James Cooper: The USMCA Trade Pact Holds Blockchain Opportunity

James Cooper is a professor of law at California Western School of Law in San Diego where he teaches International Business Transactions and International Law. He has consulted for Los Pinos, Mexico’s executive branch, and the U.S. Department of State.

The United States-Mexico-Canada Agreement (USMCA) goes into force today. The trade pact replaces the much-maligned North American Free Trade Agreement (NAFTA), which went into effect on Jan. 1, 1994 and laid the foundation for a vertically integrated marketplace on our continent. By reducing tariffs on many goods and services, North American companies were able to develop transnational vertical supply chains and better compete in the global marketplace.  

Negotiated as the European Union was being formed and the Asia Pacific Economic Cooperation forum was starting, NAFTA successfully integrated the U.S. economy with two hemispheric partner countries and created economies of scale. There was some social dislocation and trade distortion as not all boats rose with the higher tide. But the pact succeeded in creating a North American marketplace, only for Donald J. Trump to campaign on withdrawing from the pact, calling it a “the worst trade deal ever made.”

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Enter the USMCA, which provides opportunities for blockchain technology to be deployed and showcased for use cases and eventual scalability. 

Before the advent of COVID-19, some $1.4 billion worth of goods crossed the U.S.-Mexico border every day. In 2018, 80% of Mexico’s exports went to the United States. Freight forwarders, customs brokers and international finance agents will greatly benefit from making their arrangements via smart contracts. There will be less need for expensive transnational litigation, investor-state dispute settlement procedures or even private commercial arbitration if transactions are placed on the blockchain, ready for instant enforcement. 

Also, the USMCA provides for the harmonization of standards across all three partner countries concerning the sharing of consumer data and prohibits all three nations from discriminating against foreign fintech companies and ensuring national treatment across the free trade area.

The biggest opportunity for blockchain technology is in origin provision rules the USMCA requires of automobile production. Under NAFTA, 62.5% of a car had to be built within North America to qualify for preferential tariff treatment. But under the USMCA, 75% of a car must be made in the free trade area. U.S., Canadian and Mexican suppliers need to verify and validate the source of the products they use – a perfect place for blockchain technology to be deployed. 

Distributed ledgers can assist sales departments in completing the arduous paperwork for rules of origin certifications, be they under USMCA or any other bilateral (U.S.-Korea Free Trade Agreement) or multilateral free trade U.S.-Central America Agreement (CAFTA) agreements. This will make the inspections by U.S. and Border Protection (CBP) authorities that much more fluid. CBP is also working with advanced digital technologies, having piloted a blockchain solution to verify certificates of origin on important goods under NAFTA and CAFTA.  

The remittance market also stands to benefit by integrating blockchain technology. It is quite a market: In February, the Central Bank of Mexico confirmed that Mexican migrants working overseas sent home a record high $36 billion in remittances in 2019, a 7% increase from 2018. There is huge value in reducing costs of more expensive money transfer and money order services. There are some companies trying to scale up; now that the USMCA is going into force, this sector is ripe for blockchain development. The CEO of Bitso, a Mexican cryptocurrency exchange, said some 5% of remittances sent from the United States to Mexico were processed in cryptocurrencies last year.  

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While much else in the USMCA is like the previous trade deal, there are some improvements on intellectual property. NAFTA was the first trade agreement in the world to include intellectual property rights protection within its provisions, and Mexico had to change its laws to abide by the trade pact’s more onerous details. Likewise, the USMCA forces many changes in Mexican law to protect U.S. rights holders south of the border. The USMCA extends the terms of copyright to 70 years after the life of the author, an increase from the previous 50-year term, and provides for a more robust regional digital economy by prohibiting duties on music and electronic books and protecting Internet companies so they are not liable for content that their users produce. 

No wonder President Trump touted the USMCA as a great success during his last State of the Union Address. The reality is not so stark: Non-partisan watchdogs have concluded it will take years for U.S. workers and companies to truly gain from the new trade pact. The government’s own United States International Trade Commission reported the USMCA would create minimal economic gains for the United States in the near term. By the sixth year of the new agreement, the USITC predicts a rise in Gross Domestic Product of only $62.8 billion, or 0.35%.   

This means that apart from some gains in digital trade and biologics, it may be a net wash compared to the old agreement. Bilateral trade under NAFTA has expanded over 600 percent since 1994, so continuing growth of any kind is a good thing, especially in this era of beggar-thy-neighbor trade policies. NAFTA has grown to a more than $20 trillion a year regional market over the last quarter century – no small feat. By taking advantage of the efficiencies of blockchain technology, the economies of all three countries under the USMCA can only grow and consumers in North America enjoy the benefits.