The United States-Mexico-Canada Agreement (USMCA) – An Upgrade of the Trade Relationship Among North American Neighbors

The United States-Mexico-Canada Agreement (USMCA) is a trilateral trade agreement between the United States and its two neighbors, Canada and Mexico.  The three countries announced the new free trade agreement (FTA) on September 30, 2018. If formalized by all three countries, the USMCA would replace the North American Free Trade Agreement (NAFTA), which has been in force since January 1, 1994. It is likely that a new agreement if implemented by the three countries would come into effect in late 2019 or in early 2020.

Trade and investment among the three countries has expanded significantly since NAFTA entered into force, although the overall trade deficit in goods has increased significantly for the United States with both Mexico and Canada, although the balance with Canada has been more volatile due to variations in U.S. energy imports.

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As the result of the rapid change in technology since NAFTA entered into force, the number of issues of interest to business, labor and others expanded.  This trend coupled with various concerns about the impact of NAFTA led many U.S. stakeholders to pursue a review/rewrite/update of NAFTA. President Donald Trump understood that many key stakeholders had concerns and flagged NAFTA as a disastrous trade agreement during the 2016 campaign, pushing for  its reform or repeal. Renegotiation of the NAFTA was an early Trump Administration priority. Canada and Mexico agreed to engage and the three signatory countries agreed to renegotiate/update NAFTA in 2017 and began meeting in mid-August 2017.

The U.S. has gone from a trade surplus to a large trade deficit with Mexico since NAFTA came into effect, most of the deficit being reflected in motor vehicles and parts. Similarly, in goods, the U.S. has run a deficit with Canada, including in motor vehicles and parts. Thus, it is not surprising that the U.S. sought the increase of U.S. content of motor vehicles and parts as a top objective.

At the same time, many important issues (e.g., e-commerce, state-owned enterprises) had been examined and texts agreed within the he Trans-Pacific Partnership (TPP) negotiations to which the U.S., Canada and Mexico were all initial signatories but from which the U.S. withdrew in 2017. Not surprisingly, many of the chapters in the USMCA reflect issues addressed within the TPP, although there were some important changes pursued by individual parties in some of the agreements.  An issue of considerable bipartisan interest to Congress in recent years is the potential problem of currency manipulation (competitive devaluation).  This issue was included in the text of the USMCA, a first for an FTA.

Each country had issues of particular importance to it and generally those issues have been addressed in a manner satisfactory to them in the text agreed to at the end of September, although obviously no country obtained all of its objectives in the agreed text.

Each country has its own review process for considering the agreements and pursuing implementing legislation to address changes needed to domestic law. Whether the agreement will survive such scrutiny and review is, of course, not guaranteed and groups dissatisfied with particular chapters or individual issues will certainly work to be heard and to press for potential additional modifications.

In the past, legislators, businesses, labor, consumer and other groups have found it useful to be able to evaluate the text of a new agreement by comparing the text to an agreement it is replacing or to a recent agreement to which a country has been a party. Our firm for many years has periodically posted side-by-side comparison documents of agreements with other agreements to facilitate that comparison process.

Our team developed side-by-side comparisons of the USMCA text (realizing the text is subject to technical corrections) with the NAFTA and with the TPP Agreement as it read when the U.S. was a signatory. Our website provides both an introduction and then comparison texts for individual chapters. As of October 11, the following chapters listed in the table below can be found at this website: http://www.stewartlaw.com/PracticeAreas/USMCASidebySide

Additional chapters will be added in the coming days.

Below are a few of the changes in the USMCA from the existing NAFTA worth noting:

The USMCA has a total of 34 chapters, 12 more than the 22 chapters in the original 1994 NAFTA.

Some of the notable provisions, changes and modifications in the USMCA include the following:

Chapter 2 Market Access

• Maintains duty free treatment for originating goods.
• Maintains the prohibition on export duties, taxes, and other charges.
• Maintains the MPF waiver.
• Maintains the prohibition on duty drawback.
• Prohibits (a) requiring, as a condition of importation, the use of local distributors; (b) restricting the importation of commercial goods containing cryptography; (c) import and export restrictions on remanufactured goods; and (d) requiring consular transactions and associated fees and charges.
• Adds new provisions for transparency in import licensing and export licensing procedures.
• Permits duty-free temporary admission of shipping containers or other substantial holders used in the shipment of goods for 90 days.

Chapter 3 – Agriculture

• Dairy market access: The US will have access to 3.6% of Canada’s dairy market, an increase from the current level of about 1%.  This slightly exceeds the 3.25% market access negotiated under the TPP. In addition, Canada will eliminate its “Class 7” category (which includes milk powder and milk protein) and pricing system.
• Access for other agricultural goods: Canada will grant the US additional access to its chicken, turkey, and egg markets.

Chapter 4 – Rules of Origin

• For duty-free treatment, the regional value content of autos is set at 75% (an increase from 62.5%).
• Requires that 40-45% of auto content must be made by workers earning at least $16 per hour.
• Makes changes to certain product-specific rules of origin, such as chemicals, steel-intensive products, glass, and optical fiber.
• For example, the following compares the NAFTA and USMCA tariff-change rules of origin for chapter 70 (glass and glassware) (the highlighted portion is the rule pertaining to glass tableware):

Chapter 5 – Origin Procedures

• Provides that a certification of origin need not follow a prescribed format.

Chapter 7 – Customs and Trade Facilitation

• For express shipments, the de minimis threshold for duty-free and tax-free shipments is set at US$100 for the US, at US$100 for Mexico, and for Canada at C$150 (customs duties) and C$40 (taxes).

Chapter 10 – Trade Remedies

• The Parties retain their rights under the WTO Safeguards Agreement, Antidumping Agreement, and Agreement on Subsidies and Countervailing Duties.
• Maintains the existing global safeguards exclusion.
• The Parties recognize their shared concerns regarding duty evasion of antidumping, countervailing, and safeguard duties, and agree to strengthen and expand their customs and trade enforcement efforts, and strengthen their cooperation, to combat duty evasion.
• Section D replicates what was the Chapter 19 dispute settlement process in NAFTA, i.e., the binational panel review of AD/CVD determinations rather than recourse to the CIT.
• Section D clearly applies between the US and Canada, but there is some ambiguity with respect to whether it also applies to Mexico. Section D is titled: “Section D: Review and Dispute Settlement in Antidumping and Countervailing Duty Matters Between the United States and Canada.” (emphasis added) In addition, in contrast with NAFTA, the annex concerning establishing a binational panel refers only to candidates from the US and Canada.

(Note, however, that it is believed that the above reflect drafting issues and that the chapter applies to all three countries.)

Chapter 12 Sectoral Annexes

• This chapter contains provisions and sets out rights and obligations with respect to the following sectors: chemical substances, cosmetic products, information and communication technology, energy performance standards, medical devices, and pharmaceuticals.
• These annexes include provisions that promote enhanced regulatory compatibility, best regulatory practices, and increased trade among the countries.

Chapter 13 – Government Procurement

• This Chapter applies to any measure regarding covered procurement, and applies only as between Mexico and the United States.  Canada is not covered by this chapter.  Government procurement between the U.S. and Canada is covered by the WTO’s Government Procurement Agreement.

Chapter 14 – Investment

• The investor-state dispute-settlement system (ISDS) will be phased out for the US and Canada over three years, but will remain for certain industries with respect to Mexico (oil and gas, power generation services, telecommunication services, transportation services, and the management of ownership of infrastructure).

Chapter 19 Digital Trade

• This is a new chapter. It prohibits customs duties, fees, or other charges on or in connection with the importation or exportation of digital products transmitted electronically between a person of one Party and a person of another Party.
• Parties may not prohibit or restrict the cross-border transfer of information if for business.
• Parties may not require that computing facilities be the used or located in their territory as a condition for conducting business.

Chapter 20 – Intellectual Property

• Sets the period of copyright protection for a work, performance or phonogram at 70 years after the author’s death (an increase from 50 years in Canada).
• Provides 10 years of data protection for biologic drugs (an increase from 8 years in Canada).

Chapter 22 State-Owned Enterprises and Designated Monopolies

• This chapter addresses the activities of state-owned enterprises, state enterprises, and designated monopolies of a Party that affect or could affect trade or investment between Parties.

Chapter 27 Anticorruption

• This chapter addresses measures to prevent and combat bribery and corruption with respect to any matter covered by the USMCA.

Chapter 28 Good Regulatory Practices

• The Parties agreed to specific obligations with respect to good regulatory practices, including practices relating to the planning, design, issuance, implementation, and review of the Parties’ respective regulations.
• Each Party may still (a) pursue its public policy objectives (including health, safety, and environmental goals) at the level it considers to be appropriate; (b) determine the appropriate method of implementing its obligations within the framework of its own legal system and institutions; or (c) adopt good regulatory practices that supplement those set out in this chapter.

Chapter 31 – Dispute Settlement

• Maintains the state-to-state dispute settlement process of NAFTA.

Chapter 32 – Exceptions and General Provisions

• Provides an exception for Canada’s cultural industries (including the production and distribution of written materials, film, music, and radio communications).
• If a Party intends to begin FTA negotiations with a non-market economy country, it must inform the other Parties at least 3 months prior to commencing negotiations.  Thirty days prior to the release of the text of a bilateral deal with a non-market economy country, the other Parties of the USMCA have the right to review it.  The other Parties can terminate the USMCA on six month notice, replacing the USMCA with a bilateral agreement.

Chapter 33 Macroeconomic Policies and Exchange Rate Matters

• A new chapter on currency manipulation and misalignment practices.
• Each party “confirms” it is “bound under the Articles of Agreement of the IMF to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.”
• Each party should “(a) achieve and maintain a market-determined exchange rate regime; (b) refrain from competitive devaluation, including through intervention in the foreign exchange market; and (c) strengthen underlying economic fundamentals, which reinforces the conditions for macroeconomic and exchange rate stability.”
• It includes several transparency and reporting provisions and establishes a “Macroeconomic Committee” to monitor implementation and “further elaboration.”
• Provides for dispute settlement procedures where a Party has “failed to carry out an obligation.”

Chapter 34 Final Provisions

• The Agreement terminates 16 years after its entry into force, unless each Party confirms it wishes to continue the Agreement for a new 16-year term.
• No later than the Agreement’s 6th anniversary, the Parties will conduct a “joint review” of the operation of the Agreement. Each Party shall confirm if it wishes to extend the Agreement for another 16-year period.
• If so confirmed, the Agreement shall be automatically extended for another 16 years and the Parties will conduct another joint review no later than at the end of the next 6-year period.
• The Parties shall have the ability to extend the Agreement after each joint review.

The US and Canada/Mexico concluded a number of side agreements, including the following:

US-Canada Side Letter – BC Wine

• Canada agreed that British Columbia will modify the measures identified in the US panel request (WT/DS531/7 (May 29, 2018)) and implement any changes no later than November 1, 2019.
• BC will no longer allow only BC wine to be sold on regular grocery store shelves while imported wine may be sold in grocery stores only through a so-called “store within a store.”
• The US will take no further action at the WTO in relation to the BC measures.

US-Canada and US-Mexico Side Letters – 232 Process

• The US shall not adopt or maintain a measure imposing tariffs or import restrictions on goods or services of Canada/Mexico under Section 232 for at least 60 days after imposition of a measure.
• During that 60-day period, the US and Canada/Mexico shall seek to negotiate an appropriate outcome based on industry dynamics and historical trading patterns.
• Notwithstanding the NAFTA 1994, the USMCA, and the WTO Agreement, if the US takes any 232 action inconsistent with one of those Agreements, Canada/Mexico may take a measure of equivalent commercial effect in response.
• Canada/Mexico also retains its WTO rights to challenge a Section 232 measure.

US-Canada and US-Mexico Side Letters – 232 on Autos

• If the US imposes a 232 measure with respect to passenger vehicles, light trucks, or auto parts, the US shall exclude from the measure:

(1) 2,600,000 passenger vehicles imported from Canada/Mexico on an annual basis
(2) light trucks imported from Canada/Mexico; and
(3) such quantity of auto parts amounting to 32.4 billion US dollars (for Canada)/108 billion US dollars (for Mexico) in declared customs value in any calendar year.

• Canada/Mexico may have recourse to the dispute settlement procedures in Chapter 20 (Institutional Arrangements and Dispute Settlement Procedures) of the NAFTA 1994 or the dispute settlement chapter of USMCA (whichever is in effect at the time of dispute) only with respect to whether the US has excluded the number of passenger vehicles and light trucks, and the value of auto parts as set out above, from a 232 measure.

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