And Then There Were Three: The U.S., Mexico and Canada Agree to Sign the New USMCA

Canada just joined the United States and Mexico in agreeing to sign on to a modernized NAFTA, which will become known as the US-Mexico-Canada Agreement (“USMCA”). The U.S. and Mexico entered their agreement a little over a month ago, and there was a concerted push to conclude the agreement (with or without Canada) before Mexican President Enrique Peña Nieto leaves office on December 1, 2018. The U.S. intends to sign the agreement with Canada and Mexico at the end of November. The Trump Administration has stated that the USMCA model will be used in future free trade agreement negotiations.

What’s in the New USMCA:

The following provides a summary of some of the key provisions included in the new USMCA:

• Rules of Origin: The USMCA will phase-in increased regional value requirements for automobiles from 62.5% to 75%.

• Wages: In 2020, 30% of automotive manufacturing operations must be performed by workers earning at least $16/hour. By 2023, this percentage will be increased to 40%.

• Sunset Clause: NAFTA had no end date after which the agreement would be sunsetted. Under the USMCA, the countries will review the agreement every six years with the opportunity to extend it for an additional 16 years.

• Canadian Dairy Market Access: Canada had employed a complicated system of domestic quotas, import quotas, guaranteed prices for Canadian farmers and high tariffs on imported dairy products. Under the USMCA, Canada agreed to eliminate these restrictions six months after the agreement enters into force thereby expanding U.S. access to its dairy market—similar to what Canada recommended as of the Trans-Pacific Partnership (“TPP”) negotiations.

• Agricultural Products: All agricultural products that currently enjoy duty-free status under the NAFTA will continue to be duty-free under the USMCA. In addition to increased market access to the Canadian dairy market as noted above, the U.S. will also enjoy greater access to the Canadian market for poultry and eggs. Canada in return will receive expanded access to the U.S. peanut and sugar markets.

• Intellectual Property Rights (“IPR”): The USMCA’s IPR chapter will provide 10 years of data protection for biologic drugs. It would also require full national treatment for copyright and related rights, provide strong patent protection;
• Establish copyright safe harbors to provide protection for IP, provide procedural safeguards for recognition of new geographical indications (GIs), enhance provisions for protecting trademarks, including well-known marks, require criminal procedures and penalties for unauthorized camcording of movies, and require protection against trade secret theft, including against state-owned enterprises.

• Digital Trade: The new Digital Trade chapter will prohibit customs duties and discriminatory measures on digital products. It would also ensure that data can be transferred cross-border, and minimize limits on where data can be stored and processed. The chapter would also ensure that suppliers are not restricted in use of electronic authentication or signatures, guarantee protections for privacy and unsolicited communications in the digital market, limit governments’ ability to require disclosure of proprietary source code and algorithms.

• De Minimis Shipment Levels: The U.S. has reached an agreement with Mexico and Canada to raise their de minimis shipment value levels. Canada will raise its de minimis level for the first time in decades, from C$20 to C$40 for taxes.  Canada will also provide for duty free shipments up to C$150. Mexico will continue to provide USD $50 tax free de minimis and provide duty free shipments up to the equivalent level of USD $117. Shipment values up to these levels would enter with minimal formal entry procedures, making it easier for more businesses, especially small- and medium-sized ones, to be a part of cross-border trade.  Canada will also allow a period of 90 days after entry for the importer to make payment of taxes.

• Financial Services: This chapter includes core obligations, such a national treatment to ensure that U.S. financial service suppliers receive the same treatment as local suppliers. It would also provide for most-favored-nation treatment, to ensure that U.S. financial service suppliers receive the same treatment as those from other countries. The USMCA would also prohibit Local Data Storage Requirements, and set forth specific procedures related to investor-State dispute settlement claims with Mexico.

• Dispute Resolution: The U.S. had pushed for eliminating Chapter 19 of the NAFTA which required disputes amongst the parties (including antidumping and countervailing duty issues) to be adjudicated by a special NAFTA panel rather than being handled by the judicial system—much to the dismay of Canada. However, the U.S. agreed to maintain the Chapter 19 dispute resolution mechanism in the USMCA.

• National Security Measures: The USMCA allows the parties to impose tariffs for national security concerns up to 25% on automotive and auto parts; however, there are limited carve-outs for both Canada and Mexico. For example, in the future, the U.S. will refrain from imposing Section 232 tariffs or import restrictions on Mexico and Canada for at least 60 days after imposition of the measures which will give the parties time to negotiate a solution. In the meantime, the global Section 232 tariffs against imports of steel will remain in place for both Canada and Mexico.

• Labor and the Environment: The USMCA requires that Mexican trucks that enter the United States must meet higher environmental and safety regulations. In addition, Mexican workers must be given more opportunities to organize and form labor unions.

• Currency Manipulation: The USMCA includes a new provision on currency manipulation and misalignment practices that will be subject to dispute settlement mechanisms. The parties agreed to achieve and maintain a market-driven exchange rate regime, refrain from competitive devaluation and strengthen macroeconomic and exchange rate stability. In addition, a “Macroeconomic Committee” will also be created to monitor implementation of the provisions. that will monitor implementation of the language and “further elaboration.”

• Side Agreements: The U.S. also agreed to several side deals with Mexico and Canada on various types of products. For example, the U.S. and Mexico agreed to side agreements involving auto safety standards, biologic drugs, prior users and the names given to cheeses. The U.S. and Canada agreed to side deals on wine, water and R&D expenditures.

Next Steps:

Even though the three countries have agreed to the USMCA, it has not yet been implemented into their laws and regulations. In the United States, the USMCA will be implemented into U.S. law according to the steps and timelines laid out in the Trade Promotion Authority given by Congress to the President. Trade Promotion Authority (“TPA”) is a legislative procedure enacted by Congress which establishes consultation and notification requirements, as well as timelines, for the President to follow throughout the negotiation of free trade and other agreements. After the conclusion of the negotiations, the TPA requires that Congress give the agreement a straight up or down vote without making amendments to the agreement.

The timeline of events that have led to the conclusion of the USMCA negotiations are as follows—

• July 17, 2017: USTR released the NAFTA modernization negotiation objectives.

• August 16, 2017: Negotiations amongst Canada, Mexico and the U.S. commenced.

• August 31, 2018: Trump Administration notified Congress of intent to sign a trade agreement with Mexico and Canada.”

Once the agreement is signed—

• The Trump Administration will have 60 days to report to Congress on the changes that will be required to made under U.S. law to implement the agreement.

• 105 days after the signing of the agreement, the U.S. International Trade Commission (“ITC”) must complete its study of the impact of the agreement on the U.S. economy.

• 30 days before the agreement is introduced to Congress, the Trump Administration must submit the final text of the agreement to Congress.

• After the agreement introduced to Congress, the House Ways and Means Committee must vote on the bill within 45 days—the full House will then vote within 15 days thereafter.

• The Senate Finance Committee must vote on the bill within 15 days of the full House vote, and then the full Senate will vote within 15 days thereafter.

If you have any questions pertaining to the USMCA or other international trade issues, please contact Miller Proctor Law PLLC (melissa@millerproctorlaw.com).