NAFTA's key distinctions

For more than two decades a broad range of cross-border financial transactions between the United States, Canada and Mexico have been ruled by the 1994 North American Free Trade Agreement (NAFTA).


In January 2017 the NAFTA's three leaders agreed that it was time to modernise the 24-year-old pact, launching months of negotiations that ended on 30 September 2018. Now, the United States must ratify the pact and promulgate uniform regulations that will implement the United States-Mexico-Canada Agreement's (USMCA's) various chapters. This is set to take place throughout 2019, with the USMCA possibly coming into force in early 2020.

According to the Office of the United States Trade Representative (USTR), the United States exported approximately $115 billion in financial services in 2016, yielding about $41 billion surplus for trade in financial services. By further levelling the playing field, it is anticipated that the USMCA will grant the United States wider market access to financial service firms that are operating in each other's countries.

The USTR has released the full text of the negotiated pact on its website. The financial services section can be found in Chapter 17 of the USMCA. This article provides an overview of the changes that the USMCA would introduce and their implications for the US financial services industry.

Under national treatment and most-favoured-nation treatment principles, financial service firms must receive equal treatment as local suppliers and firms from any other country, respectively. Market access principles also prohibit the United States from imposing certain quantitative restrictions that would limit the export of financial services to another member nation. When it comes into force, the USMCA will strengthen national treatment protections for the covered financial services industry in the United States. Enumerated 'rules of the road' will ensure transparency and fair treatment.

Unlike the current NAFTA, or any other preceding US trade agreements, a key development in the USMCA is that there is now a provision which prohibits local data storage requirements – an essential factor affecting the financial services industry. Accordingly, the United States may not impose local data storage requirements on financial service firms, provided that the local financial regulator has access to the data for the purpose of carrying out its regulatory, supervisory mandate. This is expected to ease the expense and complication of operating redundant facilities. Access to the United States' financial services sector will also be enhanced through increased regulatory transparency.

NAFTA's key distinctions

Some of the key distinctions from the NAFTA include as follows:

  • The USMCA provides that the United States must grant financial service firms the same access to payment and clearing systems operated by domestic public entities. However, this does not include access to the United States' lender-of-last resort, ordinarily the central bank, offering loans to financial institutions experiencing financial difficulty (Article 17.15). The current NAFTA does not contain a comparable provision.
  • The USMCA modifies the NAFTA's transfer of information provisions and provides that the United States cannot prevent a member nation's financial institutions from transferring information into or out of the country. However, this provision is not intended to interfere with the ability to take measures to protect personal data and privacy (Article 17.19). The NAFTA provision appears to be more restrictive in that the transfer of information is currently limited to data processing in the ordinary course of business.
  • The USMCA contains a new provision that prohibits the United States from requiring a member country's financial institution to locate its computing facilities within the country, provided regulators have access to the information. While the NAFTA does cover the transfer of information, it has no provision that is addressing the freedom in locating computing facilities (Article 17.20).
  • The USMCA enhances the market access provisions under the NAFTA by including quantitative market access provisions. The provisions restrict member countries from placing limitations on the number of financial services firms, including their number of employees and the total value of financial service transactions or assets (Article 17.5).
  • The USMCA seeks greater regulatory transparency for new financial services by allowing the United States to introduce new services if it is authorised to provide such a service (Article 17.7).
  • The USMCA seeks to broaden the provision of insurance services without product approval by allowing new insurance products that have not been disapproved and by not imposing limitations on the number of new products (Article 17.16). The current NAFTA only broadly seeks to have the member nations consult on liberalising trade insurance services.
  • The USMCA contains limitations on the expansion of trade in financial services, despite its general trend toward greater liberalisation. The measures will not apply to government procurement of financial services and subsidies or grants provided (Article 17.2). The NAFTA does not contain provisions on government procurement and subsidies specifically relating to financial services.
  • The USMCA contains a binding state-to-state dispute settlement framework that is specific to financial services but financial services are no longer subject to trilateral investor-state dispute settlement contained in Chapter 14 on Investment (Annex 17-C).

For further information on this topic please contact Lamine Hardaway, Birgit Matthiesen or David R Hamill at Arent Fox LLP by telephone (+1 202 857 6000) or email ([email protected], [email protected] or [email protected]). The Arent Fox LLP website can be accessed at www.arentfox.com.