Following what seemed like an eternity of uncertainty, the new and improved NAFTA agreement – unceremoniously dubbed USMCA – has finally arrived, and it’s looking really positive for Nearshore.
Regulations linked to immigration and the provision of digital services have been a pressing concern for the industry for some time, but the USMCA agreement – or NAFTA 2.0 for those who dislike the new acronym – clears all of that up.
“The USMCA provides three major incentives for nearshoring,” said Daniel Ujczo, Of Counsel and Cross-Border Business Development Director at Dickinson Wright PLLC.
“The first is that Mexico and the Americas have become much more appealing compared to Asia because of their preferential access to the US. Secondly, new digital trade liberalization rules mean no customs tariffs or trade barriers on digital services. And third, the renewed relationship between the US and Mexico is a positive tonal shift on the topic of security and migration.”
On top of that, Mexico’s next president, AMLO, earned some good will with the US administration after locking the agreement down, which is likely to bear fruit once he takes office.
So, have all concerns over the new NAFTA’s impact on Nearshore been laid to rest? It certainly seems like it when you dig into the details.
Mexico’s Future in the New Reality of USMCA
Both Canada and Mexico have numerous trade deals in place, largely because NAFTA was used by other countries to get into the US as a “back door”. With USMCA, that reality is over – not the best news for Canada, but potentially very beneficial for Mexico.
One part of the new deal, Section 32, or the non-market economy provision, says that USMCA countries must share information and notify each other before negotiating on trade deals with “non-market economies”, making it more difficult for other countries – primarily China – to exploit the old back door.
“This is going to create an incentive for more nearshoring opportunities, particularly with Mexico,” said Ujczo. “A lot of the work that is being done in non-market economies can be brought into Mexico to take advantage of similar wage differentials. The United States has achieved its number one priority, which was closing the back door to North America through Canada and Mexico.”
While plenty of media attention has been on Mexico’s losses in automotive and textile manufacturing, the country is set to win big from USMCA in the long run, mainly because of its existing competition with China, and other non-market economies, on issues of labor and cost.
“The US has basically told people that if they want low-wage production or services Mexico is the only place that will have preferential access,” Ujczo continued. “To me, that’s a big win for Mexico, as it has just emerged as the most cost-effective provider of services to the US in terms of wage differentials. It also allows it to become the gateway for the rest of the Americas as other nearshore locations use the country as a springboard into the US.”
Nearshore Domino Effect
Now that Mexico has preferential access to the US market, other Nearshore countries with existing US trade deal are also in a great position to benefit from USMCA in this turbulent era of trade deals and tariffs.
“You can take my comments on Mexico and expand that to all of those countries and locales, such as Colombia, Panama, Central America, and Dominican Republic,” said Ujczo. “Mexico is at the top of the list for preferential access, but all of the Americas are also big winners, and Asian countries will start looking more toward this region for access to the US.”
This is unlikely to be an overnight trend, but it positions the industry to grow faster and further than before, especially in comparison to Asia. It’s certainly a positive development when compared to the rest of the world’s more territorial approach to digital trade.
The USMCA will complemented by committees to periodically review and modernize the agreement, which – although limited by each countries’ constitution – will address the problems of NAFTA 1.0 in terms of its lack of updates. It’s not quite “open-ended regulation”, but it will ensure that modernization does take place when new technologies or digital business trends demand it.
For now, the digital services model is a safe bet for Nearshore, and will continue to be until the first major USMCA review.
For IT services provider Softtek, the USMCA means business as usual, with concerns over North American immigration and the TN visa now being lifted. The only expected changes are positive, with more use of the company’s Cloud-based capabilities on the horizon.
“This new version of NAFTA is also much more comprehensive in everything digital, particularly the free movement of data across all three countries,” said Alex Camino, CMO at Softtek. “Mexico, Canada, and the US have done away with any data localization requirements, which is an important benefit for cloud computing customers.
“This is really an enabler for clients in Mexico, as they can choose any cloud services from the US or Canada without the previous restrictions, constraints, or data localization mandates.”
Overall, Camino holds the view that USMCA brings new certainty in the market and in the business community, meaning that things can begin to move along more rapidly.
“It also helps to alleviate concerns about the volatility of exchange rates, particularly in Mexico, as the stability of the currency allows us to plan better. That was definitely a risk that people were considering if NAFTA went south, but not anymore. This will result in more certainty for people who were on the fence about utilizing services or making investments in Mexico, and the Nearshore region in general, which is great for all players in the industry.”
For Mexico, USMCA is looking positive in it current state, but the country’s next major uncertainty is how its new president’s policies will impact all industries. For Nearshore and the digital economy, the new agreement sets a precedence that other regions should be taking notes from as digital takes over the world.