The initial portrayal of the United States-Mexico-Canada Agreement as an agreement that is not significantly different from the existing North American Free Trade Agreement may be misleading. As discussed below, the new agreement is likely to have a profound impact on many businesses.
- On September 30, 2018, after more than a year of contentious negotiations, Canada, the United States and Mexico announced the completion of negotiations toward the United States-Mexico-Canada Agreement (“USMCA”), a new trilateral trade agreement between the three countries.
- The U.S. and Mexico respectively rank first and third among Canada’s merchandise trading partners. From the perspectives of the U.S. and Mexico, Canada ranks second and fifth respectively and is the largest export market for the U.S.
- On ratification, the USMCA would replace the North American Free Trade Agreement (“NAFTA”), in effect since 1994, under which merchandise trade among the three countries has tripled to nearly USD $1.1 trillion (2017).
- According to the Canadian government, the USMCA “provides key outcomes for Canadian businesses, workers and communities in areas such as labour, environment, automotive trade, dispute resolution, culture, energy, and agriculture and agri-food…” and will “create good, well‑paying, middle class jobs, strengthen economic ties, and expand Canada’s trade in North America.”
From Agreement in Principle to Ratification: The Process
The September 30, 2018 “agreement in principle” must still be ratified by the three countries. While the treaty approval processes in Canada and Mexico make ratification highly likely in both cases, the U.S. system gives the Congress considerable leverage.
The U.S. process
The U.S. ratification timeline, beginning with the September 30 announcement, encompasses the following:
- The text of the USMCA must be published for 60 days, after which the President may sign the Agreement (expected on November 30, 2018);
- After signing, the U.S. International Trade Commission (“ITC”) has 105 days to report on the agreement’s economic impact (see the ITC process here);
- During that same period, the Administration drafts implementing legislation, which, upon the release of the ITC report, is submitted to Congress where it is sent to the relevant committee or committees of each house for study;
- After a maximum 45 days of committee study, the implementing legislation is then, in a process that can take no more than 45 additional days and during which no amendments are permitted:
- considered and voted on by the House of Representatives; and
- considered and voted on by the Senate; following which
- The legislation, as passed, is forwarded to the President for signing, whereupon the treaty takes effect.
Because the U.S. midterm elections may shift control of one or both houses of Congress from Republicans to Democrats, there is a possibility that the process may be delayed. While it is possible to compress some of the time frames noted above, the U.S. Senate Majority Leader, Mitch McConnell, stated on October 16 that there is no chance of a vote in 2018. It now appears that full implementation is unlikely before mid-2019 at the earliest.
Canada and Mexico
In Canada, the process also involves multiple steps, but there is less likelihood of delay because the governing Liberal Party controls the House of Commons, which in any event can only suggest (rather than require) changes to a treaty. In addition to the federal implementing legislation, it is possible that one or more provinces will have to make legislative changes to ensure that Canada as a whole is compliant with the terms of the USMCA. It appears that Mexico will ratify the agreement by the end of 2018.
Other key points
- Unlike the Canada-European Union Comprehensive Economic and Trade Agreement (“CETA”), the USMCA does not contain a provision allowing for portions of the agreement to take effect prior to it being fully implemented. Therefore, until the USMCA has been implemented into law, NAFTA, in its entirety, will continue to be in force.
- A number of other formalities, including translation into French and Spanish, must also be completed prior to ratification.
- In accordance with Article 34.5 of the USMCA, each party is required to notify the other parties, in writing, once it has completed the required internal procedures for the entry into force of the USMCA. The agreement will then come into force on the first day of the third month following the final notification.
Although President Trump has stated that the USMCA is a “brand new deal”, the agreement retains some important portions of NAFTA. Nevertheless, there are significant changes in the USMCA that have the potential to alter the North American trade and investment landscape.
Dairy and other agricultural products
Canada will open its dairy market to U.S. farmers by giving them access to 3.59% of the Canadian market. Analysts estimate this could increase U.S. exports to Canada by US$70 million. This is in addition to the limited access given to Canada’s partners under CETA and the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”). Under the three free trade agreements, it is estimated that Canadian dairy farmers will have lost anywhere from 8 to 10% of their market over a five-year period.
Canada will also provide new tariff-rate quotas to the U.S. for poultry and egg that would be largely superior to the ones conceded under the CPTPP. For chicken, in addition to the tariff-rate quotas available under the WTO regime, the U.S. will have access to 47,000 MT increasing to 57,000 MT by year six of the agreement, growing one percent for an additional 10 years. For egg and egg products, Canada has conceded 1.67 million increasing to ten million dozen eggs and egg-equivalent products in year six of the agreement, growing one percent for an additional 10 years. In the case of turkey, Canada will provide access equivalent to no less than 3.5 percent of the previous year’s total Canadian turkey production.
Furthermore, six months after entry into force of the USMCA, Canada will eliminate its “classes 6 and 7” pricing system (which was a solution to Canada's skim milk surplus that removed the incentive for dairy processors to use American ultra-filtered milk products that were entering Canada through a loophole). Product prices in these classes will be set no lower than a level based on the U.S. price for nonfat dry milk.
In addition, Canada has also agreed to limit the impact of any surplus skim milk production on external markets. These measures include resumption of its program to use skim milk domestically as animal feed and a new commitment to cap its exports of skim milk powder, milk protein concentrates, and infant formula. Exports that exceed specific thresholds will face an export surcharge.
While the U.S. has agreed to provide limited market access to Canada for dairy, peanuts, processed peanut products, and a limited amount of sugar and sugar-containing products, there is no question but that the amount of access given by Canada for supply-managed products was one of its major concessions in the USMCA.
Duty-free treatment on automobiles will be accorded between member countries if:
- 40-45% of an auto manufacturer’s activities (i.e., costs of manufacturing, assembly, R&D and information technology) are carried out by workers who earn at least US$16/hour (a figure that is not indexed under the agreement);
- 70% of an auto manufacturer’s steel and aluminum has been purchased within North America; and
- 75% of the overall regional value content (RVC) of the automobile is made in North America, up from 62.5%. This rule will be transitioned into the new deal over a five-year period from the date of when the USMCA enters into force.
Canada also struck side agreements with the U.S. that would protect both countries from tariffs on imported autos and auto parts. Most notably, in the event that the U.S. were to apply Section 232 “national security” tariff measures to Canada’s automotive sector, Canada will retain the right to ship 2.6 million autos and $32.4 billion worth of auto parts to the U.S. on a duty-free basis (originating light trucks will be excluded entirely from Section 232 actions). Only to the extent that Canada exceeds these thresholds – which are well beyond its current and historic export levels – would its automotive exports be subject to Section 232 tariffs.
The intention behind these rules is to incentivize car producers to shift production to, and to source parts from, the USMCA countries. However there are risks associated with this, including the possibility that the rules could result in a more expensive product, encouraging automakers to shift production to low-cost jurisdictions such as China.
Rules of origin for various industries, including textiles
Aside from the automotive industry, the USMCA also stiffens rules of origin for certain products, including chemicals, steel-intensive products, glass, optical fibre and textiles and apparel.
For textiles and apparel, the USMCA will clamp down on the use of non-NAFTA inputs in textile and apparel trade. For example, it will require that sewing thread, pocketing fabric, narrow elastic bands, and coated fabric, when incorporated in most apparel and other finished products, be made within the USMCA region for those finished products. Under new verification rules, there will be increased capacity for unannounced inspections of facilities at which violations of the new textile origin rules are suspected of occurring.
Canada has agreed to longer protection terms for intellectual property, bringing the country in line with the standards currently in place in both the U.S. and Europe. The USMCA will require a minimum copyright term of life of the author plus 70 years, and for those works with a copyright term that is not based on the life of a person, a minimum of 75 years after first authorized publication. The USMCA will also extend certain protections such as data exclusivity for pharmaceutical patent data from 8 years to 10 years. According to the Canadian government, Canada has a transition period of five years on data protection for biologic drugs, and two and a half years on term of protection for copyright, following the entry into force of the USMCA to implement these obligations.
Cross-border shipment “de minimis” levels
Under the USMCA, to facilitate greater cross-border trade, Canada has agreed to raise its de minimis level from C$20 to C$40 for the collection of sales taxes on cross-border shipments. Canada will also provide for duty-free shipments up to C$150. The corresponding U.S. threshold is US$800 for both taxes and duty. Increasing the Canadian thresholds was a key U.S. demand.
Revision, sunset clause and withdrawal
The USMCA contains a sunset clause that states that it will expire in 16 years and requires a joint review to be conducted by its members every six years – where it can be extended for additional ten-year terms. If there is a disagreement, the countries would then meet to work out their differences. This clause was a compromise with the U.S. who wanted the USMCA to contain a sunset clause which would have provided for a recertification of the deal every five years to keep it in force.
Moreover, pursuant to Article 34.6 of the USMCA, a party may withdraw from the agreement by providing written notice of withdrawal to the other parties. The withdrawal then takes effect six months after such notification. However, the agreement would remain in force for the remaining parties.
Investor–state dispute mechanism (Chapter 11)
The famous NAFTA Chapter 11 investor-state dispute resolution process, which allows foreign investors to sue host governments for alleged discriminatory treatment, will be gradually phased out between the U.S. and Canada under Chapter 14 of the USMCA. The process will remain in place for certain sectors, such as energy between the United States and Mexico. Canada and Mexico will still have an investor- state dispute resolution mechanism when the CPTPP agreement enters into force. The removal of NAFTA Chapter 11 under the USMCA was a key demand for Canada mostly because since NAFTA’s inception, Canada has spent more than $95 million in legal costs defending itself against investor-state claims and has paid out over $219 million in damages and settlements.
It is noteworthy that the USMCA also includes a provision forcing a party to inform the others of its intention to commence free trade agreement negotiations with a non-market country at least 3 months prior to commencing such negotiations. A non-market country is a country that on the date of signature of the USMCA at least one party has determined to be a non-market economy for purposes of its anti-dumping and countervailing duty laws and is a country with which no party has a free trade agreement. China is obviously a country that could be subject to this rule. Entry by any party into a free trade agreement with a non-market country will allow the other parties to terminate the USMCA on six-month notice. However, a withdrawal option upon six-month notice also exists under Article 34.6 of the USMCA as mentioned above.
Data localization requirements
The USMCA will require changes to Canadian legislation to allow federally regulated entities (“FREs”) from the U.S. and Mexico to house data at computing facilities in their home jurisdiction. Currently, FREs are subject to data localization requirements, or “in Canada” record-keeping requirements, which have been interpreted by the Office of the Superintendent of Financial Institutions (“OSFI”) to mean that specified records must be maintained on computer facilities in Canada.
Chapter 17 – Financial Services, Article 17.20 (Location of Computing Facilities) of the USMCA, which will take effect in Canada one year after the entry into force of the USMCA, introduces new commitments, stating:
No Party shall require a covered person to use or locate computing facilities in the Party’s territory as a condition for conducting business in that territory, so long as the Party’s financial regulatory authorities, for regulatory and supervisory purposes, have immediate, direct, complete, and ongoing access to information processed or stored on computing facilities that the person uses or locates outside the Party’s territory.
Article 17.20 allows a Party to require regulatory approval before allowing a covered person to utilize this provision. Chapter 17 also contains a prudential exception to these commitments in which a Party “shall not be prevented from adopting or maintaining measures for prudential reasons,” including “for the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial institution or cross-border financial service supplier, or to ensure the integrity and stability of the financial system.” These changes to the location of computing facilities and the “in Canada” requirement are anticipated to impact both OSFI’s guidelines and Canadian legislation governing FREs.
Unchanged Controversial Elements
Dispute mechanism (NAFTA Chapter 19)
NAFTA Chapter 19 dispute resolution provisions remain unchanged even though the U.S. was adamant about eliminating this element. As a result, under the USMCA, binational panels will be retained to resolve trade disputes and grievances relating to unfair trade practices such as anti-dumping and subsidy matters between member states.
U.S. section 232 (national security) tariffs
Current U.S. Section 232 punitive tariffs on steel and aluminum exports to the U.S. remain untouched. As a result, current Canadian countermeasures on U.S.-origin goods (ketchup, orange juice, motorboats, etc.) will also remain in place. However, two side letters in the USMCA provide Mexico and Canada with relief in the event that the U.S. imposes punitive tariffs on imports of automobiles and automotive parts under U.S. Section 232 (national security) and two side letters establish a mandatory consultation process in the event that the U.S. imposes Section 232 measures. Indeed, under the USMCA, Canada secured a commitment from the U.S. to provide at least a 60-day exemption from any future measures under U.S. Section 232. During this time, the U.S. and Canada would seek to negotiate an appropriate outcome based on industry dynamics and historical trading patterns.
Canada and the U.S. will retain access to each other’s procurement markets, including at the sub-federal level, through their obligations under the WTO Agreement on Government Procurement (GPA). The government procurement obligations between Mexico and Canada will be determined under the CPTPP.
Cultural provisions from NAFTA which carve out a certain amount of the Canadian media market for domestically produced programming will remain the same under USMCA. It preserves Canada’s cultural exception, which gives Canada flexibility to adopt and maintain programs and policies that support the creation, distribution, and development of Canadian artistic expression or content, including in the digital environment.
There are no changes related to “TN” visas for professional workers. Canada had wanted the list of eligible occupations expanded, while the U.S. had wanted it reduced.
The initial portrayal of the USMCA as an agreement that does not really encompass significant changes to the North American investment landscape is misleading. There are provisions in the USMCA that may have a profound impact on the way companies will do business going forward.
At the most general level, we would emphasize the following as potential first steps:
- Consulting with counsel regarding how the changes in the USMCA will impact their business, including new compliance requirements and the elimination of the investor-state dispute mechanism.
- Businesses should not assume that past practices under NAFTA will allow them to be compliant under the USMCA once in force.