From NAFTA to USMCA: revisiting the market access – policy space trade-off

ABSTRACT This paper contributes to the literature on the evolution of North–South trade agreements, which historically involved countries in the global South relinquishing policy space for activist trade and industrial policies in exchange for locking-in preferential and stable market access. It takes as case study the renegotiation of the North American Free Trade Agreement (NAFTA), drawing on the agreements, media coverage of the negotiations, and 107 interviews with negotiators and stakeholders in all three countries. I show how the renegotiation resulted in changing conflicts: while the Mexican government attempted to preserve its market access and sought to further restrict its policy space due to path dependence, the Trump administration wanted to reduce market access for Mexico and create uncertainty to re-shore production. The Trump administration partially succeeded by undermining the lock-in effect of trade agreements and including unprecedented provisions in USMCA. The actions of the Biden administration indicate a long-term shift in US trade policy towards protectionism. Combined with the USMCA sunset clause, this creates the risk that the US will use USMCA review periods to create market access uncertainty instead of seizing the opportunities to strengthen North American economic cooperation.


Introduction
Most neoclassical economists argue that preferential trade agreements (PTAs) promote economic development by increasing efficiency, locking-in market reforms, and attracting foreign direct investment (Heydon 2020).Critics, however, contend that this view does not account for the way in which many countries industrialised, which involved activist trade and industrial policies (Chang and Andreoni 2020).Successful late industrialisers such as Japan, South Korea, Taiwan, and China temporarily protected their infant industries with tariff barriers until they were productive enough to compete on international markets.They also resorted to policies aimed at transferring foreign technology to domestic firms, such as through foreign investment requirements and weak intellectual property protection.By contrast, PTAs restrict the use of such industrial policies (Shadlen 2005, Thrasher andGallagher 2008).From this perspective, the logic of North-South trade agreements involved a trade-off: countries in the global South obtained the benefits of stable preferential access to markets in the global North in exchange for the cost of restricting their policy space for activist trade and industrial policies (Shadlen 2005, 2008, Chang et al. 2016).
This logic was characteristic of the many trade agreements signed by the US and the EU with the global South and was pioneered in 1994 by NAFTA, which served as a template for the PTAs that followed (Shadlen 2008, p. 2).Considering threats by President Trump to withdraw the US from NAFTA unless Mexico agreed to unilateral concessions, this paper analyses how and why the NAFTA renegotiation changed this logic.Although not referring explicitly to this logic, the literature has identified some of Trump's efforts to reduce market access for Mexico, detailed the new USMCA provisions, and assessed their potential impact (Anderson 2020, Gantz 2020, Alvarez Medina 2021, Blecker 2021, Ciuriak and Fay 2021, Gagné and Rioux 2022, Macdonald 2023).This paper is the first to draw on interviews of negotiators and stakeholders in the US, Mexico, and Canada to reveal how changes to this logic were shaped by the impact of NAFTA on governments' preferences and available choices.
The paper finds that the renegotiation resulted in changing conflicts: while the Mexican government sought to further restrict its policy space due to path dependence, the Trump administration attempted to reduce market access for Mexico and create uncertainty.The Trump administration partially succeeded by undermining the lock-in effect of trade agreements, including through unconventional negotiating strategies and new provisions in USMCA.Although some of Trump's negotiating tactics may not return, the actions of the Biden administration indicate that his protectionist approach is here to stay.The entrenchment of Mexico's policy space constraints is relevant to other Southern countries integrated in PTAs.
107 interviews were conducted through snowball sampling until data saturation, first online from September 2020 to December 2021 due to COVID-19, then in Washington D.C. from March to May 2023.The respondents include 48 Americans, 34 Mexicans, and 22 Canadians, working as government officials (37), business (26) and labour (21) representatives, and experts (23).Interviews were semi-structured and answers checked through triangulation.The responses allow to go beyond the analysis of de jure policy space to consider de facto changes.
The paper first compares neoclassical and structuralist interpretations of North-South PTAs, which converge on the benefits of stable preferential market access but diverge on the impact of policy space restrictions on economic development in the global South.It then assesses how the NAFTA renegotiation changed Mexico's policy space and access to the US market.

The logic of preferential trade agreements
According to the prevailing neoclassical school, free trade is conducive to economic development because it increases economic efficiency (Heydon 2020, p. 7, Aistleitner andPuehringer 2021).Provided that trade diversion inefficiencies do not outweigh efficiency gains from trade liberalisation, PTAs are conducive to economic development (Viner 1950).Removing tariff and non-tariff barriers to trade forces protected domestic firms to compete with foreign firms, thereby pressuring them to reduce their costs and increase the quality of their products.As trade openness becomes the norm, firms stop wasting resources to lobby for government protection.PTAs also lock-in certain market reforms by including commitments to liberalise foreign investment and financial markets, increase protection of intellectual property rights, and eliminate 'market distorting' government interventions such as subsidies and support for state-owned enterprises (Heydon 2020, pp. 25-6).By locking-in market reforms and market access, PTAs also contribute to economic development by reducing uncertainty.
The analysis above, however, does not account for the way in which many high-income countries developed, which involved activist trade and industrial policies (Chang 2002).Japan, South Korea and Taiwanthe East-Asian Tigers that caught-up with high-income countries at record growth ratesall used activist trade and industrial policies including tariffs, quotas, export subsidies, a depreciated exchange rate, weak intellectual property rights, capital controls, joint venture and technology licensing requirements (Johnson 1982, Amsden 1989, Wade 1990, Ang et al. 2015, Lane 2021).More recently, China's high growth rates have been accompanied by activist industrial policies to promote technology transfer and trade protection for infant industries (Rodrik 2007, Lee 2021).
Although the global South retained some policy space in the WTO, PTAs with the US severely curtailed the use of such policies (Gallagher 2007).
Many non-neoclassical economists contest the beneficial effects of free trade and unregulated foreign investment by highlighting the role of sectors and structural change in economic development.Structuralist and heterodox economists criticise free trade policies for undermining economic development by locking-in poor countries in the production of low value-added primary commodities, emphasising instead the importance of state intervention to change the structure of an economy towards sectors more conducive to economic development (Rodrik 2015, Szirmai and Verspagen 2015, Chang and Andreoni 2020).Evolutionary economics echoes those insights by stressing the need to focus on the development of domestic productive and innovative capabilities (Freeman 1982, Verspagen 1993, Lundvall 1995, Lee 2013, McMillan et al. 2017).Even within neoclassical economics, endogenous growth theory, new economic geography theory, and strategic trade theory all give credence to infant industry protection by emphasising the importance of technological innovation and increasing returns to scale (Romer 1990, Krugman 1991, Grossman 1992, Szirmai 2012, Dosi et al. 2019).From the structuralist perspective, North-South PTAs involve a trade-off: they provide the global South with preferential market access to the global North at the expense of restrictions on their use of activist trade and industrial policies.
Most of the structuralist literature has focused on the global South's loss in policy space (Gallagher 2005, Thrasher and Gallagher 2008, Chang et al. 2016).Market access stability has received less attention, despite Shadlen's (2008, pp. 5-8) work demonstrating that 'the promise of a PTA is preferential market access that is secure, stable, and non-removable', by contrast to the WTO's Generalised System of Preferences (GSP)'s 'nature as unilateral concessions that are easily removable and alterable'.Given that GSP concessions are not bound under the WTO, countries in the global North can and did remove them for domestic reasons or to exert pressure on GSP receivers, which created 'political trade dependence' (Ibid., see also Gallagher 2008, Manger andShadlen 2014).The renegotiation of NAFTA provides an opportunity to analyse the extent to which the stable market accessrestricted policy space trade-off characteristic of North-South PTAs has evolved.

New policy space restrictions
Focusing first on policy space, the NAFTA renegotiation led to greater restrictions on Mexico's ability to conduct activist trade and industrial policies, while interviews with Mexican negotiators suggest these new restrictions were welcomed.Mexico's policy space was already severely restricted by NAFTA, which eliminated tariffs, increased intellectual property protection, and restricted foreign investment regulation.The provisions in NAFTA were the culmination of the Mexican government's trade liberalisation efforts in the 1980s, including its prior commitments in 1986 to join the GATT (Mayer 1998, Cameron andTomlin 2000).Given that Mexico's import-substitution strategy in the 1970s contributed to a decade of financial crises in the 1980s, President Salinas saw in NAFTA a tool to incentivise foreign investment inflows and lock-in trade liberalisation.Despite its market reforms, however, Mexico experienced declining GDP per capita growth rates since NAFTA, averaging barely 1 per cent and leading to economic divergence with the US (Blecker 2022, Sánchez-Juarez andMoreno Brid 2016, p. 276).Only major changes to policy space are analysed below.

Dispute settlement
The Trump administration de facto sought to eliminate all DSMs, including by requesting the power to ignore a ruling when 'a panel has clearly erred in its assessment' (USTR 2017, p. 17).Although Democrats wanted a state-to-state DSM, they also supported the elimination of the antidumping and countervailing duties (AD-CVD) and investor-state DSMs (ISDS).A senior Democrat official, now in the Biden administration, recalled: 'our view is that nobody should question how we apply our AD-CVD laws' (interview, 26 February 2021).As to the state-to-state DSM, according to López Obrador's chief negotiator, Jesús Seade (interview, 15 October 2020): The Democrats wanted something horrible, which was inspectors.The Republicans wanted something horrible, which was no proper dispute resolution system.[…] What resulted was that they first proposed to have a proper dispute resolution system for labour issues […] and labour of primary exports to Mexico.They said 'fruits and vegetables'.and I said 'Well, where are my televisions?Where are my cars?'.
Following pressure from the US Democratic Party, loopholes in NAFTA that prevented the functioning of the state-to-state dispute settlement mechanism (DSM) were removed in USMCA.The improved state-to-state DSM in USMCA reduces de facto policy space by increasing the threat of legal action should a country breach its obligations.Mexican negotiators welcomed this change as it provided Mexico with a tool to defend itself from US protectionist policies.For the same reason, Mexican negotiators successfully sided with Canada to retain the NAFTA DSM specific to AD-CVD, albeit negotiating efforts were borne by the Canadians: 'We did not want to waste any thoughts on that because we knew that the Canadians would fight for it ' (interview, Mexican negotiator, 19 April 2023).
As to ISDS, USMCA only preserves the mechanism between the US and Mexico and slightly increases policy space by specifying that only certain high sunk-costs sectors, including oil and gas, retain full protection (Annex 14-E.6).In other sectors, firms must exhaust national remedies first and do not have the right to launch an ISDS investigation for indirect expropriation (Article 14.D.3).The weakening of ISDS does not considerably increase de facto policy space for most activities, such as automotive production, for which expropriation yields little benefits given that the good-functioning of an auto plant depends on the brand and logistics of the automaker.According to a Mexican negotiator: The middle ground that was found was to have a slightly less extensive (ISDS) coverage, but at the same time that important sectors would be included.For example, during the course of NAFTA, there was no dispute settlement in the automotive sector.So we believed that ISDS would not be raised in the future and as such that weaker ISDS coverage would not have implications.(Interview, translated from Spanish, 20 November 2020) Despite recognising the futility of ISDS for certain sectors, also evidenced by the inconclusive literature on the effect of ISDS on investment (Berger et al. 2013, Armstrong andNottage 2016), Mexican negotiators wanted to 'protect ISDS' at the cost of restraining their policy space (interview, Mexican negotiator, 7 April 2021).They accepted a weaker ISDS at the insistence of both US Democrats and USTR Lighthizer.While Democrats wanted to eliminate ISDS to regain policy space for health and environmental regulation, Lighthizer hoped that the elimination of ISDS would reduce incentives for firms to offshore production to Mexico by increasing investment uncertainty (Lighthizer 2023).

Intellectual property rights
The US demanded and obtained stronger intellectual property (IP) protection, thereby reducing Mexican policy space for technology transfer.USMCA increased minimum copyright protection from life plus 50 years or 50 years to life plus 70 years or 75 years (Article 20.62), and of industrial designs from 10 to 15 years (Article 20.55), which increases the net flow of royalties from Mexico to the United States.The agreement also introduced patent term extensions for delays of more than five years in granting a patent, stricter protection of trademarks, and criminal penalties for certain infringements of IP protection, such as digital content theft (Article 20.84) and trade secret violation, including by state-owned enterprises (Articles 20.69 and 20.84).
Mexican negotiators welcomed most of those changes, having over-complied with NAFTA's IP regulation (Shadlen 2017).According to chief negotiator Kenneth Smith Ramos: 'On most of those (IP) issues, we agreed.[…] We have been moving since the NAFTA days to a level of more regulatory convergence with the US' (interview, 16 October 2020).
Mexican negotiators also accepted test data protection of ten years for biologic drugs, which would have further lengthened the duration of patent-holders' monopoly rights.However, the US Democratic Party demanded and obtained the withdrawal of those provisions, considered excessively anticompetitive, as a condition for its support of the new trade agreement.US chief negotiator John Melle recalled: We had others (Democrats) who had very strong feelings about the pharmaceutical provisions which we had negotiated.Trying to correct that had been one of the big political issues largely with Republicans on the Trans Pacific Partnership, having to do with the data exclusivity period for biologic drugs.That obviously got changed.(Interview, 16 December 2020) Although Trump also criticised excessive intellectual property protection for pharmaceuticals during his presidential campaign, he supported the industry's position until Democrats demanded the change.Similarly, patent protection for new uses, methods, or processes of a known product were included in USMCA but removed in the amended agreement.

State-owned enterprises
By contrast to NAFTA, which placed few constraints on the use of SOEs, USMCA criminalises trade secret violation by SOEs and expands the definition of SOEs to include firms in which the government owns a minority but controlling stake (Article 22.1).SOEs are also precluded from providing 'non-commercial' assistance to other SOEs, except if those are at risk of bankruptcy (Article 22.6); and must conduct procurement in a non-discriminatory manner (Article 22.4).USMCA also lockedin the trade liberalisation reforms in the energy sector introduced by former Mexican President Peña Nieto (USMCA Article 32.11; Gantz 2020, p. 109).
Although those provisions restrict Mexico's policy space, they were welcomed by negotiators of Mexican President Peña Nieto.Juan Carlos Baker, Undersecretary of Foreign Trade, recalled that: We never actually thought that it (USMCA SOE chapter) was going to be any relevant, because in Mexico, Canada, the US, there was very little intention of having the government running things in the economy.But now that you see what the (López Obrador) administration wants to do with the energy sector, the stateowned enterprises chapter has become extremely relevant.(Interview, 10 December 2020) With those provisions, the US aimed to set a precedent against China, which had successfully argued in WTO panels that firms in which it owns a minority but controlling stake are not SOEs, and thus should be treated as private firms operating on a level-playing field with foreign private firms (Trump administration official, interview, 30 September 2020).USMCA contains other provisions targeting China's industrial policies, including on currency manipulation (chapter 33) and the possibility of excluding a country from USMCA should it sign an FTA with a 'non-market economy' (Article 32.10).

Overview
Most of the new provisions further restrict Mexico's policy space for activist trade and industrial policies, although only slightly more than NAFTA.As the discussion on ISDS demonstrated, what matters is not degrees of policy space but rather the utility of certain policy instruments.Negotiators and senior officials in the Peña Nieto administration argued that restrictions on policy space were a means to promote investment certainty and market access stability.They considered activist trade and industrial policies unhelpful.As such, they were either favourable to new restrictions on policy space or considered them inoffensive US additions to the agreement aimed at setting precedents against China (chief negotiator Ramos, 16 October 2020).Mexican negotiator Juan Carlos Baker argued that the loss of policy space for industrial policies would not 'impede or hinder development in Mexico in any way' (interview, 10 December 2020).
Even Jesús Seade, chief negotiator for President López Obrador, argued that 'I don't think industrial policy should be such that it allows you to break your commitments, including commitments in intellectual property' (interview, 15 October 2020).This attitude challenges the structuralist literature, which assumes that foregoing policy space will negatively impact economic development.
The NAFTA renegotiation differed from the original, however, in that the utility to Mexico of regaining policy space was lower due to path dependence.Path dependence reduced the utility of regaining policy space in USMCA through two mechanisms: the lock-in of policy space restrictions in other PTAs signed by Mexico and increasing returns to NAFTA which led Mexican negotiators to focus on preserving market access and seek regulatory harmonisation with the US.
First, Mexico's development strategy since NAFTA has been to forge deep trade agreements with the rest of the world to secure preferential market access.As such, many of the new policy space restrictions in USMCA had already been accepted by Mexico in other trade agreements such as the CPTPP.According to Smith Ramos, Mexican chief negotiator in the Peña Nieto administration: Once we came into the NAFTA, we started moving away from the traditional industrial policy models that had been followed in Mexico, and I think that continues now in the USMCA.The big question here is what will do the current administration in Mexico, which comes in with these ideas of having more government intervention into the economy.What has happened in some of the policies that they are trying to take, in the energy sector for example, to favour the SOEs, etc., is that they are running into a brick wall, because a lot of these industrial policy tools are now incompatible with what we have been pursuing in trade agreements and the WTO for the last 30 years.(Interview, 16 October 2020) President López Obrador sought to regain policy space for SOEs PEMEX and CFE but was unable given Mexico's energy liberalisation commitments in the CPTPP and inability to revert concessions made by his predecessor in USMCA (interview, Mexican negotiator, 5 April 2023).
Second, increasing returns to NAFTA led Mexican negotiators to prioritise preserving their access to the US market, which entailed advocating to maintain NAFTA commitments.According to Jesús Seade, preserving Mexico's NAFTA commitments was essential to uphold the rules-based international order, which protects smaller countries from powerful economies' beggar-thy-neighbour policies (interview, 15 October 2020).This view was shared by Mexican negotiators in the Peña Nieto administration, who considered that the priority for Mexico was 'maintaining certainty' and 'maintaining openness, which implied that Mexico would maintain its commitments' under NAFTA (interview, 20 November 2020, translated from Spanish).'The intention was not to go backwards in any area, but rather to keep integrating' (Ibid.).
25 years of economic integration under NAFTA also increased Mexico's need to cooperate with the US.Between 1993 and 2019, the share of trade in Mexican GDP increased from 28 to 78 per cent, of which approximately 80 per cent is with the US.Mexico's integrationist strategy requires regulatory harmonisation with the US and Canada, which entails constraints on policy space.While Mexico can implement some industrial policies on its own, the most powerful levers of structural change are at the regional level, such as the USMCA auto rules of origin.According to Juan Carlos Baker: As an OEM now has to comply with many new requirements, they will necessarily structure their supply chains down to the level of tier 2, or even maybe tier 3 suppliers, to be in Mexico.So that could probably be way more influential in terms of shaping industrial policy than any government-driven program.(Interview, 10 December 2020) Although USMCA's strict rules of origin constitute an industrial policy for Mexico (in effect a local content requirement), USMCA's excessive intellectual property protections undermine structural transformation of the Mexican economy; a point recognised by free trade advocates (Lester and Manak 2019).

The undermining of stable market access
While Mexican negotiators further restricted their policy space to maintain investment certainty, the Trump administration undermined the stability of Mexico's access to the US market, thereby reducing the benefits of the PTA to Mexico according to both structuralist and neoclassical analyses.A Trump administration official recalled: All this stuff from the 90s, none of it worked.It was insanity to say 'Okay, what we're gonna do is we're gonna take our high wage economy, we're gonna merge it with these low wage economies, and then we're going to sell more stuff to them' […] Why would you pay Americans $25 an hour to make cars when you can pay people in Mexico $3 an hour?(Interview, 7 May 2021) The Trump administration argued that NAFTA needed to be 'rebalanced' because Mexico had benefited far more from the trade agreement: '9 out of the last 11 North American auto plants were built in Mexico' (Lighthizer 2023;interview, 30 September 2020).To do so, it undermined the stability of preferential market access, which impacted business decisions: The market needed certainty and when you combine those it almost gave us leverage to get what we wanted, because they (firms) wanted certainty, certainty so badly.And that was one big outcome actually.Realisation on our part that some of these companies are not as concerned with what the rules are, they are more concerned with just having the rules and being able to comply with them and be able to have a predictable outcome.(Interview, 10 March 2021) Although previous US governments also caused uncertainty over Mexico's access to the US market, they did not attempt to radically change NAFTA (Wise 2009).Trump's threats and accusations were unprecedented, as well as his use of trade to leverage concessions on immigration.A Mexican negotiator interviewed expressed her shock at the US protectionist objectives: When I was negotiating the Trans-Pacific Partnership, my counterpart in the Obama administration wanted the same things.We wanted free trade, we wanted to have a strong multilateral trade system.And then suddenly Trump came and changed everything.(Interview, 11 November 2020) The following sub-sections identify the different strategies through which the Trump administration sought to create market access uncertainty.

Removal of preferential market access
In March 2018, the US unilaterally imposed tariffs of 25 per cent on steel and 10 per cent on aluminium on the rest of the world.Along with several other countries, Mexico and Canada were temporarily exempted from the tariffs on the condition that they would concede to US demands during the NAFTA renegotiations (Inside US Trade, 5 June 2020).Considering that Mexico and Canada had not made sufficient concessions, in May 2018 the Trump administration imposed the steel and aluminium tariffs.Those lasted until May 2019, when the US agreed to suspend its tariffs in exchange for Mexico and Canada eliminating their retaliatory measures.The tariffs undermined the belief that trade agreements like NAFTA locked-in market access, and gave greater credibility to US threats of removing preferential market access.

Threats to remove preferential market access
From his presidential campaign to the ratification of USMCA, Trump threatened a US withdrawal from NAFTA unless Mexico and Canada adhered to US negotiating objectives.Trump repeatedly told his staff that withdrawing from NAFTA would give the US a better negotiating position, a view that was shared by some of his cabinet members (Woodward 2018, p. 156).He was temporarily persuaded not to withdraw after being informed that the costs on the American economy would undermine his electoral prospects (Ibid.).After the 2018 mid-term elections, Trump again considered unilaterally withdrawing from NAFTA to force Democrats to pass USMCA.Trump also threatened to impose tariffs, drawing on unconventional uses and interpretations of domestic and international law.

Unconventional use and interpretation of domestic and international law
Trump's threats to remove Mexico and Canada's access to the US market built on novel interpretations and uses of US and international law.Most notably, he claimed that he could unilaterally withdraw the US from NAFTA, even though the US Constitution states that Congress has the power to regulate commerce with foreign nations.The Trump administration's interpretation rested on the fact that trade agreements are also a matter of foreign policy, which is under the President's authority (Hufbauer 2017).Given that NAFTA was implemented through legislation passed in Congress, however, critics argued that Trump could not have removed the implementing legislation.Even if withdrawal would have required Congressional approval, the mere threat was enough to increase market access uncertainty.
Trump used his authority over national security issues to impose tariffs without consulting Congress or the WTO.His administration drew on Section 232 of the 1962 Trade Expansion Act, through which Congress allowed the President to impose national security tariffs recommended by the US Secretary of Commerce.In 2017, President Trump demanded a review from Secretary of Commerce Wilbur Ross on the risks to US national security from steel and aluminium imports, which led to the imposition of tariffs.In 2018, he requested an investigation into imports of cars and auto parts.The report concluded that the President could impose tariffs of up to 25 per cent, thereby threatening Mexico and Canada's access to the US market.By rendering clear that economic interests could be interpreted as matters of national security, the report also increased uncertainty for all of their exports to the United States.National security provisions did not constitute a major cause of trade uncertainty until the Trump administration because they had rarely been used before and did not target allies or consumer goods such as cars (Bown 2017).
The most dramatic use of US domestic law to increase uncertainty over Mexico's access to the US market occurred in May 2019, when President Trump referred to the 1977 International Emergency Economic Powers Act (IEEPA) to threaten the imposition of tariffs of up to 25 per cent on all Mexican goods until the end of illegal immigration to the US from Mexico (Pierson and Hals 2019).The IIEPA authorises the President to regulate trade in case of a national emergency originating outside of the United States.Although the IEEPA had been frequently used, what differed was both the nature of the emergency and the response favoured by the President.Past measures targeted regimes hostile to the US over emergencies such as terrorism, war, and drug trafficking, with responses such as the freezing of assets.
The sense of unrestrained space for imposing tariffs is well illustrated by a conversation with a Trump administration official, when asked what the administration would have done if Congress prevented a withdrawal from NAFTA: We had enough alternative tariffs at our disposal that we could have done a national security investigation, or a 201 1 , […] probably a 301, which we did on China, to say we are now going to impose those tariffs on you using executive action at a rate equivalent to what the WTO rate is.(Interview, 25 January 2021) By showing his willingness to challenge the rule of law, Trump created trade uncertainty and thus weakened NAFTA's basic objective.Trade agreements lock-in market access only insofar as governments commit to honouring them, even if they were signed by previous governments.Trump could choose to act unilaterally instead due to the large power asymmetry between the US and its neighbours, as Mexico and Canada had much more to lose from a NAFTA withdrawal than the US.Whereas the US can ignore WTO rulings or retaliation by trading partners because of the small repercussions on its economy, a country like Mexico cannot disregard the WTO or potential retaliation by the US.Some of the laws used by the Trump administration to create uncertainty already existed for a long time (Section 232, 301, IIEPA), which suggests that market stability was less a product of legal requirements under NAFTA and more of US politicians until Trump accepting the norm that PTAs should provide certainty.

Efforts to reduce market access in USMCA
During the NAFTA renegotiation, the Trump administration's overarching objective was to reduce the US trade deficit.This led to negotiating objectives aimed at reducing access to the US market, such as a 50 per cent US-specific rule of origin in the automotive industry and reduced access to US government procurement (USTR 2017).US negotiators also demanded that Mexico and Canada impose voluntary export restraints, a measure banned by the WTO.US objectives included measures indirectly aimed at reducing market access, such as de facto eliminating all dispute settlement mechanisms, as discussed before, and abolishing the NAFTA global safeguard exclusion.The Trump administration demanded a five-year sunset clause in USMCA, which was aimed at increasing market access uncertainty.Of its main protectionist negotiating objectives, the Trump administration obtained three in a weaker form: the weakening of ISDS (discussed earlier), a sixteen-year sunset clause, and more stringent auto rules of origin.

USMCA sunset clause
USTR Lighthizer believed that a five-year sunset clause would increase the costs of offshoring production to Mexico and as such dissuade firms from doing so (interview, 30 September 2020).USMCA Article 34.7 specifies that the agreement will be reviewed every six years and expire ten years after the review period should no new agreement be reached.Even though the US proposal of a five-year sunset clause was not included in the agreement, the six-year review periods and the sunset clause create the risk of regular challenges over Mexico and Canada's access to the US market.Politicians in the US can now use the review periods to appeal to their voters by demanding new concessions and raising the prospects of a US withdrawal unless Mexico or Canada accepts them.
The sunset clause also gives the US a new route to withdrawal, in addition to a vote in Congress, as the President can let USMCA expire by refusing to renew it.Jesús Seade, chief negotiator for President López Obrador, refused a five-year sunset clause primarily for this reason: I recognised immediately that the sunset clause was a really gigantic danger because not only in five years we don't know what is going to happen, but it would resolve the legal issue for the (US) government: if today you cannot pull out because maybe you need Congress's permission, in five years, just by not signing, you can pull out.(Interview, 15 October 2020) This route to withdrawal is less likely to occur given that it requires the US to notify other NAFTA members eleven years in a row (from the sixth to the sixteenth year of USMCA) of its intention to withdraw.Most respondents interviewed expressed disbelief in the idea that the US would withdraw using the sunset clause, given that doing so would hurt the US economy considerably.A Mexican negotiator interviewed even praised those changes, arguing that, while USTR's initial proposal of a five-year sunset clause was 'unacceptable', USMCA's review period every six years 'can prevent the sort of crisis that happened when President Trump was elected, that suddenly one of the three countries is very unhappy with the agreement' (interview, 7 April 2021).
Even if the US does not withdraw from NAFTA, US governments may be tempted to use this process to gain leverage in future trade negotiations with Mexico and Canada, as well as to incentivise investments in the US by creating uncertainty over the continuity of Mexico and Canada's preferential access to the US market.US chief negotiator John Melle referred to the sunset clause as a '16-year ticking-clock' (interview, 16 December 2020).During the negotiations, USTR Lighthizer was clear that the purpose of a sunset clause would be to create market access uncertainty to persuade firms to invest in the US rather than Mexico (Inside US Trade, 19 October 2017).Democrat officials were indifferent to Trump's objective of a five-year sunset clause (interview, senior Democrat, 23 October 2020), while most labour unions (including the AFL-CIO) lobbied in favour (interviews, US labour union representatives, 15 and 17 March 2021).A Trump administration official argued that those review periods will provide an opportunity to obtain new concessions from Mexico and Canada: With the 16-year time frame, it wouldn't surprise me in some point in the future if the Americans go back and raise a lot of these issues again.We are going to get other chances to talk about some of these things.(Interview, 7 May 2021) The sunset clause creates an institutional mechanism for the US to progressively worsen the market access-policy space trade-off at the expense of Mexico.

USMCA auto rules of origin
In addition to increasing regional value content rules (RVCs) for passenger vehicles/trucks from 60/ 62.5 to 70/75 per cent respectively, USMCA includes three unprecedented auto rules of origin.First, it extends RVCs to 'core' parts in a vehicle, such as batteries, engines, and steering systems (Appendix to Annex 4-B).Second, it requires that 70 per cent of a vehicle's steel must be sourced from North America (Annex 4-B, Appendix, Article 6).Third, it stipulates that 40/45 per cent of the value of passenger vehicles and trucks, respectively, must be produced in plants where direct production workers earn on average at least $16 per hour (Annex 4-B, Appendix, Article 7).By imposing a minimum wage five to eight times higher than average wages in Mexican auto factories, the Trump administration sought to dissuade investment in Mexico (Menck and Swiecki 2016, p. 32).
Although stricter RVCs can incentivise firms to locate in Mexico, they also undermine Mexico's access to the US market.The high threshold and regulatory complexity incentivise producers in Mexico to pay the 2.5 per cent WTO Most Favoured Nation (MFN) US tariff on passenger vehicle imports (interview auto representative, 16 November 2020).Under NAFTA, already 23 per cent of goods in the transport sector imported from Mexico to the US did not comply with the rules of origin (Freund 2017).The unconventional implementation of the auto rules of origin by the US since 2020 will make it even more difficult for firms to comply (the US does not accept the longstanding 'roll up' methodology, which enables an auto assembler to round-up to 100 per cent an auto part which meets the rule of origin threshold) (McCarten 2023).
Although negotiated by the Trump administration, USMCA auto rules of origin were supported by Democrats in Congress.According to a Biden administration official, Democrats were 'sympathetic' to Trump's approach on auto rules of origin, which 'grew out of Democratic criticism of TPP' (interview, 23 October 2020).The Biden administration kept Trump's protectionist interpretation of 'roll up', lending further credence to the thesis that structural factors rather than Trump alone are leading to a long-term shift in US trade policy (Hopewell 2021).Although Mexico and Canada successfully challenged this interpretation through the USMCA state-to-state DSM, the Biden administration has yet to comply.Even if it did, the uncertainty created by the Trump administration already impacted firms' expectations and investment decisions.According to an auto representative: Even if it's going to be more expensive to comply (with roll up provisions), we made a political decision to just do this.So we're doing it, Ford is doing it, GM is doing it.But some other companies are struggling.Only a few companies actually can meet the new rules with super core roll up.(Interview, 9 September 2021) The loss in market access is significant given that the transport sector accounted in 2017 for a quarter of Mexico's exports to the US (Ibid.).Mexico will increase its preferential access to the US market relative to competitors, however, if the US raises its MFN tariffs on passenger vehicles above its 2.5 per cent WTO bound-rate, for instance by invoking national security concerns under Section 232.In the case of Section 232 tariffs, imports from Mexico would be exempted from the higher tariffs thanks to a side-letter to USMCA specifying that 2.6 million passenger vehicles and 108 billion US dollars-worth of auto parts per year would be able to enter the US under the 2.5 per cent tariff.
Although USMCA restored Mexico's stable preferential access to the US market, some of its provisions create uncertainty, in particular the sunset clause, weakening of ISDS and strict automotive rules of origin.The Trump administration's unconventional negotiating tactics, objectives and policy instruments can resurface during the USMCA review periods given the protectionist turn in US politics.

Conclusion
The structuralist literature on North-South PTAs focused on the South's loss of policy space in exchange for stable and preferential market access.Regaining policy space is less feasible or useful for the Mexican government, however, given that it is now locked into numerous PTAs and even more dependent on access to and integration with the US market.Mexican negotiators during the NAFTA renegotiation focused on maintaining stable access to the US market, while the Trump administration attempted to create market access uncertainty and include novel policy space constraints mainly targeting China, such as on currency manipulation and state-owned enterprises.The Trump administration undermined the certainty of Mexico's access to the US market through its negotiating strategies, as well as some of the provisions in USMCA, in particular the sunset clause, the weakening of ISDS and more stringent auto rules of origin.Democrats in Congress supported those changes, and the Biden administration has maintained uncertainty by refusing to comply with the USMCA panel ruling on auto rules of origin.
The entrenchment of policy space constraints suggests that the developmental literature should focus on policies compatible with Mexico's integrationist strategy, including supranational policies and smart industrial policies.Ideally, the US would promote Mexico's economic catch-up by emulating the European Union's regional cohesion policies, which contributed to rapid catch-up in Eastern Europe through financial transfers aimed at building infrastructure and European value chains.The extension of the 2022 Inflation Reduction Act's (IRA) electric vehicle subsidies to Mexico and Canada offers a glimpse of such a policy.Mexico should also adopt its own policies to attract and benefit from nearshoring investment, which entails replacing austerity policies with educational and technological policies to ensure domestic firms capture more value-added.Successful policies at the subnational level, such as Querétaro's development of an aerospace industry, provide a template.
Mexico and Canada's stable access to the US market will be tested during review periods, where the US government will be tempted to create market access uncertainty to obtain concessions.Other trading partners are likely to experience even lower market access as both political parties in the US adopt protectionist trade and industrial policies, such as the USMCA auto rules of origin and the IRA's subsidies, for economic and geopolitical reasons.Furthermore, disruptions in global supply chains created by the US-China trade war, COVID-19, and the war in Ukraine, all incentivise regionalisation.Major disruptions in the near future to the labour market of high-income countries, caused by supply chain shocks, automation, and telemigration, are also likely to exacerbate demands in the global North for protectionist policies and regionalisation (Baldwin 2019).Those policies will undermine the global South's access to markets in the global North.

Note 1 .
Section 201 cannot be used by the President without the support of an independent investigation by the US International Trade Commission.