A look at a big issue ahead of the joint review of the North American trade agreement scheduled for 2026.
A big part – if not the whole point — of signing a trade agreement is so that a signatory country’s workers and producers obtain the benefits of the market it creates.
After all, they stick to its responsibilities like environmental and labor standards and they bear the deal’s risks. That’s what makes any agreement’s rules of origin (ROO) so important: They ensure a product made inside a trade bloc is treated that way.
The United States is party to the United States-Mexico-Canada Agreement (USMCA). It’s the successor to the North American Free Trade Agreement (NAFTA), and a notable improvement because of its inclusion of ROO for autos and labor standards. Here are some of its specifics:
USMCA requires 75% regional value content (RVC) for passenger vehicles, light trucks, and certain “core” parts (an increase from 62.5% under NAFTA);
It adds a labor value content (LVC) rule requiring that 40-45% of qualifying vehicles be produced by workers earning $16 per hour on average; and
USMCA requires that 70% of a motor vehicle manufacturer’s steel and aluminum must originate in North America.
Improvement over NAFTA’s rules, but they aren’t perfect: they should be considered a baseline for future negotiations – and it just so happens the USMCA, signed in 2019, stipulates a joint review take place in July 2026.
Loose or flawed ROO allow countries outside a deal to undermine its goals and impact supply chains, workers and investment choices. And that’s what’s going on in the case of the USMCA, particularly regarding the flow of Chinese investments into Mexico, which has soared in recent years. Chinese FDI in Mexico is a pathway by which China can circumvent U.S. tariffs and trade policies; China, with its $120 billion goods trade surplus with Mexico, is a key supplier of inputs and components to Mexico’s factories. The U.S. goods trade deficit with Mexico, meanwhile, was more than $171 billion last year – up from $63 billion in 2016.
The world is beginning to experience the second China export shock. And the data strongly suggests that all the work that has gone into securing important U.S. industries like autos may be undermined by gaps in the ROO in one of the United States’ major trade agreements. In 2023, 72% of China-to-Mexico FDI ($2.72 billion) went to automotive manufacturing. We warned about this threat to the American auto industry specifically in a 2024 report. This can and should be addressed in the USMCA review.
This is not the only item that should be looked at during the review. It is, however, a big one. The United States should use these negotiations as leverage to address ROO loopholes that undermine U.S. economic security. Because, again: Why sign a trade agreement if its rules undercut our workers and companies?