{"id":30657,"date":"2025-06-04T14:39:20","date_gmt":"2025-06-04T18:39:20","guid":{"rendered":"https:\/\/www.bu.edu\/gdp\/?p=30657"},"modified":"2025-06-04T14:39:20","modified_gmt":"2025-06-04T18:39:20","slug":"how-mexico-can-design-a-usmca-where-development-matters","status":"publish","type":"post","link":"https:\/\/www.bu.edu\/gdp\/2025\/06\/04\/how-mexico-can-design-a-usmca-where-development-matters\/","title":{"rendered":"How Mexico Can Design a USMCA Where Development Matters"},"content":{"rendered":"
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Mexico. Photo by Robbie Herrera via Unsplash.<\/figcaption><\/figure>\n

By Tim Hirschel-Burns<\/a> and Rachel Thrasher<\/a><\/p>\n

It is a fraught moment for North American trade policy. Over the last few months, United States President Trump has announced<\/a> and then paused various tariffs on Canada and Mexico. Both countries have threatened<\/a> retaliation<\/a> on the US while simultaneously attempting to maintain an open channel of communication to resolve trade matters. As it stands, Canada and Mexico are subject to some of the US\u2019s general tariffs and exempted from others, and starting in July, Mexican tomatoes will be subject to newly imposed<\/a> 21 percent tariff.<\/p>\n

At the same moment, the US, Mexico and Canada are preparing for a review of the US-Mexico-Canada Agreement (USMCA) slated for 2026. This key moment six years after the agreement came into force presents countries with the opportunity to confirm whether they want to extend the USMCA or allow it to expire in 2036.<\/p>\n

In this moment of instability in North American trade relations, Mexico should develop a clear set of proposals to bring into negotiations with the US\u2014whether those take place through the originally planned USMCA review or earlier. While USMCA was an improvement on the North American Free Trade Agreement (NAFTA), it continues to<\/a> pose barriers<\/a> to Mexican development, including the Mexican government\u2019s ambitious development strategy, Plan M\u00e9xico<\/a>.<\/p>\n

North American supply chains have become so integrated<\/a> that they would be hard to unwind, offering Mexico real leverage with the US \u2013 if far from unlimited\u2014that it can use to push for a development-oriented USMCA.<\/p>\n

Drawing from past research, we highlight three areas that Mexico should focus on to harness foreign investment while protecting people and the environment in which they live: eliminating investor-state dispute settlements (ISDS), expanding policy space for green structural transformation, and protecting labor rights, wages and jobs. The research points to policy recommendations, not only for Mexico, but also for other similarly situated developing countries.<\/p>\n

Investor-state dispute settlement <\/strong><\/h5>\n

ISDS is a controversial mechanism in international investment treaties that allows investors to bring legal claims against host country policies that negatively impact the value of their assets. This has included, for example, fossil fuel companies negatively impacted by climate policies<\/a>.<\/p>\n

NAFTA was part of an early modern wave of treaties that granted foreign investors access to ISDS. However, over the years, all three NAFTA parties have seen how ISDS constrains their ability to engage in public policymaking. As a result, USMCA negotiations significantly reduced the availability of ISDS for foreign firms, eliminating it completely between Canada and the US. For the US and Mexico, however, the mechanism was kept it in place, albeit with important changes.<\/p>\n

The most significant changes to US-Mexico ISDS included limiting the treaty provisions<\/a> under which a claim can be brought and requiring most investors to pursue claims in domestic courts before initiating investment arbitration. In most sectors, investors may only bring claims against discriminatory treatment and improper nationalization of private property. However, investors in key energy and transport sectors (oil, gas, power, transportation, infrastructure and telecom) continue to enjoy full access to ISDS when they have a contract with the host country government.<\/p>\n

The remaining risk of liability for Mexico is even more important because, although ISDS applies to both Mexico and the US under the USMCA, in practice<\/a> ISDS cases are most likely to all come from US investors suing the Mexican government; Mexican investors have yet to file a case under the USMCA. Moreover, nearly half<\/a> of cases filed under the USMCA thus far have come in the oil, gas and mining sectors.<\/p>\n

ISDS liability under the USMCA could well impede the plans of the current Mexican government for protecting the climate and promoting development. The USMCA was largely negotiated under the Pe\u00f1a Nieto government, whose policies were far less oriented towards a proactive government and environmentally friendly policy than the current Sheinbaum government. The lingering ISDS exposure under the USMCA threatens key components<\/a> of Plan M\u00e9xico<\/a>, including shifts in public investment toward climate-friendly sectors and raising local content in important manufacturing sectors. These could give rise to claims against local content requirements as well as claims of unfair and inequitable treatment, especially if firms feel that their legitimate expectations are being undermined by legislative changes. President Sheinbaum\u2019s plans to limit oil production<\/a> and achieve net-zero emissions<\/a> by 2050 are also particularly exposed to the sectors that obtained ISDS carveouts under the USMCA. According to the data used in our past research<\/a>, Mexico faces between $401.6 million and $1 billion of ISDS risk from the projects covered by the USMCA that they would have to cancel under the International Energy Agency\u2019s Net Zero<\/a> by 2050 scenario.<\/p>\n

To preserve space for green industrial policy and prevent potentially costly compensation claims, Mexico should take this opportunity to fully eliminate ISDS under the new USMCA, just as Canada did.<\/p>\n

Policy space to leverage foreign investment<\/strong><\/h5>\n

Of course, a dispute settlement mechanism is only problematic to the extent that it is used to enforce problematic rules in the treaty. As above, NAFTA represented an early modern treaty text that provided ample opportunities for governments to face investor claims challenging legitimate regulatory and policy actions. The parties then negotiated the USMCA on the heels of dozens of investor-state disputes where those implications became clear. As a result, the new treaty text made significant strides in clarifying policy space for regulatory action under two standards: indirect expropriation and fair and equitable treatment (FET).<\/p>\n

The rules governing indirect expropriation target regulatory action by a government that has an effect similar to a direct taking \u2013 in that the value of the investment is suddenly and significantly reduced. The FET standard has historically protected investors against egregious state behavior that falls below the minimum standard in international law for treatment of non-citizens. ISDS tribunals interpreting many international investment agreements (IIAs) have relied on the concept of undermining \u201clegitimate investor expectations<\/a>\u201d to find violations of both indirect expropriation and FET provisions. However, that broad interpretation makes it incredibly difficult for countries to make important regulatory decisions without fearing legal liability.<\/p>\n

For these reasons, the USMCA introduced language that explicitly protected states\u2019 rights to pursue legitimate public welfare<\/a> objectives (Annex 14-B) and significantly narrow the scope<\/a> of what might constitute unfair or inequitable treatment (Art. 14.6).<\/p>\n

Any review of the USMCA would need to preserve these important developments in regulatory space under international investment commitments. At the same time, other commitments that impede important climate and industrial policy instruments<\/a> remain firmly in place. Rules prohibiting performance requirements (such as export performance and local content requirements) and requiring free transfers continue virtually unchanged and pose additional obstacles to measures<\/a> Mexico will likely want to keep in its toolbox for its green structural transformation.<\/p>\n

Countries have historically used performance requirements to require or incentivize firms to integrate more deeply with the host economy and contribute to key development goals. Importantly, several aspects of Plan M\u00e9xico rely on export performance, as well as substituting domestically produced content for imported content in key sectors. Countries have also deployed capital control measures<\/a> to ensure that portfolio investments flowing into their country are not able to swiftly leave, risking financial instability in their wake.<\/p>\n

Another important challenge for Mexico in the coming years will be found in its trade and investment relationship with China. Under the current USMCA, any formal trade agreement with China may result in the US and Canada terminating Mexico\u2019s membership in the agreement (USMCA Art. 32.10.5). Still, even in the absence of a formal trade agreement, Chinese investors may be increasingly interested in investing in Mexico given Mexico\u2019s proximity to the US and its relatively more positive trading relationship with the US\u2014indeed, these factors have contributed to significant increases<\/a> in Chinese investment in Mexico in recent years. A new USMCA should not close off Mexico\u2019s ability to receive investment from China but rather ensure Mexico can regulate inward direct and portfolio investment flows in order secure public benefit.<\/p>\n

Labor rights, wages and jobs<\/strong><\/h5>\n

In addition to preserving policy space for green industrial policy, Mexico should continue to build on the progress made under the existing USMCA in the areas of job security and wages. When it initially entered into force, the USMCA represented a new model for labor rights in trade agreements. It includes a labor-specific chapter<\/a>, which commits parties to the International Labor Organization Declaration on Rights at Work, requires the implementation of policies to protect against employment discrimination, and included an Annex committing Mexico to legislative reforms to provide collective bargaining rights, which Mexico implemented<\/a> in 2019. The USMCA also created an enforcement mechanism through the novel and facility-specific Rapid Response Labor Mechanism. While further fine-tuning of its implementation could help, the Mechanism has successfully remediated<\/a> a number of labor abuses.<\/p>\n

Whereas NAFTA resulted<\/a> in limited and uneven economic growth, the USMCA\u2014at least initially\u2014scaled back policies that had harmed workers<\/a>. Conditions for workers have improved in recent years. Mexico has increased<\/a> its minimum wage to $13.75 per day, more than a doubling<\/a> of the 2018 level. From 2018-2023, average real wages increased<\/a> 17 percent, reversing the downwards trend<\/a> of the previous decade. Even the US has seen an increase in inflation-adjusted wages<\/a> as investments in infrastructure, clean energy and semiconductors helped revive<\/a> US manufacturing.<\/p>\n

US negotiation demands, such as allegations that Mexican labor regulations constitute unfair trade barriers, could target some of the measures that have improved labor conditions in recent years. A new USMCA will need to protect and capitalize on recent positive growth trends, preserve improved rights and conditions for workers, and raise wages.<\/p>\n

Looking Forward<\/strong><\/h5>\n

The current USMCA is far from perfect, but it contains many improvements relative to NAFTA. Given North American trade tensions and US attempts to use tariffs as leverage, Mexico could face pressure to trade away these gains.<\/p>\n

Whether or not the USMCA review is as meaningful as originally anticipated, Mexico should come to the negotiating table with a clear vision for a trade agreement that preserves policy space for industrial policy, protects social safeguards, promotes development and ambitiously takes on the climate crisis.<\/p>\nLeer en Espa\u00f1ol<\/a>\n

*<\/p>\n

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By Tim Hirschel-Burns and Rachel Thrasher It is a fraught moment for North American trade policy. Over the last few months, United States President Trump has announced and then paused various tariffs on Canada and Mexico. Both countries have threatened retaliation on the US while simultaneously attempting to maintain an open channel of communication to […]<\/p>\n","protected":false},"author":19363,"featured_media":30658,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[398,156,77,144,1074,61],"tags":[4670,1895,636,4811,4810,2062,547,1782,2505,4809,610,622,4808,859,1031],"_links":{"self":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts\/30657"}],"collection":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/users\/19363"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/comments?post=30657"}],"version-history":[{"count":10,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts\/30657\/revisions"}],"predecessor-version":[{"id":30674,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts\/30657\/revisions\/30674"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/media\/30658"}],"wp:attachment":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/media?parent=30657"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/categories?post=30657"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/tags?post=30657"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}