impacts strategic sectors such as agriculture, livestock, industry, and rural communities, as well as domestic services. Beyond its internal scope, this reform is interpreted as a mechanism to guarantee compliance with the Water Treaty, reduce the risk of trade sanctions, and strengthen Mexico’s position in future international negotiations.

Economic impacts and projections

For Mexico, the USMCA is not merely a trade agreement; it represents a strategic pillar for the country’s economic stability and sustained growth. Since its entry into the USMCA, Mexico has become a reliable partner in the North American region, guaranteeing its preferential access to two of the largest markets in the world. This advantage has driven foreign direct investment into the country, especially in sectors such as automotive, advanced manufacturing, agribusiness, and emerging technologies.

The importance of USMCA lies in the fact that . Without this legal framework, Mexico would face an adverse scenario because the imposition of significant tariffs would reduce the competitiveness of national products, increase supply chain costs, and directly affect job creation. The automotive sector, for example — and about 30% of manufacturing GDP in Q3 of 2025 alone and employs more than 1 million people — would be one of the hardest hit by the loss of these preferential conditions.

In addition, USMCA offers legal certainty for investors. Clear rules on intellectual property, digital trade, and dispute resolution reduce risks and encourage the arrival of foreign capital. Without this treaty, Mexico could experience an outflow of investments to other countries with more stable agreements, which would negatively impact job creation and projected economic growth.

The coming USMCA review

The possible renegotiation of USMCA, scheduled for later this year, generates uncertainty. This review process presents several possible paths for Mexico, each with distinct economic, political, and diplomatic implications. If the USMCA is successfully extended without substantial modifications, Mexico would preserve its preferential access to the US and Canadian markets, maintaining the commercial stability that supports most of its exports. This continuity would reinforce investor confidence, support job creation and stabilize diplomatic relations.

However, if no agreement is reached to extend the treaty, this absence of clarity would create uncertainty for businesses operating throughout North America. Investment decisions could be delayed, expansion plans postponed, and operating costs could rise due to increased scrutiny and customs enforcement. Further, diplomatic tensions could begin again, particularly if unilateral measures such as large tariffs are threatened again. In this environment, Mexico would need to adopt a cautious strategy focused on strengthening legal frameworks and offering targeted economic incentives to maintain its own competitiveness.

Another scenario in which the parties fail to reach consensus would activate the formal pathway toward the treaty’s expiration in 2030. While trade flows would continue in the short term, markets would begin adjusting to the anticipated end of the USMCA. This expectation could trigger a gradual relocation of investments and restructuring of supply chains, particularly in industries heavily integrated with US production networks, such as automotive manufacturing and advanced industrial sectors. Pressure on the peso, slower GDP growth, rising import costs, and early job losses would likely follow; and even if diplomatic efforts emerge to prevent severe disruption, the economic effects for Mexico would become progressively more adverse.

However, the most severe scenario involves one country withdrawing from the USMCA, which would cause the agreement to collapse for all three members. For example, if the US were to withdraw, Mexico would immediately face World Trade Organization tariffs, dramatically increasing export costs for manufactured goods and agricultural products and severely disrupting supply chains.

Clearly, any of these scenarios highlight how critical this year will be for Mexico. While a successful extension of the USMCA would support stability, attract investment, and sustain long‑term growth, a failure to reach agreements — or the withdrawal of a partner country — could reshape Mexico’s economic landscape for years to come.

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Key takeaways:

• • • Real-time oversight and strict compliance — Mexico’s SAT now requires digital platforms to provide real-time access to transaction data and withhold taxes at the source, with severe penalties, including service blocking, for non-compliance.

    • Major technological and operational demands — Platforms must invest in secure, scalable systems for data sharing, billing, and cybersecurity, and small businesses likely will face extra challenges adapting to these requirements.

    • New roles for legal and tax professionals — Lawyers and accountants will be essential in guiding businesses through compliance, privacy, and operational risks, as well as supporting technology integration and adapting to the demands of Mexico’s digital tax environment.

Mexico’s digital tax overhaul is more than a regulatory update — it’s a fundamental shift that will reshape how businesses in that country operate online. By granting the Tax Administration System (SAT) real-time access to platform data, the government aims to curb tax evasion and strengthen collection in the digital economy. This means platforms like Amazon, Uber, Netflix, TikTok, DiDi, and Mercado Libre must now share transaction details as they happen, which will mean unprecedented compliance, technology, and operational challenges for companies and professionals alike.

Platforms must also — 2.5% for income tax (ISR) and 8% for value added tax (IVA). If a seller does not give a tax ID number (RFC), the platform will keep up to 20% of the payment; and, if the platform does not comply, SAT can block the service in Mexico until the problem is fixed. That means users will not be able to access the platform until it follows the law.

The goal of all this is to make tax collection fair and stop fake invoices and false transactions. The law also adds ; now, selling fake tax documents online can lead to two to nine years in prison.

These new tax measures also raise questions about with the United State-Mexico-Canada Agreement (USMCA or T-MEC), because some proposals — such as increased data access and stricter penalties for digital platforms — could conflict with the treaty’s provisions on cross-border data flows and platform liability.

Indeed, this shift is part of a wider digital transformation in Mexico, as seen not only with the new biometric CURP for identity verification, but also with SAT’s adoption of AI-driven smart auditing — both of which bring new opportunities and challenges for compliance, security, and public trust.

Technological impact on companies

These latest rules mean big changes for tech systems. Platforms must create secure connections for SAT to access their data, although they may use APIs or that send transaction details in real time.

Companies will need stronger cybersecurity policies because opening a permanent link to SAT creates risks, especially considering the high value of data that will be flowing through the system en masse. At a minimum, businesses will need to invest in heightened encryption to protect data, authentication systems to control access, and monitoring tools to detect unusual activity

Platforms also need to update their . Every sale must include correct tax retention and generate a digital invoice (CFDI). For larger platforms that process millions of transactions daily, this means building high-capacity systems to avoid delays or errors. These platforms will also need data pipelines to handle the huge volumes of information and, in turn, send that to SAT without slowing down the services of SAT or themselves.

Small companies and startups may face extra challenges. They might not have the money or staff to make these changes quickly; and they likely will require the assistance of technology providers or consultants to implement new solutions such as compliance-as-a-service and automated tax reporting software.

Challenges and opportunities for tax and legal professionals

For lawyers, these rule changes will create new work areas. Companies will need legal advice to comply with the new rules and protect user privacy. Lawyers, for example, can help draft policies, negotiate limits on data sharing, and design compliance programs.

There will also be litigation opportunities. Many that real-time accesses could violate privacy rights and even the Mexican Constitution, with legal challenges likely by companies as a result. However, due to the recent amendments to the Amparo Law, many of these lawsuits could be frustrated at the outset, because the new Amparo requirements demand the claim of direct and personal harm and impose stricter limits on judicial suspensions, making it harder for platforms to obtain effective protection against real-time monitoring.

For accountants and tax advisors, the challenge is operational. They must help businesses manage new tax retentions and keep accurate records. Many smaller businesses, especially in retail, will need help registering with SAT, issuing invoices, and recovering taxes withheld. Accountants will also need to plan for their clients’ as a result of the retentions potentially reducing liquidity.

Both professions are likely to see more demand for their respective services. Lawyers will focus on compliance and defense matters, while accountants will handle routine tax activities; however, both will be involved in technology integration. Professionals who combine legal or tax knowledge with these needed tech skills will have a big advantage.

Adapting to Mexico’s real-time tax landscape

Real-time tax monitoring is a major shift for Mexico’s digital economy, and it aims to increase tax collection and reduce fraud, but it also brings big risks and costs. And the success of this big fiscal change depends on balance. Authorities must ensure strong security and clear limits on data access, and they should also offer support to small businesses, either in educational or instructional fashion, to help those enterprises that may have fewer resources at their disposal to navigate this turbulence.

If implemented well, however, this system could make Mexico’s tax collection more efficient and fairer. If not, these changes could lead to privacy violations, higher costs, and even less participation in the digital economy by smaller entities.

Indeed, Mexico is entering new territory with these rule changes, and the world will be watching carefully as this could become a model for other countries’ digital tax compliance — or it could become a cautionary tale of what happens when technology and regulation collide without enough safeguards.

You can find out more about theĚýregulatory and legal issues impacting MexicoĚýhere

Key insights:

• • The North American economic bloc facing significant challenges — Due to escalating trade tensions and policy uncertainties, the trading bloc comprised of the US, Canada, and Mexico is currently facing significant challenges that have the potential to undermine economic growth and stability across the region.

  • Customized trading strategies needed — Given each country’s unique economic outlook, policymakers will need to work on tailored strategies to address each nation’s specific issues.

  • Communication & collaboration are key — The future of North American economic cooperation hinges on sustained dialogue and cooperation among the member countries. For continued and shared economic prosperity in the region, the three nations must work together.

For many years, the North American economic landscape has been defined by robust collaboration among the United States, Canada, and Mexico. Policymakers strategically leveraged the region’s unique geographical advantages and opportunities to foster prosperity, leading to the creation of one of the world’s most powerful trading blocs. After the North American Free Trade Agreement (NAFTA) was supplanted by the United States-Mexico-Canada Agreement (USMCA) in 2020, it became the world’s , with the combined imports among the three nations amounting to .

Despite this success, the bloc’s partnership is now precarious. Escalating trade tensions now pose considerable challenges not only for the three participating nations but for the global economy as a whole now and in the future.

The United States

The Trump administration activities around tariffsand ensuing policy uncertainty has led to significant concerns among businesses throughout North America. These concerns are expected to , while consumer spending may also decelerate due to higher unemployment and persistent inflation.

In fact, economists foresee weaker growth in the US economy. Even though real US GDP grew 2.8% in 2024, shows that it may decelerate to 1.8% in 2025. According to the IMF, unemployment will stand at 4.2% this year, further signaling a soft labor market.

Tariffs also will result in price increases for consumers on imported goods, likely leading to additional pressure on overall price levels. Indeed, consumer prices rose 2.7% in June compared to the previous year, potentially indicating the beginning effects of Trump’s tariff policy on inflation.

This likely will contribute to inflation remaining persistent, with estimates Ěýthroughout 2025 of 3.0%, one percentage point above the Fed’s 2.0% target. At the same time, retaliatory tariffs from other countries are expected to lessen demand for US exports. In addition to trade and policy instability, Trump’s immigration agenda could continue to impact various sectors of the economy, such as construction and agriculture, where labor supply and demand may be affected.

In this environment, a slowing US economy is likely to lead to reduced tax collection, subsequently decreasing government revenue even further. An increase in government debt is anticipated, with general government gross debt as a percentage of GDP projected to rise to 122.5% in 2025.

As for 2026, real GDP growth is expected to slow further to 1.7%. Economists also project that inflation will continue to ease, reaching 2.5%, while unemployment is likely to remain stable at 4.2%. Although these figures suggest a relatively steady outlook, there are more notable downside risks than upside ones. Persistent, or even worse, increasing trade, policy, and geopolitical uncertainties could undermine economic performance and threaten the country’s stability.

Canada

In 2024, Canada’s , with real GDP increasing by 1.5%; however, the country’s economic outlook for 2025 has weakened. Rising trade tensions with the US have contributed to a deterioration in both business and consumer sentiment, while policy uncertainty has increased. As a result, the growing 1.4%, and the unemployment rate rising to 6.6% in 2025.

Unlike the two other countries in the region, inflation in Canada is expected to ease to its 2% target in 2025. However, the Bank of Canada will likely face a challenging environment in the coming months, as upward pressure from higher import prices due to tariffs and downward pressure from falling demand could infringe upon price stability.

Looking ahead, economists project a modest recovery in macroeconomic conditions for Canada in 2026. With projected real GDP growth of 1.6%, inflation at 2.1%, and unemployment at 6.5%, the economy is expected to demonstrate enhanced resilience.

Further, the Organisation for Economic Co-operation and Development (OECD) made some recommendations for the Canadian economy to help it weather these uncertain times, including seeking diversification of trading partners, strengthening innovation to boost productivity and competition, and increasing government investment in infrastructure.

Mexico

As of the midway point of 2025, Mexico’s economy is facing a challenging outlook. In 2024, the country’s real GDP grew by 1.5%; however, , with an anticipated contraction of 0.3%. to weakened exports resulting from tariffs, as well as restrained public consumption and investment.

The IMF’s forecasts also suggest that private consumption may be supported by moderate unemployment (3.8%) and declining inflation (3.5%) in 2025. Still, while unemployment is anticipated to remain at relatively low levels, this figure represents an increase from last year’s level. Also, while investment is aided by lower interest rates it is expected to recover only gradually amid persistent concerns that include geopolitical tensions and domestic uncertainty from policy changes and reforms.

Further out, a recovery for the Mexican economy is anticipated in 2026, with real GDP projected to grow by 1.4% after the previous year’s contraction. The labor market is forecasted to hold stable, with the unemployment rate standing at 3.8% in the same period. However, inflation is likely to persist at 3.2%, remaining above its target level.

The OECD has outlined several recommendations for Mexico as well, including improving property tax collection and digitalizing tax administration to grow government revenue. Conducting cost-benefit analyses could improve the efficiency of public spending; and creating regulations that encourage private investment in renewable energy could allow the country to leverage its natural resources and gain competitive advantage.

The future of the North America trading bloc

The economic performance of North America in 2025 is increasingly clouded by rising policy uncertainty and commercial tensions between the three member countries. is projected to slow to 1.6% in 2025 — a percentage point lower than in 2024 — as each country contends with unique challenges and the broader consequences of escalating trade disputes.

The imposition of new tariffs by the Trump administration has reverberated across the North American region, straining longstanding trade relationships and introducing additional volatility for businesses and individuals. These developments risk undermining the progress achieved under trade agreements such as NAFTA and its successor, the USMCA, which were designed to foster regional integration and collective growth. With the coming renegotiation of the USMCA in July 2026, the future of North American economic cooperation hangs in the balance.

By 2026, for the entire North American region. However, this outlook is contingent upon the resolution of the ongoing tariff disputes and successful renegotiation of the USMCA. Achieving agreements that address the United States’ trade deficit with each respective country remains a key priority for President Trump, as does advancing other significant agenda items, such as enhancing collaboration on immigration — particularly along the US/Mexican border — and increasing efforts to combat drug cartels in Mexico.

While it is very hard to predict what will happen in the coming months (let alone the next year) for North America, what is certain is that sustained dialogue and cooperation among the three countries will be essential to preserving the benefits of regional integration, restoring investor confidence, and promoting shared prosperity in the months and years ahead.

For more on the current trading environment, check out the Thomson Reuters Institute’sĚý2025 Tariff Survey here

The challenges posed by considerable distances and time zone disparities in cross-continental operations are undeniable. Before the COVID-19 pandemic, cost reduction efforts led many companies to seek suppliers in distant destinations, with Asia being one of the most attractive hubs. However, global supply chain disruptions originating from the pandemic were proof that these challenges can end up negatively impacting the efficiency of production processes. With nearshoring, businesses aim to mitigate these issues by bringing outsourced production centers closer together, thereby enhancing collaboration and addressing logistical obstacles much easier.

There has been a clear and growing trend of companies nearshoring their manufacturing operations to Mexico. A recent study from the Mexican Institute of Competitiveness found that linked to the relocation of supply chains in Mexico grew 47% during the first three quarters of 2023. For Asian companies, Mexico has become a very interesting alternative and a way to avoid the geopolitical conflict between the United States and China. Ěýhave already established themselves in Mexico, with those of Chinese origin having the greatest presence. Further, experts anticipate these numbers will increase in the coming years, predicting that Mexico has the potential to attract due to this phenomenon.

The impact of nearshoring

Not surprisingly, nearshoring has introduced both challenges and opportunities for law firms in Mexico. Most of the businesses that come to Mexico to embrace nearshoring are foreign companies that in some cases are not completely aware of the country’s legislation, culture, and business dynamics, explains , a legal expert in competition, antitrust, and international trade. This provides a great opportunity for lawyers to help clients navigate their nearshoring projects successfully within the legal landscape.

According to Garza, clients are coming in different shapes and sizes. Clients and their projects are unique, each with a different scope, industry, project stage, and market objectives. Therefore, lawyers advising these types of companies need to understand that there isn’t a one-size-fits-all template or framework that can be applied universally, and instead they must approach each project on an individualized basis with custom-made solutions.

The need to collaborate

In the context of nearshoring, legal guidance requires strong teamwork between legal practitioners with experience in different fields and practice areas. Garza describes how several legal practice areas have been the busiest, due mostly to legal work around the relocation of supply chains. Additionally, she considers the coordination among these practice area lawyers to be fundamental in order to serve companies in the best possible way:

Corporate — It is common that one of the first steps in these types of projects is to establish a legal entity. Lawyers need to inform their clients about the various types of companies that may be incorporated in Mexico, along with the rights and regulations that are involved. Selecting the correct corporate structure is a key factor for creating a successful business in Mexico.

International trade — Mexico is party to many free trade agreements (FTA), and it also offers diverse manufacturing and export promotion programs with interesting and attractive benefits for investors. In addition, if companies wish to export their final goods into the US or Canada, it is crucial that their businesses operate within the regulatory framework of USMCA — the trade agreement between the US, Mexico, and Canada — which has stronger terms compared to the NAFTA. Understanding how these treaties and programs apply to a client can make their operational processes more efficient and reduce significant costs.

Labor — Most of the projects that embrace nearshoring involve manufacturing, which of course, is known for being labor intensive. Given this, foreign businesses need to be aware of every aspect of Mexican labor law, including Social Security rules, profit-sharing, employee benefits, working hours, minimum wage payments, issues with unions, a ban on outsourcing, workers housing fund, and others.

Real estate — With 32 states in Mexico, each having distinct legislation and tax incentives to attract investment, the selection process for the project’s location becomes pivotal. Also, consideration of geographical factors, infrastructure, and availability of resources, such as water and energy, holds significance as well. Following the decision on a project’s location, conducting proper due diligence becomes imperative to ensure that the intended land acquisition adheres to the necessary legal permits for purchase or lease. Otherwise, an evaluation may be necessary to determine the steps required to meet these conditions.

Tax — This aspect becomes fundamental in order to determine the level of profitability for a project. Lawyers can play a significant role in designing optimal fiscal schemes that comply with Mexican tax laws and benefit from certain double-taxation agreements.

Compliance — Due to the nature of nearshoring, compliance extends beyond adherence to the company’s governance guidelines and rulings, and domestic laws; it involves aligning with the regulations of the countries encompassed within the entire supply chain and the FTAs involved. This entails monitoring the journey of raw materials and final products manufactured in the project, from their origin to their eventual destination.

Environmental, social & governance (ESG) — Comprehensive legal advice on nearshoring projects also must include guiding companies through the best international practices in ESG matters.

Foreign firms have come to Mexico to establish factories for decades; however, the projects coming in this new wave demand more complex and sophisticated solutions. These projects need to be integrated into global or regional value chains, and it is typical for the manufactured products in Mexico to be exported and commercialized elsewhere. Therefore, lawyers need to supervise every stage in the product supply chain and verify that the complete operational process aligns with the laws of the all the countries involved, including those of the final market.

Garza said that, in order for these projects to be successful, joint efforts from different practice areas and jurisdictions are indispensable. Lawyers have to transcend the mere comprehension of the Mexican legal framework and work with lawyers in other parts of the world. Additionally, they should take into consideration fast-changing global trends, technological advancements, and of course, the rise of artificial intelligence.

Looking ahead

The coming months are critical for law firms to leverage this nearshoring phenomenon by specializing further, coordinating efforts, and adopting an international perspective. The role of lawyers is not only to provide legal advice but to fortify incoming companies in all aspects, fostering a welcoming and well-advised environment for their ambitious business goals.

The recent development of nearshoring, accelerated by the COVID-19 pandemic and disruptions in global supply chains, demands a proactive approach from law practitioners. The legal community in Mexico stands at the forefront of this transformative trend, sensing legal needs and preparing to navigate the complexities of nearshoring while contributing to the creation of successful and sustainable supply chains.

In a recent featuring Reuters’ White House correspondents, the group assessed the work this administration must undertake related to trade, China, and antitrust issues. The previous Trump Administration, like many other past administrations, included the passage of many treaties that the administration felt were in alignment with the country’s position. However, Trump clearly broke with the trade policy of his predecessors and at times, seemed at odds with the rest of the world, impacting allies and non-allies alike.

Some actions were deemed controversial while others were necessary, just as the USMCA trade deal, which is the updated NAFTA treaty. The Biden Administration says it plans to review all of Pres. Trump’s previous trade policies. According to webinar panelist Andrea Shalal, a Senior Correspondent at Reuters, the Trump Administration upended global trade and waged trade wars using tariffs as weapons.

Key issues for global trade management

According to the panel, some of the key trade issues the Biden Administration will need to tackle include:

The E.U.

The ongoing trade battle between the United States and the European Union stemming from Airbus and Boeing disputes left the two regions in a transatlantic tariff war for the last four years. The Biden Administration has agreed to at least temporary lift some of the E.U.’s aircraft subsidies, which signals to the region that the U.S. is interested in working together. . want to use trade policy to fight climate change and share an interest in placing tariffs on high-carbon imports.

China

China is the trading partner with the U.S. trading an estimated $558 billion in goods during 2019. In fact, 6% of overall U.S. exports is sent to China. The current administration’s approach of carefully reviewing the tariffs and restrictions set in place by Trump is necessary.

There is much contemplation on whether anything differently will be done with Chinese tech giant , which is currently listed as security threat and is on the U.S. Commerce Department’s economic ban list. Indeed, all signs point to the ban remaining in place. The Biden Administration appears on ByteDance, a Beijing-based tech company that runs the popular TikTok social media platform. The administration asked the courts to delay moving forward with banning the platform while they review security concerns.

These two prominent issues aside, the trade war with China encompasses other areas that the current administration plans to address and enforce. China’s behavior in the market, which include intellectual property, piracy, and human right issues, will be in focus. Pres. Biden has repeatedly stated his approach to trade with be conducted through the lens of climate protection, human rights, and workers’ rights. There also are plans to pressure the Chinese government on it forced labor actions including its treatment of the Uyghur Muslim community.

Sanctions

The administration also has indicated its willingness to review and decide which sanctions should remain in place and which may see some easing. Trump made history in terms of the number of sanctions he signed during his term — since 2017, he reportedly , often somewhat indiscriminately, according to critics. Some of the places where it is thought Biden may ease sanctions include Cuba, Venezuela, and Iran.

For example, Biden’s potential review of Cuba’s designation as a State of Sponsor of Terrorism will most likely suspend Title III of the . Indeed, since the Act’s enactment in 1996, every president — Bush, Clinton, Obama, and Trump has suspended the designation, until Trump began to enforce it in 2019.

The sanctions against Iran will not all go away, but Biden has indicated he wants to return to negotiate again around them. The sanctions against Venezuela includes a ban on diesel swaps (put in place by the ) which barred non-U.S. companies from sending much needed diesel in exchange for the country’s crude oil. The Biden administration is being asked to lift this ban as the lack of diesel impacts the overall society of Venezuela. Diesel is used for public transportation, including for farmers who need it to move food supplies to markets.

Other notable activities

The incoming U.S. Trade Chief Katherine Tai speaks for the administration in saying that its approach to trade policies will put American workers at the center, ensuring “ protect and enhance U.S. jobs” adding that Biden’s vision is to “implement a worker-centered trade policy.

Tai herself was a central figure in crafting the USMCA agreement, especially by placing “a great emphasis on enforcement of labor-rights provisions,” says Reuters’ Shalal, adding that these provisions will create a road map for future trade agreements and even help tweak existing ones. That there will be unfettered trade policies is a thing of the past, she says, noting that “the rising tide doesn’t lift everyone out of poverty, as the case of the Uyghurs in China.”

The panel agreed that it is important for countries to utilize tariffs and sanctions when resolution cannot be made through negotiations; however, there should be some level of thoughtfulness in deciding whether to issue sanctions or tariffs. Clearly, as Dr. Catherine L. Mann, Global Chief Economist at Citi, : “Trade wars have global implications, and not just for the parties involved” — and that is especially true when the trade wars involve the world’s two largest economies.

On April 24, the Trump administration notified Congress that the U.S.-Mexico-Canada Agreement (USMCA) would take effect on July 1. That’s 21 months after the three countries reached an agreement in principle on the replacement for the North American Free Trade Agreement (NAFTA), which was enacted in 1994.

Entities including the Canadian Chamber of Commerce, Canadian dairy industry, automakers, and the U.S. Senate Finance Committee recommended postponing implementation of the pact due to the global COVID-19 pandemic and the fact that companies are laser-focused on maintaining and managing their supply chains and production capacities during this crisis.

U.S. Trade Representative Robert Lighthizer, however, countered that “the crisis and recovery from the COVID-19 pandemic demonstrates that now, more than ever, the United States should strive to increase manufacturing capacity and investment in North America.

“The USMCA’s entry into force is a landmark achievement in that effort,” Lighthizer continued, contending that under President Trump’s leadership, the Office of the United States Trade Representative will “continue working to ensure a smooth implementation of the USMCA so that American workers and businesses can enjoy the benefits of the new agreement.”

Whether or not the time is right, the USMCA, it appears, is upon us.

What’s new?

The renewed agreement between the United States, Mexico, and Canada may indeed bolster the economy in North America given that it adapts the disciplines of NAFTA to the current needs of the 21^st century economy. In the mid-1990s, NAFTA established trade liberalization commitments and set new rules for market-opening provisions that gradually eliminated nearly all tariff and most non-tariff barriers.

For more on this subject, join us for a one-hour webinar,Ěý, at 2 pm EDT on June 4.

Now, USMCA’s implantation arguably will increase the confidence of companies and investors. Comprising 34 chapters and 12 side letters, the agreement retains most of NAFTA’s market-opening measures as well as new provisions to make commerce more inclusive by facilitating the participation of entrepreneurial and small- to medium-sized enterprises (SME). The USMCA also makes notable changes to auto rules of origin, dispute settlement provisions, government procurement, investment, and intellectual property rights protection while bolstering employee protections and measures to combat corruption. The USMCA also includes commitments to administer customs procedures in ways that will facilitate trade or the transit of goods while supporting compliance with domestic laws and regulations.

Compared with NAFTA, the new agreement incorporates tools for:

• • • boosting the development and an efficient use of energy resources;
    • promoting digital commerce;
    • facilitating the trade of financial services;
    • encouraging the competitiveness of telecommunications;
    • fortifying the protection of intellectual property;
    • retaining dispute settlement mechanisms; and
    • bringing in a revision mechanism.

The more notable updates are listed in the following chart.

As evidence this is an innovative accordance, USMCA also includes:

• • • more stringent rules of origin for goods including chemicals, automotive products, televisions, optical fiber, glass, and steel;
    • reinforcement of protections in the transmission of data, free flow of information, and free access to public data;
    • patent protection for new innovations such as pharmaceutical products, chemical processes, business technologies, and computer software;
    • copyrights providing creators of artistic and literary works with the exclusive right to authorize or prohibit others from reproducing, communicating, or distributing their works;
    • dispute settlement mechanisms for labor and environmental conflicts;
    • recognition of the SME sector as a reinforcement for the global value chains; and
    • anticorruption practices to prevent corruption with established obligations for public and private sector.

In conclusion, the USMCA contains provisions needed by all three countries, because the North American commercial environment has changed dramatically since NAFTA was enacted a quarter-century ago. The new agreement solves many of the deficiencies and mistakes in NAFTA and will bring the U.S., Mexico, and Canada together as a global competitive force.

And to reiterate: It not only benefits commercial enterprises. Provisions protecting workers will establish new labor standards including a process for inspections of factories and facilities to confirm they are meeting their obligations.

This is a big step in ensuring fair treatment of the people who make trade and economic prosperity happen. And it also may serve as a model for other nations as they revise and modernize their trade agreements.

Many foreign and national companies in Mexico perceive the United States-Mexico-Canada Free Trade Agreement (USMCA) as an obstacle because it contains more restrictions than the North American Free Trade Agreement (NAFTA) that it replaces.

This includes new duties on steel and aluminum, and an increase in the percentage of regional content that must be used in vehicles assembled in North America. In the automotive sector, for example, the minimal amount of Regional Value Content (RVC) included in each vehicle will increase from 62.5% under NAFTA to 75% under USMCA over the next three years. (The RVC goal will be phased in at levels of 66% in 2020; 69% in 2021; 72% in 2022; and 75% in 2023.)

Assembly plants that opened production in Mexico over the past few years — including BMW, Audi, Toyota, and Kia factories — have until 2025 to reach the goal. In addition, companies that do not comply with the RVC goal will be levied a duty of an 2.5%, a provision intended to promote the installation of suppliers in three countries covered by the agreement. Also, quotas totaling 2.6 million Canadian and Mexican vehicles (well above the current 1.8 million) were established in the USMCA.

Another significant change is a labor clause stating that between 40% to 45% of vehicles must be manufactured by workers who earn at least US$16 per hour — a measure designed to avoid the relocation of production to Mexico, where wages are around US$3.50 per hour.

Mexico appears to fare well under USMCA

The effects of these changes can only be projected at this stage, but what can be seen is that, despite U.S. pressure, the Mexican auto industry did not suffer a setback in the USMCA negotiations. Some of the measures to be implemented could help the industry continue growing in the country by attracting companies or generating new local auto suppliers to achieve the regional content goals.

For more on this subject, join us for a one-hour webinar,Ěý, at 2 pm EDT on June 4.

Mexico went through a long period of economic uncertainty during the negotiations to replace NAFTA. The process resulted in investment being driven out because companies were wary regarding their long-term options. When the protracted negotiations were finally concluded, Mexico was the first country to sign and ratify the new agreement, followed a short time later by the U.S. On March 13, the Canadian Parliament ratified the USMCA before taking a three-week break forced by the COVID-19 emergency.

It was initially thought that the agreement would go into effect on June 1 — as it was established that the agreement would take effect on the first day of the third month after it was ratified by the three countries — but the countries failed to send their letters to certify their counterparts’ readiness to adopt the new agreement, and the deadline was missed.

Calls for postponement

The Canadian Chamber of Commerce acknowledged its government’s effort to modernize the agreement, but argued that it is not the right time to implement it due to the global pandemic, as the crisis has companies focused on maintaining their production capacity and supply chains.

The Canadian dairy industry also made a call to postpone the agreement’s implementation until at least August in order to give companies time to prepare for the changes that come with the new deal. In addition, the auto industry made multiple requests to the governments of each country to grant an extension until January 2021.

In the U.S., the Senate Finance Committee, which has jurisdiction over trade, also recently called for a delay “in light of the COVID-19 pandemic.” However, Mexico and Canada recently sent their letters confirming that the countries are prepared to implement the USMCA; and the U.S. trade representative recently announced the agreement will go into effect on July 1. So, it seems we are closer than ever.

A differentiator for Mexico

Mexico’s president,ĚýAndrĂ©s Manuel LĂłpez Obrador, has declared that the USMCA will differentiate Mexico from other countries, and he is hopeful that its implementation will boost the economy.

From Mexico’s perspective, the USMCA agreement represents an opportunity to keep doing business with its largest trading partner, the United States, and offers a beacon of hope to reactivate the Mexican economy once the crisis caused by the pandemic is over.

If implementation is hastened and current market and global economic conditions are not taken into account, however, it could have the exact opposite effect — a negative impact on companies’ operations and the disruption of efficient supply chains.

The renegotiation of the trade treaty between the United States, Mexico, and Canada creates opportunities and redesigns the “exemplary treaty” into an innovative one.

We will analyze the USMCA’s rules of origin and how they impact key industries — automotive, steel, chemicals, and textiles. It’s important to note that an international treaty does not assume all products traded between parties are tax-free, but that free trade will be granted for products originating in the region that comply with specific terms and rules of origin.

These rules are based on the percentage of regional content in the products, the use of components produced in the region, or a change in the classification of goods (as when raw materials are processed into new products.)

The USMCA gives us rules of origin very similar to the North American Free Trade Agreement (NAFTA) that it replaces — and it continues to ensure a free flow of tax in North America by incentivizing the region not to assemble vehicles in, or use components from, other regions such as Asia.

For more on this subject, join us for a one-hour webinar, , at 2 pm, EDT on June 4.

The recent renegotiation focused on the most impacted industrial sectors, which are heavily responsible for the economy of the three countries.

Automotive

It’s no surprise that a majority of the negotiations focused on the automotive sector, given that the production of components and the assembly of vehicles require collaboration across the region. Tensions arose with regard to the amount of regional content, components, and assembly required, and demands over working conditions in Mexico.

Specifically, USMCA’s rules of origin require 75% regional content, compared with NAFTA’s 62.5%. This increase must be formally achieved three years after the agreement enters into force, which gives auto companies time to phase in the requirements. As an important addition to these measures, the steel used in the production of cars and trucks must also have 70% regional content.

A USMCA measure that leaves Mexico at a disadvantage is the provision that 40% of cars and 45% of trucks must be manufactured by workers who earn at least $16 per hour. In Mexico, auto worker wages currently are $3.60 to $3.90 per hour, so this rule largely eliminates Mexico as a source of cheap labor in the automotive industry. Automakers will have to take this into account as they decide where to locate production, how to redesign their supply chains, and how to compare the value of free trade with cheaper labor.

The new rules also include a commitment to establish stricter requirements for the importation of small parts or components brought in from Asia, which at least returns some potential advantage to Mexico.

Steel

The rules of origin for the manufacture of televisions and other electronics were updated to accommodate current technologies and technical language.

Some inoperative compliance options were eliminated, and it was established that 65% to 75% of the steel used in certain steel-intensive products (cars, washing machines, furniture, stoves, etc.) would originate in the region. This requirement is being phased in over the next two to five years, depending on the product.

Chemical

In the chemical industry, the rules were modernized to introduce new compliance alternatives that recognize various chemical processes that transform materials: chemical reaction, particle size change, isomer separation, and purification.

The chemical industries in Mexico, the United States, and Canada took a unified stance to push for changes that make the rules of origin simpler and more flexible. Under NAFTA, the rules of origin for the chemical sector were defined by the method of tariff shift (change of heading) or with a content-value methodology.

Textiles

Under the USMCA, sewing yarn, pocket fabric, and elastics contained in a garment are required to originate in the countries of the region. For finished textile goods, coated fabrics (plastic) are also required to originate in the region. This provision may lead to the establishment of new domestic suppliers given that these materials are commonly imported from Asian countries.

Among other changes in the textile sector, it was established that the coverage of the provisions for textile folk goods (crafts) is extended in order to incorporate indigenous-produced goods into preferential tariff treatment. It also expands the coverage of checks to detect customs crimes, and establishes a textile committee to facilitate consultations and greater cooperation between the authorities.

These new sector-specific implementations show the three nations’ interest in growing their economies, increasing cooperation, and making regulations compatible with today’s technology, environmental concerns, and equitable labor standards.

The negotiators adapted to market demands and industry recommendations, although the revisions will benefit some parties more than others. Further, they may change the leadership role each country will assume within each market sector.

This is the first installment in a three-part series addressing implications of the United States-Mexico-Canada Agreement (USMCA)

How would you characterize the current climate?

Smith: It’s been a very frenzied and disruptive time for us in this profession. We haven’t seen a wrecking ball like this in our lifetime.

What’s an example of the impact on companies?

Smith: There are many products that historically could be imported into the U.S. duty-free. For example, zero-duty-rate products range from laptops to toys. That changed with a Tweet if the country of origin for these products is China.

And there are companies that have previously streamlined and tooled their systems and manufacturing processes to enjoy duty-free benefits under NAFTA. However, under NAFTA 2.0 (the U.S.-Mexico-Canada Agreement) you’ll be hard-pressed to find an auto industry trade compliance professional not bewildered about just how complex the new rules of origin will be to automate.

A customs’ border between the U.K. and E.U.? Let us not forget about a looming hard Brexit.

So, there’s this whole new population of companies whose heretofore mature and steady state has already, or is about to, become upended. The compliance whimpers of the past pale by comparison. Today’s disruption is impacting margin, not just data fields on a customs form. Global supply chains are radically and rapidly changing to protect earnings. And these disruptors make for a new dynamic for a large swath of the importing community.

What’s the global picture?

Smith: As disruptive as things have been in the U.S. with importing products, there’s definitely been retaliation against the U.S. in other markets. We’re very busy globally helping companies that are dealing with retaliatory tariffs being imposed on U.S. exporters in, for example, China and the European Union.

And if Brexit manifests, traders on both sides of the crossing will have a new broker fee hitting the cost of goods sold and a new import value-added tax cash flow hit to contend with. Many of our clients are global multinationals fighting these disruptors on all fronts (Section 301 tariffs on China, Section 232 steel and aluminum tariffs, USMCA, and Brexit) simultaneously. That’s the global picture.

What is your guidance for companies? How can they best prepare for whatever is coming around the corner?

Smith: They need real-time visibility into their supply chain in order to perform an analysis that would show the impact of changes that are being talked about — like Brexit — or projecting and forecasting, say, what a List 4 China 301 tariff is going to do. To mitigate these situations, they need the ability to quickly analyze and see what’s happening today.

If a company has really good technology and systems, they can do that with the push of a button, but that’s sort of a utopian state for most companies. So, we go through an exercise of interviewing and collecting data from many different sources within the company. From that, we put together a current-state analysis and model the impact of different scenarios on the supply chain and the margin.

There’s this whole new population of companies whose heretofore mature and steady state has already, or is about to, become upended. The compliance whimpers of the past pale by comparison.

And it’s not only the physical flow of product. It’s the financial flow, which can be very different. A product could go directly from China to the U.S., but there could be two legal entities in between in different countries that impact the ownership and financial flow. You need to see and understand that in order to make good decisions from a planning standpoint and a regulatory compliance standpoint.

We clearly map out and explain what, for example, a hard Brexit or NAFTA 2.0 would look like for their particular businesses. We say, “In order to mitigate, or be prepared on day one, this is what you have to do.” We develop a laundry list of actions they need to take.

Unfortunately, a lot of companies wait on the sidelines until they are faced with the hard realities.

What role does technology play in this analytical process?

Smith: A lot of the ideas we bring to clients center around technology. They should be building toward a platform that gives them answers to these types of questions at the push of a button. The way they would do that would be to automate their supply chain and their compliance via an enterprise system rather than multiple best-in-breed stand-alone systems.

What obstacles typically prevent that from happening?

Smith: What we see is that companies will have a best-in-breed approach. They’ll have Software Vendor A’s technology for a particular function like tariff classification. Then they’ll have Software Vendor B’s software solution for managing a foreign trade zone. And then they may have Software Vendor C’s solution for free trade agreements, as an example.

They may be saying, “Yeah, we’re automated,” but they’re on different systems which makes it very hard and time consuming to create meaningful reports and perform analytics. Best case in this scenario would be to have a data lake that information from all those systems would flow into for analytics and reporting. That’s why I’ve been a strong advocate and proponent of moving to an enterprise system where the data is normalized and the reporting and analytics are on a single platform.

Another issue on the tech front is how blockchain is going to impact the supply chain. I suggest companies think about that when they are looking at automation and new systems and capabilities. Trade technology will need to interface and interact with blockchains in the future. When they’re blueprinting and designing their systems, they need to determine how they’re going to communicate with various blockchains.

Are there institutional obstacles within companies, as well?

Smith: Sure. It’s budget. It’s getting the institutional support from IT and finance. It’s making this an organization-wide priority. Although today, given all the trade disruption, that’s becoming easier to do. It’s easier to make the case. What’s the saying? “We must seize upon the opportunities created by chaos.”

The interview was edited for length and clarity.