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NAFTA replacement set for troubled birth as supply chains reel from COVID-19

For years, the Trump administration looked to replace the North American Free Trade Agreement, battling lawmakers from both parties and the nation's northern and southern neighbors for a signature trade policy piece to boost U.S. manufacturing and farmers.

Now that the United States-Mexico-Canada Agreement is set to take effect July 1, the coronavirus pandemic threatens to upend the pact's implementation and wipe out its promised benefits.

"It's hard to see how this can be implemented during the pandemic," Simon Lester, associate director of the Stiefel Center for Trade Policy Studies at the Cato Institute in Washington, said in an interview. "Companies are struggling to remain in operation and stay out of bankruptcy. It's too much to ask to have them reconfigure production at the same time."

U.S. Trade Representative Robert Lighthizer, in announcing the completion of final steps for implementation April 24, still touted the deal the way he had as he was helping craft its terms in recent years: that it would providing more jobs, stronger labor protections and expanded market access across the continent.

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Manufacturers adjusting

But the pandemic will likely have a greater impact on manufacturing supply chains than will the USMCA, Peter Allgeier, deputy U.S. trade representative under the Bush and Obama administrations, told S&P Global Market Intelligence.

"In the immediate future, manufacturers will concentrate on making their supply chains more resilient and sustainable, probably by greater localization of vertical supply chains and geographic diversity of their supply chains," Allgeier said, adding that U.S. manufacturing was already not likely to see a major bump from the deal. "These adaptations [to the outbreak] are likely to be much more significant than any adjustments to comply with the USMCA."

Lester also said the USMCA is unlikely to provide much of a boost to U.S. manufacturing, in part because the requirements the Trump administration is trying to impose in the auto sector would make production in North America more expensive when demand is already fragile.

"That means automakers will have a harder time competing with competitors in other parts of the world, and it would also raise car prices and therefore reduce demand," Lester said.

READ MORE:Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

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The deal requires that 75% of automobile components be produced in North America, up from the current 62.5% requirement, in order for cars to quality for duty-free treatment. It also stipulates that autoworkers earn a minimum of $16 per hour.

The Congressional Budget Office estimated that these provisions will cost automakers roughly $3 billion in tariffs over the next decade.

"The biggest economic impact, if there is one, will be on the auto sector because of the new rules of origin," Bill Reinsch, senior adviser at the Center for Strategic and International Studies, said in an interview. "They are new and complicated, and the three governments have yet to provide much guidance."

Virus impact on implementation

Some implementation areas, such as Mexico's compliance with the new labor rules, will be delayed by COVID-19 because inspectors will not be able to visit plants, Reinsch said.

Before the outbreak, the U.S. International Trade Commission projected that the economic impact of USMCA will be modest, primarily because tariffs are already zero among the three countries and their economies are already substantially integrated. That is all still true, Reinsch said.

Implementing procedures to realize the promised gains for U.S. dairy — exports of which are supposed to grow by $315 million annually — and U.S. egg exports, which President Donald Trump said could rise by 500%, could also be challenging as U.S. meat producers and vegetable growers have had to shut facilities due to outbreaks and even destroy or dump out supply.

And realizing these benefits may only be possible to the extent that factories and businesses are open by the time implementation rolls around. Several in the U.S. South and Midwest have begun gradual reopenings.

In the short term, the reopening of Mexican factories matters as much as the U.S. states opening, said Chris Rogers, research director for Panjiva, a division of S&P Global Inc.

"Generically, of course, you need all your suppliers to be up and running in order to run your production line," Rogers said in an interview. "It may well be, therefore, that a factory in an 'open' state simply can't run as either another U.S. states is still closed or Mexico is still closed."