Manufacturers like Precision Engineering expect USMCA to help them compete
Precision Engineering LLC. in Uxbridge sees itself as a micro-factory, one that relishes the chance to compete against Fortune 500 companies.
The 32-year-old fabricator makes intricate parts out of sheet metal for machines and systems people rely on every day. Precision says it simply needs the specifications for the part — whether for a plane, a military radar, airport’s security system or a building’s elevator — and its plant can make it, guaranteeing quality and timely delivery.
But sometimes, that’s not enough, especially when Precision must fight for business against factories in other countries that will make the same part, but on a floor where workers receive a fraction of the wages paid in the United States.
“We have several customers who have factories in Mexico,” said Precision Engineering President Liora K. Stone. “I remember I was in one of those factories in Mexico, talking to the general manager, and he said to us, at triple time, on a Sunday, his labor costs, his hourly wage, was still about $5 to $6 less than our minimum wage. In triple time. So just on that alone, you’re like, ‘How do I compete?’ ”
Soon, though, Stone and other manufacturers hope to see a more level playing field, with the arrival of the new U.S.-Mexico-Canada Agreement, or USMCA, which President Donald Trump signed into law Jan. 29.
The 2,000-page deal mostly revises the North American Free Trade Agreement (NAFTA), first approved in 1994 under President Bill Clinton, while adding new laws for intellectual property and digital trade. The agreement also touches on agriculture, including giving U.S. dairy farmers more access to Canadian markets.
Canada still must ratify the USMCA, so NAFTA remains in place for now.
In Massachusetts, business organizations such as Associated Industries of Massachusetts and the New England Council cheered USMCA’s signing as an essential update of the country’s trade relations.
“With over 600,000 jobs in our region supported by trade with Canada and Mexico, and nearly $13 billion in exports in 2018 alone, the importance of this agreement for our region’s continued growth and prosperity cannot be understated,” said the New England Council’s President and CEO James Brett.
President Trump has trumpeted how the pact will help the auto industry by bringing factory jobs back, requiring automakers to obtain 75% of their production content from within North America, up from 62.5% with NAFTA, to qualify for duty-free benefits. At the same time, the agreement steers automakers to factories paying employees higher wages, stipulating that at least 40% of vehicles originate in places where workers earn at least $16 an hour.
Stone and other manufactures are hopeful that the USMCA will put the three countries on more even footing in other manufacturing industries, too, starting by raising the pay per hour at all factories in Mexico.
“We’re hoping that the USMCA levels the playing field between manufacturers in all three countries, so that one country is not underpaying or paying at a very low wage rate. I don’t mind competition, but only when the playing field is level,” she said.
Mexico, for its part, has agreed to new labor laws that will provide better protection for workers, including making it easier for them to unionize, which experts call an important first step.
According to the International Trade Commission, labor provisions within the USMCA, if enforced, should promote higher wages and improved labor conditions in the three countries. The commission analyzed collective bargaining commitments in Mexico, for example, determining the provisions would increase union wages there by 17.2%.
“The USMCA labor chapter represents a significant departure from NAFTA, which does not include a labor chapter, but instead addresses labor rights in a side agreement,” the commission wrote in a report last year, adding that the collective bargaining provisions related to Mexico would have a moderate effect on the U.S. economy.
To Stone, such reports are promising. And the UMSCA appears on the surface a welcome revision to the 26-year-old NAFTA.
“With respect to things like the cost of labor and competing with Mexico, NAFTA really made things worse,” she said. “In the decades after NAFTA you saw more and more manufacturing go overseas, and so I think businesses in general, and even us in particular, were really aching for some changes to these trade agreements.”
Precision has had to look for creative ways to keep its costs and labor down — to compete and encourage new business, she said.
Manufacturing conditions differ not only on the labor front, she said. Environmental regulations vary significantly from country to country. The USMCA does address the environment, creating an interagency committee tasked with monitoring environmental laws, regulations and practices in Mexico.
While businesses like Precision may not yet know how the USCMA will affect them when it does replace NAFTA, their general reaction to the deal’s signing has been “a sense of relief,” said Kristen Rupert, senior vice president of external affairs and executive director of the International Business Council at AIM.
As debate over the USMCA raged, businesses were worried that NAFTA would crumble with nothing to replace it, Rupert said. “A lot of companies have developed intricate supply chains with Canada and Mexico, and had this administration opted to withdraw entirely from NAFTA, that would have been pretty catastrophic.”
AIM, the largest employer group in the state, was a vocal supporter of USMCA ratification, noting its importance to the companies in Massachusetts that send a wide variety of parts and products to Canada and Mexico. In its blog, AIM wrote the USMCA would preserve “more than 2 million American manufacturing jobs — at least 15,000 of them in Massachusetts — that rely on trade with Canada and Mexico.”
Rupert clarified how exactly those jobs would be preserved, saying that with USMCA’s passage, there will be no major disruptions to supply chains, including for those many small to mid-size manufacturers in Massachusetts making and exporting individual parts for larger products.
“It takes a long time to develop and perfect your supply chain. Likewise, it takes time to unwind your supply chain or make significant adjustments to it,” she said. “Let’s say NAFTA went away or there were significant increases in tariffs in products crossing either border, these are costs that a company has deal with and decide whether they absorb it, eat it, pass it on to their customers. That money has to come from somewhere.”
With those cost increases, she said, “you could see hiring freezes or layoffs.”
“That’s what you would be looking at if there were a major change: USMCA is not a major change, so in that way it will preserve jobs.”
Still, in the two weeks after its signing, relief over the USMCA is starting to give way to questions about the deal’s various provisions, according to Julia Dvorko, regional director of the Massachusetts Export Center. She said most companies have taken a “wait and see” approach.
One of the biggest unknowns for companies is how to go about claiming duty-free status for imports or exports, Dvorko said.
“There will be specific rules for specific products when it comes to whether you can export duty-free or you can import the product duty-free,” Dvorko said. “A lot of companies are not sure yet what the specific rule is for their product.”
At Precision, Stone doesn’t expect to see the full effects of the USMCA on her firm any time soon. “Call me in nine months,” she said.
In a perfect world, the deal would bring equity to wages across the three countries, enforce the same environmental regulations that she deals with here in factories in Mexico and help U.S. steel mills compete with those in other countries.
“The person doing the best job at the best price will get the work, as opposed to me trying to play with one hand tied behind my back,” she said.
Material from the Associated Press was used in this report.