On 30 September 2018, the Trump Administration published the text of a trade agreement the Administration proposes to have the US enter into with Mexico and Canada. The Administration refers to the proposed trade agreement as the "United States-Mexico-Canada Agreement," or USMCA. The text indicates that the USMCA would replace NAFTA.
The Administration wants Congress to review and ultimately ratify this agreement on an up-or-down basis (i.e., "fast-track," with no possibility of amendment) in accordance with the Trade Promotion Authority (TPA). In addition, the Administration has expressed its goal to have the USMCA signed by Mexican President Peña Nieto before his term expires on 30 November 2018. By publishing the proposed USMCA text by 30 September, the Administration enabled the achievement of that goal; the TPA requires the publication of the proposed text at least sixty days prior to the signature of the agreement.
Given other TPA requirements (e.g., an economic impact study by the US International Trade Commission), Congress will likely vote on the agreement next year.
The USMCA is comprised of 34 chapters, three schedules, eighteen annexes and twelve side letters. One of the chapters (on Rules of Origin) is 234 pages in length. Set forth below are brief summaries of selected points that impact international businesses.
Auto industry – rules of origin:
- 75% to 80% of the overall content must come from USMCA countries (depending on the calculation method used).
- 70% of the steel and aluminum content must come from USMCA countries.
- 40% (45% for trucks) of overall content must be produced by workers earning at least USD16/hour.
- R&D and IT costs are included in the calculation of labor value content.
- With a few exceptions, the phase-in period for the foregoing rules is five years.
Auto industry – exclusions from possible Section 232 tariffs:
- Mexico: 2.6 million passenger vehicles, all light trucks, and USD108 billion in parts, are excluded.
- Canada: 2.6 million passenger vehicles, all light trucks, and USD32.4 billion in parts, are excluded.
- The existing Section 232 tariffs on steel and aluminum, which could impact the auto supply chain, are not dealt with in the USMCA. It is not clear how such tariffs might be affected by USMCA side letters under which the US may not "adopt or maintain" a measure imposing 232 tariffs or import restrictions for at least sixty days after "imposition of a measure."
Investor-State Dispute System:
- The ISDS is eliminated for Canadian investors in the US and US investors in Canada.
- The ISDS is also eliminated for Mexican investors in Canada and Canadian investors in Mexico. (Note the CPTPP signed by Mexico and Canada includes a similar system).
- Except in the oil and gas, infrastructure, energy generation, transportation and telecommunications industries, US and Mexican investors' rights to challenge Mexican and US restrictions are limited to claims of (i) direct expropriation, (ii) failure to provide most favored nation treatment, and (ii) failure to provide national treatment. In addition, US and Mexican investors (a) are required to pursue their claims in domestic courts for at least thirty months prior to using the ISDS, and (b) are no longer allowed to use the ISDS for claims over investments that are in the process of being established.
NAFTA Chapter 19 challenges to anti-dumping and countervailing duty decisions:
The Chapter 19 procedure is maintained.
Mexican energy industry:
The agreement includes a short chapter setting forth:
- The US's and Canada's recognition that: "(a) Mexico reserves its sovereign right to reform its Constitution and its domestic legislation; and (b) The Mexican State has the direct, inalienable and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory, including the continental shelf and the exclusive economic zone located outside the territorial sea and adjacent thereto, in strata or deposits, regardless of their physical conditions pursuant to Mexico's Constitution." This recognition is made "without prejudice to their [the US's and Canada's] rights and remedies available under this Agreement."
The three parties' confirmation of "their full respect for sovereignty and their sovereign right to regulate with respect to matters addressed in this Chapter in accordance with their respective Constitutions and domestic laws, in the full exercise of their democratic processes."
The agreement expires after sixteen years unless the parties agree to renew the sixteen-year term in accordance with the process set forth in the agreement.
- The parties promise to adopt laws effectively recognizing the right to collective bargaining.
- The parties are required to (i) adopt and maintain "in law and practice labor rights as recognized by the International Labor Organization," (ii) effectively enforce their own labor laws, and (iii) not to waive or derogate from those laws.
Sustained or recurrent failure to enforce labor laws in a manner that affects trade or investment may give raise to a dispute resolution procedure under the agreement.
Canadian "Supply Management" access:
- Canada allows increased access to the Canadian market for specified US origin dairy, poultry and egg products. The access is managed through a Tariff Rate Quota system.
- Canada eliminates milk classes 6 and 7. In addition, Canada commits that prices for non-fat solids used to manufacture milk protein concentrates, skim milk powder and infant formulae will be no lower than a calculated amount using a US reference price. However, the domestic sale of milk components used for non-human consumption is excluded from this requirement.
- Canada is to monitor its global exports of milk protein concentrates, skim milk powder and infant formulae and impose export charges if, in a given year, the exports exceed certain thresholds.
The parties are required to establish:
- Ten years of data protection for biologics;
- Protections against the misappropriation of trade secrets, including civil and criminal procedures and penalties, judicial procedures to prevent disclosure of trade secrets during litigation, and penalties for government officials for unauthorized disclosure;
- Procedural safeguards for the recognition of new geographical indications; and
A minimum copyright term of life of the author plus 70 years, or a minimum of 75 years after first authorized publication.
Financial services – data storage:
The parties are prohibited from requiring that data be stored locally, provided that the financial regulator has the access to data that it needs to regulate.
Consumer transactions – new de minimis levels:
- The USMCA establishes price levels at which consumers have to pay duties and taxes on imported goods (whether brought back on a trip or delivered by mail or courier).
- Canada raises its level from CAD20 to CAD40 for taxes. Canada also provides for duty free shipments up to CAD150.
- Mexico continues to provide USD50 tax free de minimis and provides duty free shipments up to the equivalent level of USD117.
- The US level remains at USD800.