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NAFTA Renegotiation Concluded: Introducing the USMCA

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On September 30, 2018, hours before a deadline that mandated the publication of a modernized NAFTA text, the United States, Mexico, and Canada agreed to an updated trade agreement after more than a year of negotiations. The 1994 North American Free Trade Agreement (NAFTA) was originally implemented to promote economic growth and the harmonization of trade standards throughout the continent; however, critics of the deal believed it to be outdated in many respects. Key issues at the negotiating table included automotive content rules of origin, access to government procurement, various dispute resolution chapters, labor standards, agricultural safeguards, and much more.

The new agreement will be known as the United States-Mexico-Canada Agreement, or USMCA, and will now head back to the respective legislative bodies of the three nations for domestic implementation. While many of the main provisions won't take effect until 2020, it is critical for U.S. businesses to understand the updated features, highlights, and changes in the new 34-Chapter USMCA. Read on for an analysis of key features of the agreement.

Automobile Content Rules of Origin

One of the main sticking points in the last year of negotiations was the U.S. position on automobile content rules of origin. Under the USMCA, automakers will now be able to qualify for zero tariffs on cars and trucks if 75 percent of their vehicles' components are manufactured in one of the three nations, up from the 62.5 percent requirement in NAFTA. The change will be implemented in stages, and cannot be first implemented before January 1, 2020. In addition, 40 – 45 percent of all North American vehicle production will have to be produced by workers making at least $16 an hour.

Labor Standards

The Labor Chapter provides for enforceable labor obligations for the parties, and obliges the nations to adopt labor rights laws and practices as recognized by the International Labor Organization. The Chapter includes an Annex on Worker Representation in Collective Bargaining in Mexico, and as mentioned above, increases the minimum wage for automobile workers.

Environmental Standards

The Chapter on environmental standards obliges the parties not to weaken or reduce environmental protection laws to encourage business or trade, and recognizes key issues such as the protection of the ozone layer, the protection of marine life from ship pollution, marine litter, air quality, and endangered species. It further obliges all three countries to prevent overfishing and stop subsidizing fisheries.

Currency Manipulation

A new chapter was added in the USMCA that addresses "Macroeconomic Policies and Exchange Rate Matters." It obliges the parties to avoid manipulating exchange rates through competitive devaluation and also establishes certain reporting provisions to promote transparency involving monthly and quarterly reports to the International Monetary Fund (IMF). The provision also establishes a trilateral "Macroeconomic Committee" to monitor the implementation of the chapter.

Intellectual Property Protection

A new intellectual property chapter largely resembles the provisions in the Trans-Pacific Partnership trade agreement that the U.S. abandoned in early 2016. The new provisions strengthen key copyright and patent protections, including giving biologic drugs ten years of data exclusivity protection (Canada's domestic law currently only protects biologics for eight years), and lengthening the protection on copyright to the term of the author's life plus 70 years (Canada's copyright law is currently only the life of the author plus 50 years). The Chapter also strengthens provisions for protecting trademarks, such as well-known marks.

Market Access for Goods and Updated Dairy Rules

One of the tensest negotiating points between the U.S. and Canada concerned Canadian dairy market access for the U.S. dairy industry. Under NAFTA, Canada maintained a dairy pricing scheme that effectually prevented U.S. farmers from entering the market. Under the USMCA, the dairy market will be greatly expanded for U.S. farmers and exporters.

Digital Trade

A new digital trade chapter addresses customs duties in cross-border digital transactions, data localization, and enforceable consumer protection in the digital marketplace. It also promotes collaboration in addressing modern cybersecurity challenges.

Dispute Settlement

The NAFTA Chapter 11 on investor-state dispute settlement (ISDS) mechanisms that allowed companies to sue governments for interfering with potential future profits with legislation or policy was removed for the USMCA. However, the NAFTA Chapter 19 dispute resolution process that provides an arbitration process for companies who feel they have been unfairly affected by anti-dumping and countervailing duties remains in the new USMCA text. This was an important concession Canada sought because of its history of softwood lumber disputes that challenged certain U.S. trade restriction mechanisms.

Non-Market Economy Restriction

The USMCA also contains a provision that gives the parties an option to terminate the entire agreement if any of the three countries enter into a free trade agreement with a "non-market economy," language clearly aimed at preventing Mexico or Canada from entering into any type of trade deal with China. If this clause is triggered, it gives the remaining parties the option to continue the USMCA in an amended bilateral agreement.

De Minimis

Under the USMCA, Mexico and Canada will increase their de minimis shipment value levels, which is the minimum value an imported shipment is subject to duty collection and customs documentation. Mexico's de minimis threshold will double from $50 to $100, and Canada is doubling its threshold from C$20 to C$40.

Section 232 Tariffs

Although the U.S. Section 232 tariffs on steel and aluminum were not lifted, Section 232 was addressed in various side letters that accompanied the text of the USMCA. The U.S. agreed to exclude 2.6 million automobile imports each from Canada and Mexico from potential Section 232 tariffs, a number that is far higher than either nation's current level of automobile exports to the U.S.

Lifespan of USMCA

The USMCA will expire in 16 years, and the three nations will conduct a joint review six years after the deal enters into force with an option to extend the deal beyond the planned 16-year term.

The updated chapters also address topics like anticorruption, textiles and apparels, financial services, and telecommunications. The U.S., Mexico, and Canada are expected to sign to the USMCA by the end of November, and it will then be up to the domestic legislatures to enact the provisions of the USMCA into domestic law. If you have any questions about any of the new requirements or provisions of the USMCA, please contact Alan EnslenJulius Bodie or any member of Baker Donelson's Global Business Team.

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