How the USMCA will impact Arizona’s economy
The new agreement goes into effect today
On Dec. 18, 2019, the U.S. House of Representatives voted to impeach President Donald Trump. Less than 24 hours later, it gave overwhelming support to the United States-Mexico-Canada Agreement (USMCA), which Trump signed into law in January. The 385-41 congressional vote represented a rare bipartisan win in otherwise divisive times.
After the affirmative vote, Rep. Paul Gosar, R-Ariz., who represents District 4 and is known as one of Congress’ most conservative members, said, “When [House Speaker Nancy Pelosi] and I agree on an issue, there’s something there.”
The USMCA goes into effect July 1. For border states like Arizona, the agreement is a much-needed update to the 26-year-old North American Free Trade Agreement (NAFTA) that brings big benefits to its economy and workers. Representatives from all nine Arizona congressional districts voted in favor of the USMCA, as did the state’s two senators, Republican Martha McSally and Democrat Kyrsten Sinema, who said, “I’m proud to have worked with my colleagues on both sides of the aisle to advance the USMCA and take an important step toward ensuring Arizona employers can sell more products abroad, fueling business opportunities here at home.”
The United States, Mexico and Canada enjoy robust trade relationships. In 2018, Arizona alone exported $9.8 billion in goods to Canada and Mexico, with Mexico receiving $7.6 billion of those exports. According to the North American Research Partnership and Crossborder Group, more than 228,000 jobs in Arizona depend on investment and trade with Mexico and Canada.
NAFTA, implemented in 1994, facilitated trade between the three countries by eliminating tariffs and creating agreements on rights for business investors. The USMCA includes key provisions that will have a special impact on Arizona.
Rules of Origin. New rules of origin require that components and labor for products be majority-sourced from the three countries to be traded duty-free. The rules for the automotive industry require that products incrementally reach 75% content from North America (in contrast to 62.5% under NAFTA) and that 40-45% of the labor involved in automotive manufacturing be paid a minimum of $16 per hour. A 2019 report by the North American Research Partnership and Crossborder Group, titled “The USMCA and Its Impact on Arizona,” noted that the new rules of origin “could benefit Arizona given its proximity to OEMs [original equipment manufacturers] in Northwest Mexico such as Ford in Sonora and Toyota in Baja, California, its connectivity (via I-19) to Mexico’s Highway 15 corridor leading to the Bajio automotive cluster, and easy access to the U.S. southern auto corridor.”
Goods Market Access. The USMCA preserves market access for Arizona farmers and expands U.S. access to Canada’s wine, dairy and poultry markets, which could further benefit Arizona’s agricultural sector. Rep. Tom O’Halleran, D-Ariz., of District 1 in Sedona, described the agreement as “a triumph for hardworking families, our Arizona agriculture producers, businesses of all sizes, and rural communities that are too often overlooked.”
Intellectual Property and Digital Trade. The USMCA contains a modernized chapter on intellectual property and a new digital trade chapter. The latter was welcomed by Rep. Ann Kirkpatrick, D-Ariz., of District 2, located in Tucson and along the Mexico border. “Representing a border district, I understand the direct and vital impacts a strong trade agreement has on Arizona and our local economy,” she said in a statement. “I have always supported modernizing NAFTA and enhancing the agreement to reflect our 21st century economy.” Rep. Andy Biggs, R-Ariz., of District 5 in Gilbert, said that “our growing e-commerce sector will gain greater certainty that its intellectual property is being protected.”
Small Business. New customs and trade rules will make it easier for small businesses to break into foreign markets. Higher de minimis thresholds allow products with globally sourced components to include slightly higher amounts of components from non-USMCA countries while still meeting the rules of origin. This should give companies the ability to source globally to some extent while keeping the tariff-free incentive to source from North America. The higher de minimis could positively impact the SkyBridge operation at Phoenix-Mesa Gateway Airport, which expedites imports and exports through the U.S.-Mexico Unified Cargo Processing program.
Labor. The USMCA’s labor chapter contains new enforceable labor standards that will improve wages and labor conditions in North America — an integral part of the agreement for Rep. Raul Grijalva, D-Ariz., of border District 3. “House Democrats significantly improved President Trump’s NAFTA 2.0 agreement to include strong, enforceable labor provisions to counter the outsourcing of manufacturing jobs and directly penalize companies who abuse their workers,” Grijalva said.
With supply chain disruptions from COVID-19, the USMCA is also poised to fill massive gaps in imports from China with goods from Mexico and Canada. Supply chains from China had already been disrupted by high tariffs when the COVID-19 pandemic exacerbated the problem, said Lilia P. Massey, an import buyer, planner and logistics specialist for Longust Distributing, a wholesale flooring distributor based in Mesa, Arizona. She said in 2019 her company imported 130 containers of tile and ceramic products from China, totaling $1.5 million. This year, it has imported only three containers. “Construction is a big industry in Arizona, so it really hurt us,” Massey said.
Longust Distributing is now acquiring more products from ceramics companies in Mexico, Massey said, thanks in part to provisions in the USMCA. “There will be better prices in the construction industry, which will lead to more jobs,” she said. “I think it will be better for all three countries — for the pricing, for consumers and for businesses.”
Rep. Grijalva has said the USMCA is only a first step. “Southern Arizona’s economy depends on robust trade with Mexico,” he said in a statement, “and while this agreement is not perfect, it’s a strong baseline for future trade deals that can help working people.”