Uncertainty is growing for Korean companies with production and supply chain operations in North America as the review process for the United States-Mexico-Canada Agreement (USMCA) — the backbone of North American free trade — looks increasingly likely to drag on. With the United States declining to agree to extend the current agreement, rules of origin, curbs on non-market economies, and economic security cooperation have emerged as the pivotal variables in any follow-on negotiations.
According to a report released Thursday by the Korea International Trade Association (KITA) Institute for International Trade, the three USMCA member countries conducted their first joint review of the agreement on July 1. The USMCA replaced the North American Free Trade Agreement (NAFTA) and took effect in July 2020, with a provision requiring the parties to review the agreement's performance and discuss whether to extend it six years after its entry into force.
The problem is that the United States did not agree to extend the current agreement as it stands. If all three countries agree to an extension, the agreement would continue through 2042; without consensus, the current agreement remains in force but must undergo annual joint reviews through 2036. While the agreement will not terminate immediately, negotiations over core rules — including rules of origin, labor standards, and economic security — could continue for years.
Recent US trade policy has expanded beyond simple tariffs to incorporate rules of origin, investment restrictions, export controls, and supply chain regulation. For industries tied to North American production networks — such as automobiles, steel, and batteries — any revision to the agreement could reshape parts sourcing, production locations, and investment plans.
The report identified the key issues in the joint review as: tighter rules of origin for manufactured goods including automobiles, steel, and aluminum; regulation of investment, overproduction, and transshipment by non-market economies; economic security cooperation covering critical mineral procurement, export controls, and foreign investment screening; stricter customs, rules-of-origin verification, and certification procedures; stronger enforcement of labor and environmental standards; and adjustments to digital trade rules.
In the United States, a significant number of stakeholders agree on the need to preserve the USMCA but are calling for improvements in rules of origin, labor, and economic security. In Mexico and Canada, by contrast, views favoring the stability of the tariff-free North American market and continuation of the existing agreement appear to predominate.
South Korea is not a party to the USMCA, but Korean companies cannot easily escape the agreement's reach. Those that operate production facilities in North America or supply parts and materials to local companies could be directly affected by changes to rules of origin and supply chain regulations.
South Korea's exports to the three USMCA countries grew 79 percent over the past decade, rising from $81 billion in 2016 to $145 billion last year, and the three countries now account for more than 20 percent of South Korea's total exports. Over the same period, annual Korean foreign direct investment in the three countries rose 85 percent, from $15.5 billion to $28.6 billion.
A KITA survey of 43 Korean companies operating in or investing in the United States, Mexico, and Canada confirmed the concern. Some 48.8 percent of respondents said the outcome of the USMCA joint review would have a significant impact on their business operations.
Rules of origin topped the list of variables companies viewed as most consequential. Stricter rules of origin for automobiles and auto parts ranked first at 27.9 percent, followed by tighter rules for steel and aluminum at 20.9 percent and stronger rules for other manufactured goods at 9.3 percent.
As for how they plan to respond, 41.9 percent of respondents said they were considering building alternative supply chains within North America. Another 32.6 percent said they would seek to enter as new suppliers during supply chain restructuring, while 27.9 percent said they would expand investment in the United States. The responses reflect a view that while regulatory changes could raise costs, they could at the same time open new supply opportunities.
Jeon Yun-sik, a senior researcher at KITA, said the USMCA is unlikely to be terminated outright given its role as the foundation of North American industrial supply chains, but added that a prolonged joint review process will inevitably increase uncertainty in the local business environment. "There are concerns about rising cost pressures from tighter rules of origin and supply chain regulations, but opportunities to enter as alternative suppliers may also expand," he said. "Companies need to build a proactive response framework — reviewing the rules of origin and supply chains for each of their products."
kwater@heraldcorp.com
