The trade agreement signed by the U.S., Mexico and Canada to replace NAFTA, known as the USMCA, takes effect on July 1. Credit: Shutterstock.com

Mexican lawyers and trade professionals are rushing to prepare clients for the U.S.-Mexico-Canada trade agreement, which takes effect Wednesday.

The coronavirus has laid bare the importance of shoring up North American supply chains and manufacturing after countries in the region found themselves scrambling for locally produced medical supplies and technology. All three economies are now sorely hurting after months of quarantines.

"Now more than ever, it is crucial that the three parties think as a trade bloc and not as separate countries," said Adriana Ibarra-Fernandez, a partner with Baker McKenzie in Mexico City who once served as legal director of rules of origin, customs procedures and safeguards in the Mexican Economy Ministry.

Ibarra-Fernandez views the trade pact as a "great opportunity" to reactivate economic activity across North America following the arrival of COVID-19. In the shorter term, she says companies are hustling to review whether changes to rules of origin apply to their products, contacting suppliers to request new certificates of origin and preparing to issue USMCA certificates to customers.

The lower house of the Mexican congress was set to approve a raft of complementary legislation during an emergency session to update laws governing areas such as intellectual property and customs to comply with the trade agreement. And on Monday, Mexico published USMCA as a replacement for the 1994 North American Free Trade Agreement in the government's official gazette.

The document in the gazette, signed by both President Andrés Manuel López Obrador and Foreign Minister Marcelo Ebrard, said all three countries seek to "again strengthen the long-standing friendship between them and their people, and the solid economic cooperation that they have developed through trade and investment."

It also emphasized that the countries seek to "improve and promote competitiveness of the region's exports and companies in global markets."

Trade lawyers say Mexico is in an enviable position to win manufacturing market share as the U.S. seeks to detangle supply chains from China. Yet during the pandemic, Mexico has sent worrisome signals to foreign investors by nixing a U.S.-built beer factory and issuing rules that made unviable dozens of projects in the electricity sector.

Already, U.S. Trade Representative Robert Lighthizer has warned of legal challenges to come against Mexico under USMCA if the country fails to enforce new labor rules, and of a potential state-to-state dispute settlement case over Mexico's reluctance to approve biotech products.

"There's a lot of anxiety about what the trade deal will bring," said Juan Francisco Torres-Landa, managing partner of Hogan Lovells' Mexico office and soon-to-be head of the firm's Latin America practice group. "This is not going to be a smooth process—this is going to be a bumpy road."

Torres-Landa perceives a mismatch between expectations that the trade agreement can usher in economic growth and development for Mexico, since he sees government policies creating an "adverse environment" for private sector investment.

The agreement includes an annex to address labor conditions and oppressed wages in Mexico. Specifically, the USMCA calls for collective bargaining and secret votes for unions to dilute the influence of business owners in Mexico and allows U.S. labor inspectors to visit facilities in Mexico.

"The labor aspects of the USMCA are unprecedented," said John Foote, a partner in Baker McKenzie's Washington, D.C., office who advises companies on international trade. "We have never seen provisions like this in any previous trade agreement—labor standards that are enforceable against individual companies, and which tie the agreement's benefits, and even market access, to compliance with those standards."

Mexican tax powerhouse Chevez Ruiz Zamarripa has warned clients that the U.S. government will now have the authority under USMCA to deny preferential tariffs for goods produced by Mexican companies that don't meet agreed-upon labor standards.

Industry is struggling to get back online in Mexico after months of shutdowns aimed at curbing the spread of COVID-19. The López Obrador administration deemed car-assembly, mining and construction essential activities and allowed their operations to resume starting  June 1.

Still, high infection rates have delayed some openings in the key automotive sector, which represents about a fifth of Mexico's manufacturing gross domestic product. The USMCA aims to raise regional content requirements for vehicles assembled and sold under favorable tariffs in North America, and also to increase wages for Mexican workers in that industry.