Worldwide: The New NAFTA 2.0—The United States-Mexico-Canada Agreement (USMCA)

Last Updated: October 23 2018
Article by Maria Alonso and Pierfilippo Natta (Legal Intern)

The North American Free Trade Agreement ("NAFTA") has been in effect since January 1, 1994, and more than two decades later, on May 18, 2017, the United States Trade Representative ("Trade Representative"), Robert Lighthizer, notified Congress of the United States' intention to renegotiate NAFTA. The United States commenced renegotiations with Canada and Mexico on August 16, 2017. On August 27, 2018, a preliminary trade agreement was announced between Mexico and the United States. Moreover, on August 31, 2018, the Trump Administration formally notified Congress of its intention to enter into a trade agreement with Mexico, and Canada, if it was willing, which commenced a 90-day deadline to rework the trade deal. The November 30, 2018 deadline was set to ensure that the Mexican government signed the trade agreement before President Enrique Peña Nieto leaves office on November 30th.  In accordance with the Trade Promotion Authority ("TPA") or the fast-track authority, the Trump Administration needed to submit the "revised text" to Congress 60 days before Congress could ratify it bringing the Administration's deadline to October 1. At times it seemed that Canada was not going to reach an agreement with the United States and consequently, only a bilateral trade agreement between the United States and Mexico would be reached. But on September 30th, Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland announced that "Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA)."1 The USMCA will replace the North American Free Trade Agreement and is not expected to enter into force until late 2019 or early 2020.

The Administration published the text of the USMCA on September 30th and now the agreement can be signed by outgoing-Mexican President Peña Nieto before he leaves office. The trilateral trade agreement has a new name—the United States-Mexico-Canada Agreement, although the new name no longer includes "free" or "trade agreement," the USMCA continues to avoid tariffs. In all, the USMCA consists of 34 chapters, 3 schedules, 18 annexes, and 12 side letters. The USMCA addresses a wide range of areas that will regulate the $1.2 trillion in annual trade among the three countries. Below are brief summaries of selected provisions found in the USMCA.2

Automotive and Rules of Origin

  • New automotive industry rules of origin will apply, 75% of auto content must come from North America, from a current 62.5%, and 40-45% must be made by workers earning at least $16 per hour.
  • At least 70% of steel and aluminum content must come from North America.
  • There is also possible Section 232 tariffs exclusion for the automotive industry. The United States is currently considering whether it will restrict imports of automobiles and automotive parts from Mexico and Canada. However, the United States has agreed to exclude 2.6 million passenger vehicles and all light trucks from each country. Additionally, the United States will exclude a quantity of auto parts amounting to $108 billion U.S. dollars and $32.4 billion U.S. dollars from Mexico and Canada, respectively.3
  • The USMCA provides stronger rules of origin and enforcement for industrial products such as chemicals, steel-intensive products, glass, and optical fiber.
  • The rules of origin de minimis remains at 7%.

Agriculture and Canadian Market Access

  • All the food and agricultural products that have zero tariffs under NAFTA will remain at zero tariffs.
  • Canada will grant new-tariff rate quotas exclusively for United States' dairy products. As a result of the market access gains, American dairy farmers will now have the opportunity to export numerous dairy products into Canada, including fluid milk, cheese, cream, skim milk powder, butter and cream powder, and many others.
  • The United States will provide reciprocal access on a ton-for-ton basis for imports of Canada dairy products through first-come, first-served tariff rate quotas and will provide new market access for Canadian peanuts, processed peanut products, and products made from sugar refined.
  • Canada agreed to eliminate milk price classes 6 and 7, which allowed low priced dairy ingredients to undersell United States dairy sales in Canada and in third country markets.
  • Canada granted the United States new tariff rate quotas for chicken, eggs, egg products, and increased access to Canada's turkey production.
  • Mexico agreed to not restrict market access for U.S. cheeses labeled with certain names, such as Blue, Monterey Jack, and Mozzarella simply because these names are also used by Mexican cheese producers.
  • The agreement has unprecedented standards for agricultural biotechnology, including gene edits and the three countries have agreed to enhance information exchange and cooperation on agricultural biotechnology trade-related matters.

Intellectual Property4

  • There will be more protections for United States innovators and creators starting with 10 years of market exclusivity for biologic drugs. The United States and Mexico had agreed to this in the U.S-Mexico preliminary agreement back in August. This is a change for Canada as its domestic data exclusivity for biologics is currently 8 years.
  • The minimum copyright term will now be the life of the author plus 70 years, and for works not based on the life a person the copyright term will be a minimum of 75 years after the first authorized publication.
  • A new Committee on Intellectual Property Rights (the "Committee") is established, with a government representative from each of the three countries.

    • The Committee will accelerate the procedural aspects of enforcing intellectual property rights and strengthen border enforcements of these rights.

Digital Trade5

  • The UMSCA includes the historical introduction of a Digital Trade Chapter. It provides a foundation on the advancement of trade through e-commerce, including both products and services. This is the first international agreement to feature a strong discipline on digital trade.
  • The new Chapter 19 provides a prevention of customs duties and any harmful measures, applied on digital products being distributed by electronic means.
  • Chapter 19 also strengthens the use of electronic signatures and authentication methods, in order to facilitate suppliers' course of business.

Investment6

  • NAFTA Chapter 11 allowed investors to make arbitration claims for damages as a result of the violations of investment obligations under NAFTA investment provisions. The USMCA sets forth these provisions in Chapter 14.
  • Canada and Mexico will still have the investment-state dispute settlement mechanism available because both countries are parties to the Trans-Pacific Partnership ("TPP").
  • On the other hand, Canada and the United States will not have this dispute mechanism available, except for specific "legacy investment" claims, which are investments made before the USMCA enters into force. The "legacy investment" claims will only proceed to arbitration for three years after NAFTA terminates.
  • As between the United States and Mexico, the investor-state dispute settlement mechanism will still be available pursuant to Annex-14D of the USMCA, but only for limited industry sectors, including oil and gas, telecommunications, energy, and transportation.

New De Minimis Levels

  • The USMCA provides price levels at which consumers have to pay duties and taxes on imported goods.
  • The United States de minimis level remains the same at $800 (USD).
  • The Canadian de minimis thresholds for duties and taxes were increased. Canadian de minimis thresholds are now $150 (CAD) for duties and $40 (CAD) for taxes. The current Canadian tax level is $20 (CAD).
  • The Mexican de minimis thresholds will continue to be $117 (USD) for duties and $50 (USD) for taxes.

Prohibition on Negotiations with Non-Market Economies

  • The USMCA Article 32.10 limits the free trade agreement negotiations with a non-market country.
  • Three months before any of the three countries begin negotiations with a non-market economy country, the North America negotiating party needs to officially inform the other parties and provide as much information as possible about the negotiation.
  • If either the United States, Canada, or Mexico enter into a free trade agreement with a non-market country such as China, then the other parties can terminate the USMCA on a six-month notice and replace it with a bilateral agreement.
  • Most have viewed this provision as a warning to Canada and Mexico to not negotiate or be cautious when entering into a free trade agreement with China.

Customs and Trade Facilitation7

  • Parties will now be required to electronically update on a regular basis, procedures relating to import/export and transit of goods through their territories.
  • The Single Window system will be established by December 31, 2018, which will enable the electronic submission through a single entry point of documentation required by parties for importing goods into its territory. This is important as it allows for one platform to be used among the three countries.
  • The Committee on Trade Facilitation is established, which will be composed of government representatives from the three countries.

    • The Committee will facilitate exchange of information among the parties with the implementation of a Single Window system, including each party's participating border agencies and the automation of its forms, documents, and procedures.
  • Compared to NAFTA, customs officials will see an increase in authority as they will now have the ability to initiate border measures against goods which are "in transit" through their respective jurisdiction.
  • The USMCA permits customs officials to detain and destroy "suspected counterfeit trademark goods or pirated copyright goods."8

Certificate of Origin

  • The USMCA origin claims for preferential treatment can now be made via Certifications of Origin issued by the exporter, producer, or the importer. Under NAFTA, the preferential treatments claims could only be made by the exporter.
  • The Certifications of Origin no longer need to be in the prescribed format (as in CBP Form 434), it may be provided in any form, such as in an invoice or any other document as long as it meets the minimum data requirements set forth in Annex 5-A.

Dispute Settlement

  • The USMCA preserves NAFTA Chapter 19, now renumbered as Chapter 10, while it remains largely unchanged it does add elements that reinforce cooperation for transparency in remedy investigations as well as duty evasion. All parties have the right to challenge each other's anti-dumping and countervailing duty decisions before an independent, expert panel.
  • NAFTA Chapter 19 was a huge sticking point in US-Canada negotiations, but in the end the United States was unable to have Chapter 19 eliminated.

Sunset Clause

  • The USMCA will remain in effect for 16 years, unless all three countries confirm in writing that they wish to extend the agreement for another 16 years.
  • Parties are required to jointly review the USMCA beginning 6 six years after the entry into force and potentially annually if there is no agreement to extend the USMCA.

It is important to note that the USMCA does not contain an agreement on the existing steel and aluminum tariffs. According to the Administration, these tariffs will be negotiated separately. Moreover, the Administration is still considering whether it will use Section 232 to restrict imports of automobiles and automotive parts from Mexico and Canada. As for the next steps in finalizing the USMCA, the parties are expected to sign the USMCA by late November and the three countries will begin preparations for their domestic ratifications procedures. For the United States pursuant to TPA requirements, this includes completing an economic impact study by the U.S. International Trade Commission. The study is expected to be completed at the earliest, in early 2019. Then a draft legislation to implement the USMCA will be presented to Congress. Per TPA provisions, the USMCA will be ratified by Congress on a yes-or-no basis, and Congress cannot add amendments or reservations. Congress is expected to vote on the USMCA in 2019 and will have a maximum of 90 days to do so. As previously discussed, the USMCA is not expected to enter into force until 2019 or 2020 because after all three countries notify each other that ratification has been accomplished, it will take approximately three months after the last notification before the USMCA can enter into force. In sum, there is still a long road ahead for the USMCA.

Footnotes

1 Press Release, Office of the United States Trade Representative, Joint Statement from United States Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland, (Sept. 30, 2018) (available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/september/joint-statement-united-states).

2 The complete text of the USMCA is available at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico (last visited Oct. 10, 2018).

3 See Side Letter to Governments of Canada and Mexico regarding exceptions to Section 232 (2018), available at https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/US%20Mexico%20232%20Side%20Letter.pdf (last visited Oct. 10, 2018). 

4 United States-Mexico-Canada Agreement (USMCA), ch. 20, Sep. 30, 2018, https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/20%20Intellectual%20Property.pdf  (last visited Oct. 10, 2018).

5 Id. at ch. 19, https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/19%20Digital%20Trade.pdf (last visited Oct. 10, 2018).

6 Id. at ch. 14, https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/14%20Investment.pdf (last visited Oct. 10, 2018).

7 Id. at ch. 7, https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/07%20Customs%20%20and%20Trade%20Facilitation.pdf (last visited Oct. 10, 2018).

8 Id. at ch. 20, art. 20.J.7(6)(e)(i), https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/20%20Intellectual%20Property.pdf (last visited Oct. 10, 2018).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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