Labor reform in Mexico is popular in Congress now- the CP is key to increasing Mexio’s economic growth and stabilizing wage rates

Labor reform in Mexico has been an important priority for the U.S. This reflects the longstanding concern over the impact of lower Mexican wages on reducing investment in U.S. manufacturing, with impacts on U.S. jobs and wage rates.43 The Mexican manufacturing sector has produced the lowest average wages growth among OECD countries as well as low productivity growth.44 Figure 6 shows that China’s wage growth has been 150 percent higher than in Mexico. The underlying driver of low wage growth is low productivity, which has defined the Mexican economy for the past decades. In particular, productivity growth in Mexico’s manufacturing sector has been about half that of the U.S.45 This is despite the enormous progress on increasing exports of complex manufactured products such as cars and computers, and successful integration into global value chains in North America.46

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USMCA now contains the most comprehensive set of binding labor commitments and novel enforcement mechanisms of any trade agreement. It includes a rapid response mechanism, which expedites the process for handling alleged violation cases. These USMCA labor commitments were an important factor that led to the broad bipartisan support of USMCA in Congress and propelled the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) to endorse the agreement— the first time the largest federation of American unions has endorsed a trade agreement. In a speech by U.S. Trade Representative (USTR) Katherine Tai, she stated that “Enforcing the higher labor standards in the USMCA is a core pillar of the Biden-Harris administration’s worker-centered trade policy”.47 The Biden administration has demonstrated the importance of making progress on labor conditions by its willingness to use the rapid response mechanism. This year, USTR has used this process to handle workers’ rights violations in Mexico by the American auto firms Tridonex and General Motors. The administration has also financially backed this approach, securing nearly $50 million from Congress to support Mexico’s trade enforcement under USMCA. The U.S.’ hope is to improve Mexico’s labor conditions and wage rates through USMCA’s labor commitments and start a trend towards wage convergence with the U.S. by prohibiting labor practices that stifle demands for higher wages. These labor provisions could have localized effects on Mexico’s export-orientated sectors including higher than average growth in wages. However, in the absence of more substantial reforms—social, tax, and structural—it is unlikely to drive a trend to convergence with U.S. wages. Without reform of Mexico’s social insurance programs and tax regime that are currently pushing workers into the informal economy and encouraging firms to remain small, Mexico’s long-term low productivity rate and wages are likely to persist.48 In the absence of structural reforms that get at these underlying drivers of low wages and productivity, Mexican wage rates are likely to stagnate. In addition, the new restrictive elements of USMCA may reduce trade and slow down Mexican productivity even more, potentially further depressing wages growth.49