North America's Shifting Supply Chains: USMCA, COVID-19, and the U.S.- China Trade War

• Author: David A. Gantz
• Pages: 121-149

North America’s Shifting Supply Chains:

USMCA, COVID-19, and the U.S.-China

Trade War

D

AVID

A. G

ANTZ

*

I. Introduction

The United States-Canada-Mexico Agreement (USMCA) entered into

force on July 1, 2020,

1

after a long and arduous journey that began in 2017

with multiple U.S. threats to terminate NAFTA and effectively ended when

the Trump Administration and the Democratic Congress agreed in

December 2019 on a series of amendments to the original text signed

November 30, 2018.

2

For purposes of this article, it suffices to note that while much of NAFTA

is carried over into the USMCA, extensive modernization and innovation

was accomplished, reflecting the passage of twenty-eight years since NAFTA

was originally negotiated in 1991–1992.

3

Overall, the most significant

changes directly affecting regional trade are those affecting the auto

industry; particularly, the requirements that the regional value content of

automobiles and light trucks benefitting from NAFTA’s origin—zero tariff

status—must, after three years, increase from 62 percent to 75 percent, and

that 70 percent of the steel and aluminum used in automotive production

originate in North America (with the steel, after seven years, also having to

* Samuel M. Fegtly Professor Emeritus, Rogers College of Law, the University of Arizona;

Will Clayton Fellow for Trade and International Economics, Center for the U.S. and Mexico,

Baker Institute. Copyright



2020 David A. Gantz. Web: http://www.law2.arizona.edu/faculty/

facultyprofile.cfm?facultyid=41. SSRN page: http://papers.ssrn.com/sol3/cf_dev/AbsBy

Auth.cfm?per_id=36165. Baker Institute: https://www.bakerinstitute.org/experts/david-a-

gantz/.

1. Press Release, Office of U.S. Trade Rep., USMCA To Enter Into Force July 1 After

United States Takes Final Procedural Steps For Implementation (Apr. 24, 2020), https://

ustr.gov/about-us/policy-offices/press-office/press-releases/2020/april/usmca-enter-force-july-

1-after-united-states-takes-final-procedural-steps-implementation [https://perma.cc/N6XP-

JD46]; see also Agreement Between the United States of America, the United Mexican States,

and Canada, Dec. 13, 2019, https://ustr.gov/trade-agreements/free-trade-agreements/united-

states-mexico-canada-agreement/agreement-between [https://perma.cc/WX3X-SWGQ].

2. United States-Mexico-Canada Agreement,

O

FF

. U.S. T

RADE

R

EP

.

, https://ustr.gov/trade-

agreements/free-trade-agreements/united-states-mexico-canada-agreement [https://perma.cc/

46HU-246K] (last visited Oct. 19, 2020).

3. See David A. Gantz, The United States–Mexico–Canada Agreement: Overview and Analysis 1

(Rice Univ. Baker Inst. for Pub. Pol’y, Report No. 12.11.18, 2018), https://

www.bakerinstitute.org/media/files/files/1f9f406a/bi-report-121118-mex-usmca.pdf [https://

perma.cc/A77M-P9DA] [hereinafter “Gantz, Report No. 12.11.18”].

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122 THE INTERNATIONAL LAWYER [VOL. 54, NO. 1

have been melted and poured in North America).

4

With steel and

aluminum, most foreign producers are saddled with 25 percent and 10

percent additional duties, respectively, based on bogus national security

concerns, but China is not among those significantly affected.

5

These provisions in themselves will require significant modifications of

the supply chains utilized by the dozens of auto plants operating in North

America, keeping in mind that NAFTA created the full integration of North

American automotive supply chains nearly thirty years ago.

6

Simultaneously, several other factors are forcing North American

manufacturers, including but not limited to those in the automotive

industry, to adjust their supply chains, creating a veritable “perfect storm” of

pressures to decouple with China (and reduce dependence on other non-

North American sources) for materials and components, encouraging an

already significant decoupling of the U.S. and Chinese economies in the first

quarter of 2020.

7

Although this is not the place for a detailed discussion of

the broader United States-China relationship, it is notable that a high

official of the Trump Administration has argued for an end to “blind

engagement” with China and criticized U.S. allies for not taking action to

address the prospect of “a Chinese century.”

8

The most important of the factors discussed in the article is the

U.S.–China Trade War (discussed in Part III of this article) which, despite

the conclusion of the “Phase One” Agreement on January 15, 2020, permits

the United States to continue to impose tariffs from 7.5 percent to 25

percent on some $360 billion worth of tariffs on Chinese imports.

9

Many

observers, including this writer, believe that these penalty tariffs, imposed

originally to pressure China to improve its protection of intellectual

4. See David A. Gantz, The United States-Mexico-Canada Agreement: Tariffs, Customs, and Rules

of Origin 3, (Rice Univ. Baker Inst. for Pub. Pol’y, Report. No. 02.21.19, 2019), https://

www.bakerinstitute.org/media/files/files/6ee1ade5/bi-report-022119-mex-usmca.pdf [https://

perma.cc/55LP-6TAK] [hereinafter “Gantz, Report No. 02.21.19”];

D

AVID

. A. G

ANTZ

,

A

N

I

NTRODUCTION TO THE

U

NITED

S

TATES

-M

EXICO

-C

ANADA

A

GREEMENT

: U

NDERSTANDING

THE

N

EW

NAFTA

24–44 (2020).

5. See discussion infra Section IV.

6. See Gantz, Report No. 02.21.19, supra note 4, at 1.

7. James Kynge, US-China Economic Decoupling Accelerates in First Quarter of 2020,

F

IN

.

T

IMES

(May 11, 2020), https://www.ft.com/content/115fc14f-4a8a-45da-8688-c59605a5191a

[https://perma.cc/JMM3-47MA].

8. See Katrina Manson, Pompeo Calls for an End to “Blind Engagement” with China,

F

IN

. T

IMES

(July 23, 2020), https://www.ft.com/content/825870b5-99a3-4b45-9fb3-1baa7772f011 [https://

perma.cc/HGN9-H9K9].

9. See generally Economic and Trade Agreement Between the Government of the United

States of America and the Government of the People’s Republic of China, China-U.S., Jan. 15,

2020, https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/

Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf [https:/

/perma.cc/7E5X-XWT3] [hereinafter “Phase One Agreement”]; see also Peter Eavis et al.,

What’s in (and Not in) the U.S.-China Trade Deal,

N.Y. T

IMES

(Jan. 15, 2020), https://

www.nytimes.com/2020/01/15/business/economy/china-trade-deal-text.html [https://

perma.cc/YZ3K-HKF4].

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW