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5 Ways to Ease Canadian Supply Chain Pain


5 Ways to Ease Canadian Supply Chain Pain

Canadian businesses are facing a painful dilemma as they enter the second half of 2021.

A study released by the Bank of Canada in early July shows business confidence has soared across the country as vaccination programs have rolled out and reduced restrictions on public movement. Business leaders reported strong sales outlook, unprecedented levels of planned hiring and plans for greater investment. In fact, the monetary policy overseer’s quarterly survey showed confidence at its highest level since 2003.

There is good reason to be buoyed about the future. Canadian consumers have saved an estimated $220 billion during the pandemic that they are now looking to spend. Another Bank of Canada survey showed near unprecedent intentions amongst consumers to spend their savings once the economy opens. That is the good news.

The bad news is retailers, wholesalers and service-sector businesses reliant on the movement of goods are also facing unprecedented supply chain woes. Shipments of goods critical to the success of these businesses have been delayed by months due to backlogs at ports in Asia stemming for a global container shortage. In its survey, the Bank of Canada found 60% of businesses would have some difficult or significant difficulty meeting demand if there was a sudden increase. Commodity prices have soared to their highest levels since 2014 while factory-gate prices in China – where many manufactured goods are produced and exported to Canada – witnessed a year-over-year increase of 6.8% in April 2021. Shipping costs from China to the coast of British Columbia have tripled.

‘Just in Case’ Becoming the Norm

The delays and escalating costs of shipping are prompting businesses to stockpile inventory at rates not seen in recent years. The just-in-time supply chain model that has characterized the movement of goods throughout most of the 21st century is now being traded in for a just-in-case model. But the market has responded accordingly with warehouse lease rates up 25% and warehouse availability almost non-existent with little new capacity slated in the near term. In some cases, businesses have had to invest far more heavily in warehousing than they had planned when inventory arrived at port on time, along with delayed inventory and the oversupply that could not be contained within existing warehouse space. In addition, fiscal stimulus programs have tightened the labor market, driving down labor availability and driving up labor costs.

All the added expense is fuelling concerns about inflation as businesses pass down the additional costs to consumers. A spike in inflation could dampen consumer demand, which would then resolve the supply chain woes, but would also stagnate economic recovery. This leads to the greater challenge of whether to plan for a consumer boom or a more temperate market.

What is a Business Decision Maker to Do?

As the old saying goes, necessity is the mother of invention. Businesses have been finding creative solutions to supply chain problems as they have arisen – from alternative transport routes and methods to new suppliers and even alternative materials to build their products.

The reality, however, is there is no one-size-fits-all solution to the supply chain woes being faced by Canadian importers. Solutions will vary based on industry, pain points, sourcing markets, ports of entry and several other factors.

Gain Visibility: One of the key actions being taken by businesses is digging in to learn more about their suppliers’ suppliers. Doing so allows them to better identify potential disruptions where materials may be scarce, or transit routes are congested.

Call for Backup: Even businesses that have reliable suppliers should consider finding alternative sources of supply and ideally from a different country. In most cases, delayed supply is the result of congested ports or a regional dearth of cargo container availability. Finding backup suppliers in other markets means not only having an insurance policy for supply but also for transport.

Make Accurate Supply Projections: It is a tall order to know how consumers intend to spend in the wake of a global pandemic. But businesses that use analytics to gauge future demand will suffer fewer supply chain headaches as they will be able to plan better for anticipated inventory arriving from overseas.

Secure Freight: Cargo capacity is at historic lows as businesses around the world fight for space on ocean freighters. Even inland transport has become challenging. For businesses that have not secured space, finding available transport can be near impossible. Working with a freight forwarder can help not only to identify available capacity but also to secure space for future supply. This is particularly true for businesses that have a stronger gauge of upcoming demand.

Lower Landed Costs: Businesses searching for alternative suppliers can often find cost savings by leveraging free trade agreements to reduce duty outlay. Canadian businesses may find refuge in trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which gives importers free trade access to markets like Vietnam and Singapore. Other opportunities may be found with suppliers in Europe via the Comprehensive Economic and Trade Agreement (CETA). Of course, Mexico is a viable alternative to sourcing in Asia and is party to the recently enacted United States-Mexico-Canada Agreement (USCMA) that replaced NAFTA. Using Mexico could also remove the need to use ocean freight where congested ports are forcing weeks-long delays to bring goods to market.

When will it End?

Canadian importers are anticipating the day when business can get back to normal. After years of uncertainty over the fate of free trade in North America, conflicts with the U.S. over steel, aluminum, and lumber, and conflicts with China over agricultural goods, there is a desire to see things stabilize. The reality, however, is that Canadian importers will have to compete with their counterparts in the U.S. and other markets with recovering demand for cargo space. While more containers are being brought online, the shortage is anticipated to continue into the early part of 2022 or even later. That means rates will remain high for the foreseeable future, particularly for Asia-origin goods moving to North America’s west coast.


Michael Zobin is a Canada-based director of global trade consulting at Livingston International. His expertise includes supply-chain optimization; duty deferral and drawbacks; conducting compliance program reviews; developing compliance procedures; voluntary disclosure; and post-entry review.


Optimism for Growth in 2021 is Uneven in the USMCA Region

The past year and the ensuing Covid-19 recession has created a time of uncertainty and instability for economies throughout the world, and especially in the USMCA region, according to a recent Payment Practices Barometer survey from trade credit insurer Atradius.

The most telling data gathered in the region concerns business confidence, where survey results were drastically different in Mexico, Canada and the U.S. The majority of survey respondents in Mexico expect to see an improvement in business performance over the coming months, while in Canada, this picture is reversed with only a minority expressing optimism. The U.S. falls somewhere in the middle.

More than half of all sales transacted on credit

Of the total value of all B2B sales in the USMCA region, 53% were made using trade credit last year. This represents growth, as 44% of businesses told us that they increased the use of trade credit in the months following the pandemic.

Temporary fiscal packages in the U.S. and Canada have helped struggling businesses in the short term. As these are withdrawn in the coming months, we are likely to see a rise in insolvencies.

In this environment of heightened risk, it is important that businesses continually monitor the financial health of their customers and note any early warning signs of insolvency. Some of those signs may include slower payments or late payments. However, it should be taken into consideration that the pandemic has presented additional strain on the supply chain that is often out of any one company’s control, leading to slower payments.

Credit management costs rise sharply

Businesses throughout the USMCA region have reported a rise in the cost of managing their accounts receivable in the months following the Covid-19 outbreak. The sharpest rises were reported by businesses that managed credit and collections in-house.

In part, this rise can be attributed to an increase in the percentage of sales made on credit; simply a greater number of credit sales requires more resources to manage them. However, this may also be an indicator of a deteriorating risk environment, as the longer an invoice remains unpaid, the more resources it takes to collect on it.

For businesses that do not use trade credit insurance or an invoice collection service such as factoring, rising payment delays equate to rising costs. Businesses that do outsource credit management to such services enjoy the certainty that their invoice will be paid and that management costs will not escalate.

Businesses favor domestic markets for credit sales

The USMCA region saw many more domestic credit sales than foreign credit sales in the year following the outbreak of the pandemic, with a 60/40 split in favor of domestic customers. This could have been caused by the supply chain challenges that followed the Covid-19 pandemic, leading to concerns over offering credit to foreign customers.

Businesses outside of the USMCA region should approach trade in the region with optimism. While it is clear that the Covid-19 pandemic is not over, the region is rebounding as expected. If there’s one thing that businesses around the world have learned is that offering more flexibility within their supply chains can help tremendously in the face of unexpected events like the Suez Canal blockage, where its effects were compounded by the pandemic’s supply chain disruptions. Companies that diversify their customer base will be better prepared to capitalize on opportunities should their competitors face unexpected disruptions to their supply chain.

Uneven outlooks for growth

On average, most businesses across the region are positive in their outlook and expect to see improvement in the second half of 2021. Upon a closer examination, a country-by-country comparison reveals a vastly different picture. In Mexico, 81% of businesses surveyed anticipate growth, while 36% of businesses in Canada hold the same view. Businesses in the U.S. fall about halfway between these poles. However, it should be taken into consideration that each country in the USMCA all started from very different places before the pandemic, making their perceptions of recovery different.

Businesses in Mexico were experiencing a recession long before the COVID-19 pandemic and received limited financial support from their government over the past year and a half. In contrast, both the U.S. and Canada started from a stronger economic position going into the pandemic and have received substantial financial help from their governments to stay afloat.

Businesses in both Canada and the U.S. may be bracing themselves for the removal of government fiscal support as well, which will have a much greater impact on their business than those in Mexico who are used to the lack of government support and ready for a rebound.

Post-recession growth is predicted for all of the countries in the USMCA region. It will be interesting to see which businesses thrive and grow during this period and whether the optimism and pessimism expressed by the survey respondents comes to pass over the next year.


Aaron Rutstein is the Vice President – Regional Director, Risk Services – Americas at Atradius


Post-COVID Resilient Supply Chains in North America: The Role of Mexico

If we’ve learned anything after surviving 2020, it’s that no industry will return to its affairs as if the pandemic simply did not happen.

Regarding the post-pandemic supply-chain transformation in North America (Mexico, the United States, and Canada), we at Foley & Lardner have received the same message from both the U.S. President[1] and our clients[2]: resilient supply chains are the new name of the game, and they are to be secure, redundant and diverse; also, they will be more transparent regarding purchaser’s needs and the supplier´s ability to fulfill them, will favor provider adaptability over lean inventories, and preapprove alternate purveyors over a race to the bottom.

With the aforementioned in mind, we should begin by laying out the known truths by which Mexico has historically contributed to strengthening the North American supply chains:  (i) the country provides quality manufacturing at the lowest costs in the region, (ii) it benefits from free trade agreement provisions with more than 60% of the world´s Gross Domestic Product (52 countries); (iii) almost all of the favorable factors when considering near-shoring, are present in Mexico, (iv) 25+ years of NAFTA experience created a skilled workforce whose numbers will grow as Mexico´s population ages, (v) intellectual property rights are duly protected, and (vi) trade promotion programs (i.e. IMMEX) are well known and have been running smoothly for years.

Said truths, however, could be hampered by a number of matters that we should keep a close eye upon, namely:

I. COVID-19 Vaccination

Both the Mexican federal government and individual States have concurrent jurisdiction regarding mandatory health measures, including vaccinations.

In December 2020, the federal government´s National Vaccination Policy set the goal to immunize the entire population within 18 months, firstly with frontline health care workers, followed by those 60 and older, those in their 50s, 40s, and lastly, 18 and older. Largely to scarce vaccine supplies and a rocky organizational start, progress to date casts doubt upon whether the 18-months goal is achievable.

In January 2021, the Mexican Ministry of Health issued high-level guidelines for individual Mexican states and private entities to acquire and administer vaccines, as long as they follow the National Vaccination Policy; operational details are still needed.

Furthermore, compliance with fluid COVID-related health and labor regulations in manufacturing facilities is still a major issue, both in terms of being able to continue production, as well as preventing lawsuits due to real or imaginary risk of exposure.

II. Outsourcing & Insourcing Ban

Due to his Political Party´s (MORENA) control of both Houses of the Mexican Congress, the President´s initiative to ban the current practice of outsourcing and insourcing will likely enter into effect on May 2021 (with an apparent 3-month vacatio legis).

But for “specialized services”, meaning those that are not part of the economic activity of the intended beneficiary, all workers will have to be in the payroll of the employer, which will entitle them to profit sharing provisions.  Simulating receiving specialized services would constitute elements of proof towards the commission of criminal tax fraud.

Since most manufacturing operations in Mexico currently rely on outsourcing operations, incoming law will force reassessing and restructuring a number of labor, corporate and tax present-day structures.

III. VAT-Certified IMMEX Benefits Diluted

Mexican IMMEX (aka Maquila) companies operate under a governmental authorization that includes preferential conditions, both operational and fiscal.

The highest degree of preferential treatment conditions is granted to companies that are VAT (Value Added Tax)-certified, which allows them to avoid paying otherwise applicable VAT upon the importation of goods used in their manufacturing operations.

Such preferential treatment will automatically be diminished as soon as each VAT certification is renewed by individual IMMEX companies, which should occur every one to three years depending on their current authorization.

Upon VAT certification renewal, companies will, most importantly: (i) operate under a reduced time frame to utilize most temporarily imported goods (from 36 months to 18 months), although longer periods apply to products such as containers, machinery and equipment; (ii) no longer will be automatically enrolled in Sectorial import programs which allow for reduced duty imports on steel, textiles, others; (iii) have to file weekly import documents, instead of monthly; (iv) will not be able to temporarily import products without declaring serial numbers; (v) and will no longer have the ability to obtain expedited 16% VAT refunds on their operational balance (capacity to continue temporarily importing without paying VAT remains, however).

IV. Mandatory Technical Standards (NOMs) No Longer to be Exempted

Prior to October 2020, importation of certain materials, i.e. those to be utilized in production processes, were permitted to enter Mexico under “exemption letters” that would allow them to be imported without proof of NOMs compliance (note that not all imports are subject to NOM compliance, in accordance to their relevant Harmonized Tariff Schedule classification).

Even though little is still known in the importing community, importers are no longer allowed to use such exemption letters and, upon bringing goods into the country, are obliged to demonstrate compliance with relevant NOMs, either prior to the importation process or afterward.

In addition to evolving administrative application criteria, a number of procedural rules must be pursued for each of the aforementioned venues.

V. Labor Enforcement of USMCA (United States-Mexico-Canada Agreement) Obligations

As was required in USMCA, Mexico has already amended its labor laws to guarantee the basic rights of freedom of association and collective bargaining (with the non-stated objective of increasing wages in the country).

In accordance with such amendments, (i) effective immediately, existing collective labor contracts shall be free of “interference” from employers (this is, under their dominance or control), and (ii) in the medium term, labor contracts need to be “legitimized” by May 1, 2023 at the latest, in accordance with the July 2019 process issued by the Mexican Labor Secretary.

Due to the foregoing, there will be real, working unions, and current collective contracts signed with employer-friendly unions (commonly known as “protection” contracts or contracts with “white unions”) will soon be eliminated; it is probable that this will bring new leadership and more than one union to a company.

As per USMCA, determination of denial of freedom of association and collective bargaining rights may be made by a Facility-Specific Rapid Response Labor Mechanism; if such a determination is made, the covered facility´s goods or services could face a suspension of preferential tariff treatment or the imposition of penalties.

One thing is certain: labor relations in Mexico are changing rapidly, and now is the time for employers to preventively look into these issues.

VI. Tax Rules Regarding Permanent Establishment

Recent tax reforms have expanded the scope of permanent establishment rules in Mexico. As it is known, if a foreign company is deemed to have a permanent establishment for tax purposes in the country, it shall be subject to levies with respect to the relevant revenue of said establishment.

Thus, companies already doing business, or that are considering setting up operations in the country, should evaluate these recent changes to assess potential risks of being considered to have a local taxable presence.


Alejandro Nemo Gomez Strozzi, a partner at Foley & Larder, focuses his practice on providing advisory and consulting services related to international trade compliance, antidumping, customs, foreign trade and Mexican administrative law. As a top international trade lawyer, he has advised major multinational companies in the automotive, steel and consumer products sectors.

Fernando Camarena Cardona, a partner at Foley & Lardner, is a senior business and legal advisor on international and domestic tax issues in Mexico, providing both tax counseling and assistance with litigation. He represents small companies to Fortune 500, FTSE 100 and other global and brand name corporations in the energy, manufacturing, nutritional supplement, insurance and other industries. 

Marco Najera Martinez, a partner at Foley & Lardner, is a recognized go-to transactional and regulatory lawyer representing global companies doing business in Mexico. With particular experience in the Mexico antitrust laws, he represents Fortune 500 corporations, as well as Mexico companies, in this highly specialized area. 

katherine tai

Katherine Tai Confirmed as United States Trade Representative

On March 18, 2021, Katherine Tai was confirmed as the U.S. Trade Representative. Tai will be the first woman of color in this role.

Tai’s nomination hearing focused on a worker and labor-centric trade policy as well as a return to multilateralism, which we believe will include more active participation in the World Trade Organization. She stated that the office of the USTR would create trade policy while working alongside other executive branch departments, including Treasury and the Department of Commerce.

This policy reflects the priorities of the Biden administration to shift away from the Trump administration’s focus on bilateral trade agreements and a different course for USTR, which is expected to engage a broader consensus in advancing trade policies.

For insight into Ambassador Tai’s labor-centered and environmental approaches to trade policy, the USMCA demonstrates her priorities.  She helped draft USMCA as chief trade counsel on the House Ways and Means Committee. Additionally, Ms. Tai stated in her confirmation hearing that environmental policy should be a part of trade policy.


Robert Stang is a Washington, D.C.-based partner with the law firm Husch Blackwell LLP. He leads the firm’s Customs group.

Julia Banegas is an attorney in Husch Blackwell LLP’s Washington, D.C. office.



Managing a streamlined supply chain for cross-border cargo transportation entails much more than identifying the fastest, most efficient method of getting cargo from point A to point B. Current market challenges have been amplified due to the pandemic and now go beyond ensuring cargo arrives at the final destination on time. The safety of transportation workers as a result of internal processes is now at the forefront of cross-border transportation. After all, if the truck driver is not healthy enough to deliver the products, the products do not move. In the new normal, worker safety is more important than ever.

“Some of the challenges out there are found more so in the area of the trucks that are crossing and the drivers,” says Michael Ford, vice president of Government and Industry Affairs at BDP. “If I was a trucking company, how do I ensure my driver’s safety? When that driver gets in the cab every day, do I know they are healthy?”

Ford continues, “Setting up those types of protocols internally, ensuring that I’m putting a safe driver on the road and that they’re able to perform those tasks as if there’s any type of cross border is critical, especially now. Coordinating, communicating, setting that up, and ensuring that everything is in play really becomes important.”

When driver safety has been established, coordination efforts are challenged once again depending on the region the cargo is crossing. Each region presents a unique set of roadblocks from customs to short and long-haul planning times. Cross-border transport from the U.S. to Canada is a much different process than what U.S. to Mexico transport requires for success.

Although these challenges are not new, they include more variables that require streamlined coordination from the very beginning. Trade lanes are now more open and traveler impact has shifted, presenting opportunities along with the challenges.

“In the past, we have seen much more congestion than we do currently,” Ford notes. “It has always been there between the U.S. and Mexico. But now, while there is less cargo and less traffic running back and forth, it has improved processing time. So, less cargo, less travel. If anything, it has improved and allows U.S. and Mexico customs to do what they need to do–which is all about security and ensuring the right cargo is coming through.”

Technology continues to play a critical role in ensuring worker safety and the efficient transport of cargo. The pandemic created an environment where technology is no longer simply an option but a requirement for the continuation of operations as it provides alternatives to paper-processes and close-contact for workers and customs agents.

“Previously when trucks cross, the driver pulls over, gets out of the cab, and hands paperwork over,” Ford says. “So, the question now is how do we achieve that full paperless experience on both sides in the U.S., Canada, and Mexico? When the driver pulls off, I need to know I have the driver, the driver’s ID, etc. and technology supports the keeping up with this information. It also keeps the driver in the cab and allows whatever information needed to be accessed.

“Advanced data has allowed a lot of that to take place. Being able to share and obtain better inter-agency  cooperation goes a long way to helping the flow of cargo across the borders.”

Technology is a part of the bigger picture. Without technology, the constant exchange of information and obtaining updated data is slowed down. Without inter-agency communications along with customs collaborations, cross-border operations are at risk for further delay. Collaborations between customs agents are the key to making operations for cross-border providers more simplified and accelerated. This incorporates security and accuracy while verifying the right cargo continues to its final destination.

“U.S. Customs has been working with Mexico and vice versa to establish points inside of the other’s country and allowing personnel to set up there,” Ford says. “In the case of letting Mexican Customs come into U.S. territory and process the clearance, it allows that truck to go all the way through, eliminating the need for stopping at the border area. This makes a world of a difference and it speeds everything up. It requires the need for cooperation of the companies that want to improve their business flow. Changing to a brand-new environment for cross borders is big.”

Beyond reducing interactions, the overall reduction of paper processes and redundancies continues to be at the top of mind for companies engaging in cross-border operations. Along with its other supply chain disruptions, COVID-19 has pushed logistics players toward paperless and contactless operations, adding more pressure to the already complex market. For some, utilizing the technology toolbox (such as blockchain) could be the very thing that overcomes the hurdles presented by the pandemic.

“We hear a lot about blockchain, and there are applications inside of this cross-border sector where blockchain can be used as a piece of technology,” Ford says. “Instead of paper, using a blockchain technology to prove that your goods qualify under the USMCA agreement should be in play, for example.”

Regardless of whether the world is battling a pandemic, streamlined collaboration will ultimately pave the way for successful cross-border trade. This requires the latest data for every participant, thorough internal and external communications, and solid business relationships with a common goal to ensure products are received safely and accurately.

“Everybody needs to be involved,” Ford maintains. “It is everybody working together: the carrier, the custom-house broker, the government, and all others. It is also about forming that type of relationship where information is being shared and collected, and as much in advance as possible is part of the success that needs to happen.”

He concludes: “Things can’t just stay the way they have been. But on the other side of things, we need cargo security and the customs officers from the U.S. and Mexico need to be safe. We talk about COVID-19 and workers, but we are also asking those officers to be on the front lines. Keeping that in play becomes a big challenge.”


Michael Ford is a career professional with more than 40 years of experience in international transportation, specializing in import/export documentation and regulatory compliance. Among his other affiliations, Mr. Ford is the co-chair for Trade on the Export Committee in the development of the new Customs ACE system and has served with Customs as a member of COAC (Commercial Operations Advisory Council), chair of the Mid-Atlantic District Export Council and the partner sector with the American Chemistry Council, Responsible Care Committee. He can be reached at

This article was originally published in December 2020


2021 Logistics & Transportation Forecast: Here’s What to Prepare for in the New Year

The US-China trade war, COVID-19, regulations and compliance, economic disruptions, and more all contributed to a hectic year for players in the global logistics and transportation arenas. It’s safe to say that 2021 will inevitably require a new level of innovation and predictions compared to how operations used to be. Sophisticated forecasting and agility take on a new meaning for proactive measures to prove successful in the new normal. With the hope of 2021 on the horizon, Deepak Chhugani, founder and CEO of Nuvocargo, the first digital freight forwarder and customs broker for US/Mexico trade, lists what he considers to be some of the most significant events to prepare for in 2021 and how shippers, manufacturers, and other industry players can prepare.

-Mexico is now the USA’s #1 trade partner, according to the US Census Bureau’s 2019 report. The China-US trade war, as well as the COVID-19 pandemic, are driving more US companies to establish new supply chains and we anticipate explosive growth as Mexico becomes the new China. Companies are nearshoring and moving their US supply chains closer to home in favor of Latin America and more specifically Mexico. The automakers especially should continue to see a big boom and reliance on Mexico as it favors homegrown manufacturing. The auto industry will continue to see a shift, in particular the Bajio region of Mexico, which is flush with trucking capacity.

-Digitization, software, and giving shippers and carriers efficient tech tools are critical as technology continues to disrupt this industry. COVID-19 has forced the traditional and analog logistics industry to adopt technology as its primary way of doing business. Everyone is working from home, switching in-person and paper processes with digital transactions and signatures. Digital freight forwarding technology can help businesses ease this transition from offline to online and empower them with tools to smoothly transition towards more digital and modern ways of managing their cargo and supply chains.

-Changes to the global logistics industry (trucking, maritime, and others) that inherently impact the cross-border world is mainly the result of the United States-Mexico-Canada Agreement (USMCA) and tariff schedules. The expectation was that the USMCA would increase annual US exports to Canada and Mexico significantly.  As exports increase, that results in more cross-border truckloads between the US and Mexico which will lead to more capacity crunches as several trucking players have exited the marketplace in recent years and volumes will only increase. This should also increase reliance on cross-docking shipments to leverage trucking capacity on both sides of the US/Mexico borders.

-Politics will also play a role in 2021 as we can anticipate a Biden administration will bring more stability and predictability to trade relationships, especially after the recent signing of the new North American Free Trade Agreement USMCA. An expected increase in US government spending and a policy refocus on middle and lower classes could also prove beneficial to Mexico’s production capabilities, as additional consumption incentives are created. Finally, with the tight grip on China not likely to loosen in the near future, both countries (US/Mexico) could benefit from embracing the shift of global supply chains to bring more manufacturing to North America.

-Transportation of COVID-19 vaccinations will create more demand and we’ll see an increase in shipping, especially refrigerated cargoes and cold-chain solutions. The U.S. Department of Transportation just announced that “all of its necessary regulatory measures have been taken for the safe, rapid transportation of the coronavirus disease (COVID-19) vaccine by land and air.” As a result, there will be additional safeguards and support in place for the trucking industry. Also, the importance of freight forwarders is likely to increase as the complexity of vaccine distribution reaches never-before-seen levels. Freight forwarders’ role as the “connective tissue” of logistics will be key and will take the pressure of managing the logistics of pharmaceutical companies. On the flip side, prioritizing vaccines means that some non-essential cargo will get bumped, increasing rates and affecting businesses that are not properly prepared for this unprecedented time.

-COVID-19 and border restrictions continue to impact customer’s exporting needs as they move their freight into the US. Since most of the available equipment is retained at the border and looking to move southbound from Laredo, the export/import ratio of 8:1 continues to impact the overall capacity into specific areas such as Guadalajara, Bajio, and Mexico City which creates challenges. Companies will have to be nimble and diligent as they navigate and comply with their customer’s requirements.

North America

Out of Asia: Promise from Pandemic of a Manufacturing Renaissance in North America (Part 3)

In their first two installments (which you can view here and here), George Y. Gonzalez and Jesus Alcocer respond to the gaps exposed in the supply chain by the pandemic by proposing a shift away from overreliance on China and a shift towards reshoring manufacturing closer to home. In their final installment, they will explore how the potential cost of reshoring out of Asia to North America could be lessened if capacity is relocated to Mexico, a natural alternative. Wrapping up their discussion, they will also examine how Houston may serve as a central hub for cross-national manufacturing and trade.

Mexico Has Also Been a Beneficiary of This Shift Out of China

Mexico has benefited from this rearrangement almost as much as Vietnam. According to A.T. Kearney, manufacturing imports from Mexico rose $13 billion to $20 billion in 2019. Thanks to this climb, the U.S. now imports 42 cents from Mexico for every dollar it purchased from LCAs, up from 37 cents during the past seven years. This pattern has also extended into 2020. In the first quarter of this year, imports in maintenance and repair, construction, and insurance sectors all grew in the triple digits, while imports of information and communications technology products (“ICT”) grew 20% year-on-year.

The trade relationship between the two North American countries has developed in spite of political obstacles. The Trump Administration imposed tariffs on Mexico-produced steel in 2018 but removed those barriers in May 2019. Likewise, Andres Manuel Lopez Obrador, Mexico’s president since 2018, was widely regarded as a nationalist suspicious of international trade. According to the Congressional Research Service, “in the area of foreign policy, President-elect López Obrador generally has maintained that the best foreign policy is a strong domestic policy.… Some observers feared that López Obrador might roll back Mexico’s market-friendly reforms and adopt a more isolationist foreign policy.” Against these inauspicious circumstances, bilateral trade has grown steadily since 2016. Mexico surpassed Canada as the U.S.’s largest trade partner in 2019. In 2013, Canada exported 8.3% more to the United States than Mexico. Now the order has reversed, with Mexico exporting .5% more than Canada into the U.S.

Growing imports can be partly explained by a hike in U.S. FDI in Mexico, which grew approximately 5.2% between 2018 and 2019 to $100.89 billion. Investment in primary and prefabricated metals manufacturing close to doubled from 2015 to 2019 to close to $2.27 billion, while FDI in machinery manufacturing grew about 25% during that same period. These are some of the industries where U.S. FDI in China has dropped most sharply, as explained above. Rising FDI stock was driven by waves of U.S. companies establishing a base or increasing their footprint in Mexico, following the market-oriented reforms in that country in the last decade. According to A.T. Kearney, by 2016 more than half of U.S. companies with manufacturing operations in Mexico had relocated production therefrom places such as China to supply the U.S. market.

Moreover, according to the Boston Consulting Group, some major Chinese consumer electronics manufactures have been adding capacity in Mexico to serve demand in Latin America. This broadly corresponds to the Chamber survey referenced above, which indicates that while LACs are still the top relocation choice for U.S. firms, North America is an increasingly popular option. Close to 17% of the firms dislocating their operations from China in 2020 indicated they would move that capacity to Mexico or Canada, up from 10% in 2019. An additional 22% reported they would move it to the U.S., up from 17% in 2019.

Mexico as a Natural Alternative

Mexico is already the U.S.’s largest trading partner, as well as the manufacturing base for a substantial part of its products. Last year, Mexico traded $614 billion with the U.S. – surpassing Canada ($612 billion) and China ($558 billion). “Merchandise trade between the two countries in 2018 was six times higher (in nominal terms) than in 1993, the year NAFTA entered into force,” according to the Congressional Research Service. Among the leading U.S. exports to Mexico are “petroleum and coal products ($28.8 billion or 11% of exports to Mexico), motor vehicle parts ($20.2 billion or 8% of exports), computer equipment ($17.4 billion or 7% of exports), and semiconductors and other electronic components ($13.1 billion or 5% of exports).” On the other hand, the top U.S. imports from Mexico in 2018 included “motor vehicles ($64.5 billion or 19% of imports from Mexico), motor vehicle parts ($49.8 billion or 14% of imports), computer equipment ($26.6 billion or 8% of imports), oil and gas ($14.5 billion or 4% of imports), and electrical equipment ($11.9 billion or 3% of imports).”

Increasing the cross-border manufacturing prompted by NAFTA may be the most practical way for the U.S. to eliminate its cost gap with China. “Many economists credit NAFTA with helping U.S. manufacturing industries, especially the U.S. auto industry, become more globally competitive through the development of supply chains in North America. A significant portion of merchandise trade between the U.S. and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods.” Mexico’s wage growth is on par with Vietnam’s, but Mexico’s productivity is about 5.2 times higher. Mexico’s combination of low labor costs and relatively high productivity result in production costs that are 20-30% lower than in the U.S. (including transportation and associated fees).

Mexico also has an important advantage vis-à-vis China with respect to transportation costs, which account for a significant portion of costs in industries like metals and automotive parts. Shipping a 40-foot container loaded with automotive parts from Shanghai to Los Angeles cost an average of $1,374.03 – $1,518.66 (before taxes and duties) in July 2020. Shipping that same container from Veracruz, in the Gulf of Mexico, to New York, cost $1,102.24 – $1,218.27. Sending that same container by truck from northern Tamaulipas, where a large portion of the country’s manufacturing base is located, to Houston cost an average of $304.11 – $336.12 – four to five times less than shipping it from China. Mexico also maintains a clear edge in delivery time. It takes 75% less time to transport goods to the customer from Mexico than from Asia. Proximity is an essential advantage in industries that are shifting towards highly personalized products, including electronics, automotive, and clothing. The short distance can also be exploited to combine the countries’ supply chains across the border, one of the main drivers of economic growth under NAFTA.

According to the Center for Car Research, between 80 and 90% of U.S. automotive trade is intra-industry, and parts produced in Mexico and the U.S. cross the border up to eight times along the manufacturing process before they are delivered to consumers. In fact, on average, close to 40% of the content of a vehicle produced in Mexico was initially imported from the United States. This tight integration was only achieved after the NAFTA, which allowed producers to spread their supply chain across the border. Before 1993, for example, the vehicles produced in Mexico contained only 5% of parts produced in the U.S

The Effect of the USMCA

NAFTA completely changed the landscape of North America by driving unprecedented integration in the region and generating a dramatic increase in trade and cross-border investment. NAFTA also had an essential role in promoting Mexico’s privatization, where state-owned enterprises represented a substantial part of production until at least 1988. Between 1988 and 1994, 390 Mexican businesses were privatized – close to 63% of large corporations in the country. Telling of Mexico’s explosive development in this era is that before 1988 there was only one billionaire family in Mexico: Monterrey’s Garza Sada, who made their fortune selling beer and steel. In 1994, however, Forbes’s ranks included 24 Mexican billionaires. Between 1993 and 1994 alone, the number of multimillionaires in the country rose by 85%.

The USMCA, which consists of 34 chapters, four annexes, and 14 side letters, will further encourage growth by maintaining the most important aspects of NAFTA: a legal framework with protections for foreign investors and a free-market zone between the three nations. It will also maintain investor-state dispute settlement (ISDS) “between the United States and Mexico for claimants regarding government contracts in the oil, natural gas, power generation, infrastructure, and telecommunications sectors; and maintains U.S.-Mexico ISDS in other sectors provided the claimant exhausts national remedies first.” According to the Congressional Research Service, ratification of the treaty was expected to remove some investors’ unease about domestic policy uncertainty and the international economy. “Longer-term prospects for export-oriented manufacturing, as well as oil production, appear positive,” according to that report. After the elimination of steel tariffs on Mexico and Canada in May of last year,  the International Monetary Fund (IMF) estimates that the USMCA will increase trade between the three North American countries by approximately $15 billion.

Among the most significant achievements of the USMCA is that it will accelerate the integration of energy [utilization] on both sides of the U.S.-Mexico border. The treaty maintains NAFTA’s zero tariffs for energy products,   which have made Mexico “the No. 1 export market for U.S. natural gas and refined products and the No. 4 export market for upstream oil and gas equipment.” It also locked in Mexico’s historic 2013 energy reform, which allowed foreign investment in oil and gas.  Previously, state-owned Pemex was the only company allowed to invest in Mexico’s energy sector, a state of affairs that NAFTA explicitly acknowledged. The USMCA also facilitates the transport of energy products. For example, it allows “hydrocarbons transported through pipelines to qualify as originating, provided that any diluent, regardless of origin, does not constitute more than 40% of the volume of the good.”  Lastly, it maintains the automatic export approvals for U.S. liquified natural gas (LNG) that is exported to Mexico or Canada.

Another key feature of the treaty is the customs administration chapter. This section mandates streamlined procedures that lower the time, complexity, and cost of exporting and importing many goods. According to the IMG, “most of the benefits of USMCA would come from trade facilitation measures that modernize and integrate customs procedures to reduce trade costs and border inefficiencies further.” The international organizations indicate these new procedures could lead to “one-tenth of a percent reduction in regional merchandise trade cost.” This section will also boost the trade of low-value products because it raises the value-thresholds for products eligible for tax-free, duty-free, streamlined customs, treatment. Mexico’s $50 limit for tax-free entry has remained the same, but products up to US $117 can now enter duty-free entry through a simplified customs processes. The IMF expects these modifications to benefit small and medium businesses, as well as online retailers.  They may also have an impact on manufacturing processes where the value of parts that cross the border is low.

The treaty also strengthens IP protections. Intellectual property is one of the U.S.’s most significant exports, and IP-intensive industries generate 45 million jobs in the U.S., as well as close to $6 trillion dollars per year (38% of the GDP). This is also one of the sectors where the U.S. has enjoyed a significant and consistent trade surplus. According to the Congressional Research Service, “IP-intensive goods and services are an important part of U.S. trade with Canada and Mexico.” Chapter 20 of the USMCA established a committee on IP rights, which will deal with concerns related to trade secrets and patent litigation, as well as a mediator in some IP disputes. The USMCA also extended minimum copyright protection to 70 years, up from 50 years under NAFTA, and retains a minimum of 20 years for patent protections. Moreover, it empowers copyright possessors to “expeditiously” enforce their rights in online settings. Law enforcement officers are also entitled  to “stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any Party.” Lastly, many violations of copyright and trade secrets, now carry criminal sanctions under the treaty, including cyber theft — even if the perpetrator is a state-owned entity.

The USMCA’s strong IP protection contrasts with the perceived weaknesses of China’s IP regime. In 2018, a U.S. Trade Representative’s investigation indicated that the U.S. government would take actions to curve China’s “forced technology transfer requirements, cyber-theft of U.S. trade secrets, discriminatory licensing requirements, and attempts to acquire U.S. technology to advance its industrial policies.”  For instance, U.S. Customs and Border Protection reported stopped $1.2 billion of IP-infringing goods at coming into the U.S., with China being the largest source.

The onset of the COVID-19 pandemic has revamped reported IP violations of Chinese entities in the pharmaceutical industry. The Wuhan Institute of Virology recently applied for a patent of a compound based on Gilead Sciences -produced Remdesivir, which has been hailed as a potential medication for COVID-19 patients. China-based BrightGene Bio-Medical Technology Co. is also in the process of manufacturing a Remdesivir generic. It is worth noting “that Gilead’s patent application in China for Remdesivir use in coronaviruses has been pending since 2016.” The Chinese government has also found a potent tool to promote technology transfer through its antitrust law. “China has required technology transfer in antitrust reviews of foreign firms in China 2025 sectors,” according to the Congressional Research Service.

Finally, the treaty includes new rules that will require Mexico to increase the wages of some of its workers in the automotive industry and to source a larger part of its manufacturing materials within North America. Vehicles must now contain at least 75% of content sourced in North America to be eligible for tariff exemptions. Likewise, it dictates that at least 70% of a producer’s steel and aluminum purchases must originate in North America to be eligible for exemptions and eliminates several loopholes that allowed for transshipments under NAFTA. These sections were aimed in part at encouraging member states to displace Asia as the source of steel, aluminum, and electronic components, according to a professor at the business school of the Tecnológico de Monterrey.

The Mexican government has been in talks with a host of Asian steel producers, including South Korea’s POSCO, Japan’s Nippon Steel Corp, and Mitsubishi Corp, about the possibility of manufacturing steel for the auto sector in Mexico, in order to take advantage of the local content rule, according to Reuters. The news agency also reported that Andres Manuel Lopez Obrador’s administration is enticing Apple to set up manufacturing bases in the country. “These phones don’t have to be produced in China … there is an enormous opportunity to produce them” in Mexico, Economy Minister Graciela Marquez told Reuters.

The  Mexico Texas Relationship

The relationship of Mexico with Texas is historical and current. The Lone Star State was part of Mexico until 1836. Today, people of Mexican ancestry account for close to 36.6% of Texas’s residents, and Spanish is spoken in the homes of close to 30% of Texans, according to data from the U.S. Census Bureau. Their economic ties are as strong as their cultural and ethnic ones. Texas accounts for 44.41% of the U.S.’s trade with Mexico, followed by California – which accounts for 11.6%. Mexico is also Texas’s largest foreign trading partner, representing 43.79% of its exports and 35.15% of its imports. China, in contrast, makes up for 8.7% of Texas’s exports, and 14.6% of its imports  Texas also carries approximately 72% of all imports by value coming from Mexico to the U.S. Laredo, which received $132 billion in imports from Mexico by truck last year, itself accounts for about 40% of all truck cargo from Mexico into the U.S., according to data from the Department of Transportation.

Mexico and Texas’s heavy trade in oil products and vehicles underscore the robustness of their trade relationship. Oil and bitumen substances corresponded to 21.8% of Texas’s total exports to Mexico in 2017. Texas also accounted for 61.5% of propane and 40.9% natural gas Mexico purchased from the U.S. Likewise, oil represented close to 10% of Mexico’s exports to Texas, which is about 69% of all oil Mexico exports to the U.S. The USMCA, by maintaining zero tariffs in energy products and reinforcing Mexico’s energy reform, will potentiate trade in this area. Mexico exported approximately $5.3 billion worth of vehicles to Texas in 2018, close to 23% of the total value of the vehicles it exported to the U.S. that year. An important part of this trade takes place within the automotive manufacturing process, where energy cost is a critical component.

Can Houston Become North America’s Hong Kong?

Houston is well-positioned to serve as a hub for the growing trade cross-national manufacturing base in the U.S.-Mexico border. Houston serves as a gateway for a substantial portion of foreign trade in the U.S. and is ranked as one of the easiest places to do business in North America. Texas’s ports receive more cargo than any other state at 573 million tons – which accounted for approximately 23% of all waterborne cargo in the U.S. in 2018. Neighboring Louisiana is the second largest with 569 million tons. California, in contrast, carried 249 million tonnes – less than half of Texas’s amount, according to data from the U.S. Army Corps of Engineers.

Houston itself was the largest carrier of international cargo in 2018, at 191 million tons (up 10% year on year). The port of Houston, however, is not the only one in the metropolitan area. The ports of Texas City, Beaumont, Port Artur, and Lake Charles (Louisiana) together account for approximately 508 million tons of water cargo, including 336 million in foreign cargo. This is equivalent to about 20% of the total tonnage of the largest 150 ports of the U.S., as well as 22% of foreign cargo.

In terms of shipping, the city of Houston plays a similar role as Hong Kong does within the China ecosystem. Hong Kong’s port handled 19.6 million TEU in 2018, while China processed approximately 245.6 million TEU, according to the World Bank. Based on this data, Hong Kong accounted for about 8% of container shipping by TEU in China, while the port of Houston accounted for about 10% of U.S. sea cargo by weight. Similarly, when conflated with the nearby ports of Shenzhen and Guangzhou, Hong Kong constitutes about 28% of container trade in China. Houston, along with nearby ports and the Port of Southern Louisiana, accounted for close to 31% of the total cargo by weight in the U.S.

Houston’s role in the U.S.’s overall economy is also similar to Hong Kong’s role in China. The Houston metro area generated approximately $478 billion in 2018 or close to 2.2% of the country’s total. This is analogous to the proportion that Hong Kong contributed to China in 2019. Last year, China’s GDP by purchasing power parity (PPP) was approximately $21.4 trillion ($14.3 trillion in current dollars), while Hong Kong’s stood at $467 billion that same year  ($366 billion in current dollars). Hong Kong, therefore, accounted for approximately 2.5% of China’s GDP.

agricultural subsidies


Everybody’s Subsidizing

$700 billion every year – that’s how much governments worldwide provide in some form of subsidy to their agricultural sectors. Researchers behind the OECD’s “Agricultural Policy Monitoring and Evaluation 2020” report found that the 54 countries studied (all OECD and EU countries, plus 12 key emerging economies) provide over $700 billion a year in total support to the agricultural sector. The vast majority of this, $536 billion, is in the form of payments to producers; the rest takes the form of consumer support and enabling services such as infrastructure investment or research and development.

Subsidies are in part, a recognition of the unique challenges that the agriculture sector faces – and the important role it plays in our society by ensuring food security. Farming is highly weather dependent and extremely vulnerable to uncontrollable events such as natural disaster. Agriculture also requires significant investment from producers in expensive equipment, inputs and labor before any profit can be made, and faces an obvious time delay between shifts in demand and supply.

700 billion

However, agricultural subsidies can also have trade-distorting effects. For this reason, they are the basis of many international disputes. In the recently negotiated U.S.-Mexico-Canada Agreement agricultural subsidies played a key role: Canadian dairy subsidies were perhaps the biggest agriculture-related sticking point for the U.S., and Mexican tomato subsidies continue to cause tensions. Across the globe Brazil, Australia and Guatemala have disputed India’s subsidies to its sugar industry.

The complaint from least developed countries is that global subsidies disproportionately disadvantage their small producers, whose own governments cannot provide the same support, leaving them unable to compete with the heavily-subsidized farms of richer countries. Communities say that foreign products, such as European milk, are flooding their markets, crippling local herders and farmers and leaving consumers vulnerable to price changes.

The United States has borne the brunt of criticism for its agricultural subsidies. American farmers receive billions in support. However, when measured as a percentage of total farm revenues, South Korea, Japan, China, Indonesia and the EU all provide producer support above the global average of 12 percent, whereas the United States, along with Russia, Canada, and Mexico have historically been at or below this average.

China more than

Who Subsidizes the Most?

The tables below show the largest subsidizers ordered by total spending, and by percentage of gross farm revenues, according to the data collected by the OECD. Smaller countries like Norway, Iceland and Switzerland top the tables when it comes to support as a percentage of gross farm revenue at 57.6 percent, 54.6 percent and 47.4 percent respectively. The United States does not even make the top 10 on this measure, with total producer support calculated at 12.08 percent.

In terms of total spend, China, the EU, and United States comprise the top three. However, China spends almost four times as much as the United States, and more than the next three biggest spenders – the EU, United States and Japan – combined.

ag subsidies tables

Exactly how and to whom subsidies are dispensed differs widely by country, as do the goals of agricultural subsidy programs. Here we look at a few of the biggest subsidizers: China, the United States, Japan, and the EU, as well as the case of New Zealand, a nation with virtually none.

The United States

Throughout most of its early history, the United States did not subsidize agriculture. A nation largely founded by farmers and land workers held agriculture in high esteem, but was determined that no other group should be taxed to fund another. However, the Great Depression of the early 1900s and the presidencies of Hoover and Roosevelt reversed this. Hoover established the Federal Farm Board which fixed market prices for certain produce, inducing excess production of the supported items. Roosevelt supported the Agricultural Adjustment Act (AAA), which paid farmers not to produce in order to reduce agricultural surpluses.

In 2019, OECD data show that the United States provided agricultural support of over $48 billion, however, close to half of this was in the form of support to consumers through nutrition assistance programs. Federal support to agriculture has shifted and changed with various administrations, with the five-year Farm Bill being the primary legislative vehicle used to implement changes to the “farm safety net“, including government subsidies.

Under the rules of the WTO the United States, along with other developed countries, agreed to set limits on spending. The U.S. limit is $19.1 billion on certain types of “market distorting“ support. However, the latest data shows that direct support to farmers in 2019 was the highest it has been in 14 years, at around $22 billion, leading to questions about whether the United States exceeded its annual limit on “amber box” spending.

This spike is largely attributed to recent ad-hoc compensation to farmers, unrelated to the Farm Bill and initiated by the Trump administration, to compensate farmers for unforeseen losses. To make up for lower prices and lost sales caused by the U.S.-China trade war, the U.S. government committed billions in dollars to farmers in 2018 and 2019 through the Market Facilitation Program. When COVID-19 hit, and the administration implemented another program – the Coronavirus Food Assistance Program – to help farmers stay afloat despite disrupted supply chains. All in all, government payments to farmers are projected to reach as high as $37.2 billion in 2020.

China 4x more


China began subsidizing agriculture in earnest relatively recently but has quickly become the world’s biggest subsidizer by dollar amount. Formerly the nation’s primary source of employment, the Chinese government for years taxed agriculture to support urban populations. In 2004, China first implemented subsidies to protect rural workers from foreign competition. Although it has now evolved into a manufacturing economy, roughly half the labor force is still employed in agriculture, with lower living standards than their urban counterparts. The Chinese government subsidizes rural farmers to prevent political instability, while bolstering the production of particular crops to reduce reliance on foreign produce, such as U.S. soybeans.

China’s agricultural subsidies have ruffled the feathers of other world powers, particularly the United States, which won a WTO case against the country’s unfair wheat and rice subsidies. The U.S. Trade Representative complained that Chinese subsidies undercut U.S. producers exporting their produce to China’s vast market. The WTO panel investigating the issue found that in 2012, 2013, 2014 and 2015, “China provided domestic support… in the form of market price support to producers of wheat, Indica rice and Japonica rice in excess of its commitment level of “nil””. Disagreements over subsidies remain a sticking point in the U.S.-China trade war.

China may be beginning to scale back its subsidies. After two decades of steady growth, the OECD data show that China’s share of gross farm receipts going to support producers has started to decline in the last two years. Given its astronomical spending it will take a long time for China’s spending to approach anything on par with the European Union, let alone the United States.

line charts on China spend


Japan’s agricultural subsidies as a share of gross farm revenues are two times above the OECD average, at 41.3 percent, remaining high despite over a decade of cutting back. About 80 percent of the support is in the form of market price support, artificially keeping prices at a certain level, which is achieved mainly by border controls for rice, milk and pork.

In their discussion paper for the International Food Policy Research Institute, Yoshihisa Godo and Daisuke Takahashi outline Japan’s unique subsidy landscape. Most Japanese farmers farm as a secondary business and have another stable source of income, yet they receive the same benefits as full-time farmers, without feeling the same need to innovate and compete. The political pressure these small plot farmers yield gives them much sway over farmland use regulations and other policies that benefit them, such as income compensation programs.

These issues result in inefficiency and a lack of productivity, helping to explain why Japan is the only country with a declining food self-sufficiency rate, entrenching established interests and driving away young potential farmers.

This puts Japan’s heavy agricultural protection in a category of its own. Whereas the action of heavy-subsidizers like Europe and the United States increase their agricultural output – in Japan it has decreased. This may help to explain why Japan is becoming more willing to reduce tariffs on agricultural goods, pledging to cut back such tariffs on pork and beef in their recent free trade agreements with the EU, United States and UK.

The European Union

Since 2010, government support to agriculture in the EU has been stable at around 19 percent. The EU’s Common Agricultural Policy (CAP) is an extensive EU-wide policy and their largest budget item, accounting for around 40 percent of the annual budget. It aims to support farmers, improve productivity, and safeguard the livelihoods of European farmers, while improving sustainability and protecting rural land. The EU’s outline of the CAP explains that farming requires special protections given its distinctness from other productive activities, such as its reliance on the weather and time delays. The CAP provides three forms of protection: income support through direct payments to farmers; market measures to combat price or demand drops; and rural development.

The centrally organized system however lends itself to opacity and corruption in the distribution of these subsidies in some member states where populist governments are able to capture the benefits and use them to reward friends and punish enemies. The burdensome administration process and system that doles out cash based on the amount of land-owned is also proving to be a roadblock for young farmers who access their land through non-conventional contracts or seek to start small – meaning they miss out on subsidies that are propping up their larger competitors.

Subsidies are also forming a key part of the UK-EU Brexit negotiations. UK farmers will lose out on billions of dollars of EU agricultural subsidies when the country breaks with the bloc, which will be a huge challenge for the government and the country’s farmers who will see a phasing out of subsidies they rely on to keep their farms afloat. But it will also provide an opportunity for them to take a new approach that rewards farmers who incorporate good environmental practices.

India and What’s Hidden in the Data

India is notably absent from these tables given that they are the world’s largest producer of milk, pulses and spices and second largest producer of rice, wheat and fruit among many others. They are undeniably an agricultural super power, so is it that they don’t subsidize? No, they definitely do, but the answer is a bit more complicated.

Indian farmers are aided by direct payments and large subsidies for inputs, such as irrigation water, power and fertilizers. Producers in India receive support corresponding to about 7.8 percent of gross farm receipts, as well as market price support of 2 percent. If we only take into account the positive support, India is subsidizing agriculture by over $11 billion. However, this is offset in the OECD data by what they term India’s negative market price support, which reflects the amount that domestic producers are implicitly taxed due to a series of complex domestic regulations and trade policy that more than offsets any gains they receive from subsidies to the tune of $77 billion, a -14.8 percent hit in terms of farm receipts.

Generally, developed countries such as OECD member countries have very low values for this negative market price support category, sometimes even zero. But other countries with restrictive domestic and trade policy – such as Argentina and Vietnam, which have negative support values of $11.4 and $5.2 billion respectively – hurt their producers in this way.

A World Without Subsidies? Just Look to New Zealand

Not all wealthy, agriculture driven countries rely on subsidies, however. Australia and New Zealand’s agricultural supports are just 1.85 and 0.7 percent of their gross farm revenues respectively. New Zealand in particular is a fascinating case. Its low agricultural support may be surprising given New Zealand is five times more dependent on farming than the United States.

In 1984 New Zealand’s government ended all farm subsidies, which at the time represented around 30 percent of the value of farm production. Despite fear and protests at the time, around twenty years after the action just one percent of farms had gone out of business and the value of farm output increased by 40 percent. By reacting to competitive pressure and consumer demand, cutting costs, and innovating, New Zealand farmers were able to rebuke the argument that agriculture needed government support to survive.

Effects of the “New Subsidizers”

Certain types of agricultural subsidies have trade-distorting effects, but their historical use among the biggest and wealthiest agricultural exporting countries provoked a “they’re doing it, so we should too” response. The biggest growth in subsidy use over the last decade has been among the fast-growing emerging economies such as China, India, and Turkey, clearly seen in the data from the OECD.

Given differing WTO rules on agricultural subsidies for developed versus developing countries, and the significant amount of spending particularly by China, this shift is important to recognize to both break old perceptions of who subsidizes and to ensure that new baselines are used to negotiate future rules on agricultural subsidies.


Alice Calder

Alice Calder received her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.


NAFTA to USMCA: A Brief Overview of Significant Changes

The United States-Mexico-Canada Agreement (USMCA) became effective on July 1, 2020, 26 years after its predecessor, the North America Free Trade Agreement (NAFTA). While NAFTA was originally conceived during the 1980s, the free-trade block did not materialize until the early 1990s, in part as a result of the perceived need to counterbalance the effects of the then–recently created European Union (1993). Mexico was experiencing unprecedented economic growth under the administration of President Salinas de Gortari (1988-1994), an economist and the first non-lawyer elected into the Mexican presidency since 1958, while President Bill Clinton (1993-2001) was driving sustained economy growth in the United States that ultimately led to a US federal budget surplus from 1998 to 2001. Canada, on the other hand, had just elected Prime Minister Jean Chrétien (1993-2003), who had run, at least partly, on a promise to renegotiate NAFTA within six months, as he believed that the new free trade agreement negotiated by then–Prime Minister Brian Mulroney (1984-1993) made too many concessions to the Mexicans and Americans.

In contrast, the USMCA comes into effect in what undoubtedly are unprecedented times in modern history. Although there existed a consensus among member states that the tri-lateral agreement needed an update, no one could have predicted that its successor would be greeted by an economic downturn caused (or accelerated) by a crippling pandemic that has forced an almost complete shutdown of the Mexican and United States economies.

In addition, while the US-Mexico relationship appears relatively strong, the US relationship with Canada has been more strained, marked by intermittent friction between the two countries on a variety of trade-related issues, such as steel tariffs in the United States and dairy tariffs in Canada. Given this backdrop, it is hard to predict how smooth the implementation of the USMCA will be. For example, in late-July hearings in the US House, both parties’ lawmakers exacted promises from the US Trade Representative’s office that it would quickly and aggressively use the USMCA’s enforcement mechanisms, with those representatives revealing that some cases were “ready to go” and would be on file by this autumn.

The general consensus is that the USMCA achieves some notable changes and a number of incremental improvements. A full description of these changes is beyond the scope of this discussion, but the changes that will likely have the greatest impact relate to a few, select industries, and certain procedural changes, including the following:

Domestic Content Rules for Automobiles

Auto content rules were a major issue throughout the USMCA negotiations. The USMCA includes two significant changes to how cars will be made and when they can be declared as made in the United States. First, the USMCA increases to 75% (from 62.5%) the percentage of a vehicle’s parts that must be manufactured in North America. Although the 75% number has garnered most of the attention, the USMCA (as did NAFTA) actually includes different rules: Part content is divided into core, principal, and complementary parts with content requirements of 75%, 65%, and 60%, respectively. The content calculations will also be subject to the USMCA’s rules of origin, which do away with NAFTA’s tracing scheme as well as the concept of “deemed originating.” These changes will affect the automotive supply chain. For example, the USMCA introduces a new rule requiring that 70% of the total steel and aluminum used in an automobile must be sourced from North American suppliers. Combined with the elimination of the tariff shift rules for stamped products, this will require supply chain changes for a number of auto producers.

While there are broader labor rules incorporated into the USMCA, the primary focus is on the agreement’s new requirements that workers earning at least $16 per hour make 40% to 45% of a vehicle’s components.

In keeping with the findings of Section 232 of the Trade Expansion Act of 1962 relating to automobiles, the USMCA incorporates quotas for Canadian and Mexican auto imports. Although the quota is well above current rates, this provision likely will morph into an issue in future years.

Labor Laws

The USMCA includes an array of labor-focused provisions. One example is a requirement that the countries adopt and enforce labor laws consistent with the International Labor Organization. The signatories also agreed to effectively enforce labor laws, and not to waive or derogate from them. The USMCA also requires the countries to: (1) take measures to prohibit the importation of goods produced by forced labor; (2) address violence against workers exercising their labor rights; (3) address sex-based discrimination in the workplace; and (4) ensure that migrant workers are protected under labor laws.

The USMCA also includes an Annex on Worker Representation in Collective Bargaining in Mexico, under which Mexico commits to specific legislative actions to provide for the effective recognition of the right to collectively bargain. To fulfill this commitment, Mexico enacted historic labor reforms on May 1, 2019, and is implementing transformational changes to its labor regime, including new independent institutions for registering unions and collective bargaining agreements and new and impartial labor courts to adjudicate disputes.

The agreement also requires all businesses in Mexico to ensure that they are in compliance with all aspects of the USMCA, including the collective bargaining provisions. The United States and Mexico have established a Facility-Specific, Rapid Response Labor Mechanism (Labor Mechanism) to enforce the collective bargaining obligations through the imposition of remedies, which may include the suspension of the preferential tariff on goods manufactured by a breaching facility. The countries have already begun their appointments to these dispute-resolution bodies, and the US Trade Representative has testified that cases are already being identified for action in the fall of 2020.

Other Notable Changes

While NAFTA had no provisions relating to dairy, the USMCA increases the opportunity for dairy exports to Canada, long a contentious issue between the two countries, making the US Dairy industry a winner in the deal. As Alan Ross of Canadian law firm Borden Ladner Gervais LLP states “Under the new agreement, US dairy farmers receive access to about 3.5% of Canada’s $16 billion annual domestic dairy market. Operationally, Canada will provide new tariff rate quotas exclusively for the United States and eliminate certain milk price classes, changes which have proven unpopular with the Canadian dairy industry.”

Also, the USMCA (1) includes environmental obligations to, among other things, combat wildlife trafficking, address air and marine quality, and protect marine life and, as part of its environmental efforts, the USMCA provides funds for monitoring these environmental efforts; and (2) prohibits customs duties on digital products (i.e., products that are transmitted electronically, such as computer programs, videos, or music). This last issue alone merits further analysis and consideration, as digital taxes become de rigueur in Europe and elsewhere. Finally yet importantly, unlike NAFTA, the USMCA includes a sunset clause. The countries settled on a 16-year term for the deal, with a review to identify and fix problems and a chance to extend the deal after six years.

Monitoring and Enforcement

The signatories countries are to make every endeavor to arrive at a mutually satisfactory resolution of all disputes arising out of the USMCA.  However, if they are not able to reach a resolution, Chapter 31 of the USMCA provides the framework for dispute settlement. In it, the parties will first consult with technical experts in the hopes of resolving the dispute. Should that fail, a ministerial panel will review the dispute and submit a final report. If the final report finds that (1) the measure is inconsistent with a party’s obligation; (2) a party has failed to carry out its obligations under the USMCA; or (3) the measure is causing nullification or impairment of the scope, the disputing parties must try to agree on the proper resolution for the dispute within 45 days. If the disputing parties are unable to resolve the dispute within 45 days, the complaining party can suspend the responding party’s benefits of equivalent effect to the dispute.

The USMCA retains the binational panel reviews of unfair trade law matters. These include customs determinations, antidumping and countervailing duty determinations, government procurement, breach of the most-favored-nation treatment for investors (noting that Canada has opted out of the investment provision of the USMCA), and disputes involving public telecommunications services, digital trade, intellectual property, labor rights, and environmental obligations.

In a significant change from NAFTA, the investment chapter (Chapter 14) of the USMCA (1) only applies to the US and Mexico (given Canada’s withdrawal from investor-state dispute settlement regime – ISDS), and (2) narrows the circumstances under which cross-border investors can bring actions under the general rules of ISDS. For instance, the USMCA prevents many US and Mexican investors from asserting claims under the “fair and equitable treatment” standard, which is included in most international investment treaties and is a frequent basis for such claims. Exactly how this will impact cross-border activities remains to be seen.

Generally speaking, Chapter 14 provides access to international arbitration for general investments and covered government contracts subject to satisfaction of certain pre-arbitration conditions and limitations (including the exhaustion of local remedies and certain statutes of limitation). Investors (post—established investment) may seek protection for breach of national treatment and most-favored-nation treatment under the general investments protections. Further, under the government-covered contracts protections, investors in oil and gas production, telecommunications, transportation, certain infrastructure, and power generation may also be entitled to protection under the USMCA. Lastly, it should be noted that (1) the participation of Mexico and Canada in the Trans-Pacific Partnership (otherwise known as the CPTPP) will force all investors to take a fresh look at their options when seeking relief from wrongdoing by another state, and (2) the consent by Canada to ISDS for legacy investment claims will elapse three years after NAFTA’s termination.

As mentioned above, the USMCA also created the Labor Mechanism as a way to deal with labor disputes. In particular, the Labor Mechanism enables the United States and Canada to bring a dispute against a facility in Mexico that they believe is not in compliance with Mexico’s new labor laws. The Labor Mechanism permits the suspension of the preferential tariff as a remedy, the imposition of penalties on goods or services from the violating facility, or the denial of entry of goods from the violating facility.

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While we remain confident that member states are invested in the growth of the North America region as a whole, and the consensus is that the USMCA does address some of the most relevant concerns of the parties to the tri-lateral agreements during the NAFTA years, it will be hard to really measure the USMCA’s true effects (whether positive or adverse) in the short and possibly mid-term given, among other things, the political and economic turmoil that has seen it take its first steps.


Free Trade Agreements: Is There a Trade Lane Left Without One?

Since the first Free Trade Agreement (FTA) in 1860, a lot has happened. A solid 160 years will do that for you. On the FTA front specifically, the focus has also shifted: what used to be an opportunity for significant duty reduction and, therefore, a more competitive position in the FTA partner’s home market has turned into a tool for faster access to the market and control of a trading relationship. With the applied, weighted, mean duty rates globally down to 2.59% from 8.57% in 1994 (Source: based on World Trade Organization (WTO) data), the importance of duty rate reduction has been marginalized—so why is there still such a strong movement towards adding more FTAs to an already considerable total worldwide?

Some Recent Developments

Trade agreements are not only about duty rates anymore; the collaboration and facilitation part is just as, if not more, important. That means trading partners make efforts to reduce the paperwork on the trade lane, give priority to incoming shipments, and collaborate on data exchange and simplification of procedures. In today’s economies, these elements are just as crucial as a few duty points. In addition to the facilitation, environmental clauses are included in new FTAs. Got to start somewhere. Customs unions (like the EU) take it one step further—they usually allow for goods to move freely between member states and have a single common tariff for the outside world.

In a similar fashion, the FTA accounts for financial and administrative arrangements that are not limited to duty rates and import documents. In a broader scope, abolishing of export subsidies, transparency with added value calculations, investigative cooperations, etc. are part of the package and simplify the use and verification of FTA claims.

Perhaps not a trend (yet?), but the Pan-Euro-Mediterranean is loosening its Rules of Origin (likely in effect in 2021). Rules of Origin set forth the requirements that need to be met to benefit from FTA arrangements (i.e., qualify for preferential treatment). Typically, Rules of Origin encompass a required tariff shift (i.e., a substantial transformation needs to take place) and/or a value-added component (i.e., the value add of locally sourced parts, materials, labor, etc. needs to exceed a specific threshold). The value-added thresholds have historically been relatively high (60% and up) and loosening those requirements will simply allow more products to qualify, which will give developing countries especially more opportunities to qualify their exports for preferential treatment.

Per the WTO, over 300 Regional Trade Agreements (RTA) are currently in force. This number only reflects agreements that include preferential duty rate schemes, as agreements such as bilateral investment treaties or Joint Commissions would increase this number two- or three-fold. The RTA number includes bilateral/local agreements as well as ‘monster trade pacts’ such as the EU, USMCA or ASEAN – China agreements. It has been a steady growth of FTAs since the 1990s, with a peak in the action between 2003 and 2011. And (see below) there is no end in sight.

What’s Next?

Go big or go home is what the EU is thinking. Agreements are in place with around 40 countries, ratification in progress for agreements with around 30 countries, and agreements with another 20 countries are waiting to be signed. For any countries left behind, it seems that there are ongoing negotiations (e.g., Australia, New Zealand) or plans to negotiate. Don’t despair.

Never-ending speculation on a Trans Atlantic agreement (US – EU) or a Trans-Pacific Partnership (TPP) including the US will not be put to rest until actually completed and in force (the US withdrew from the TPP in 2017). The US currently has 14 FTAs with 20 countries, re-did the USMCA in 2020, and negotiations with Kenya and Taiwan seem to be in the works.

Lastly, with Brexit in its final stages, the UK is also breaking off FTA relationships with EU partners. That means the UK will have to create separate FTAs with these countries. Practically, not all of the EU FTAs will have a UK equivalent by January 1, 2021, and some may never be in place. This means regular (Most Favored Nations – MFN) rates will apply come January 1 unless another preferential program (like the Generalized System of Preferences) applies. But with the UK exit comes an opportunity for Britain to conclude agreements the EU has not been able to pull off. Perhaps a US – UK FTA is nearer than thought. Let’s check the odds on that!


Anne van de Heetkamp is VP of Product Management and Global Trade Content at Descartes and is an international trade expert with 20+ years of industry experience. Previously he served as Director for global trade compliance/management company, TradeBeam.