The Trump Administration is preparing to submit legislation to Congress to implement the US-Mexico-Canada Agreement (USMCA), designed to replace the North American Free Trade Agreement (NAFTA). President Trump has routinely referred to NAFTA as a "disaster," identifying NAFTA renegotiation – or withdrawal – as a priority of his trade agenda based on the perception that trade and investment liberalization under NAFTA helped drive manufacturing jobs out of the United States. Furthermore, after over 25 years, NAFTA has begun to show signs of its age, no longer reflecting the state-of-the-art in foreign economic policy as it did in 1993, for example, through its provisions on services trade, intellectual property, investment protection, and state-owned enterprises (SOEs).
Notwithstanding the rhetoric surrounding NAFTA and the new negotiations, the USMCA does not reflect a fundamentally different approach to US trade agreements nor a wholesale revision of NAFTA. The disciplines governing tariff elimination, non-tariff barriers, and services liberalization remain largely the same and, with limited exception, any changes address post-Internet commercial topics and/or updated US approaches to trade issues as set out in 2015 Trade Promotion Authority legislation and modern free trade agreements (FTAs). Nevertheless, these changes and others carry potentially significant implications for business planning across sectors and provide insight into the Administration’s likely approach and priorities in subsequent trade negotiations.
Although the Administration is preparing implementing legislation to be submitted to Congress, a number of issues are likely to put off a final vote beyond this summer. In addition to the delayed economic impact report from the US International Trade Commission, the Trump Administration will need to address bipartisan concerns with Section 232 duties and Democratic objections to labor and intellectual property provisions and skepticism about enforcement. President Trump has threatened to withdraw from NAFTA to force a vote on the USMCA as it currently stands, although that appears increasingly unlikely. Whether the Administration negotiates an alternative to Section 232 duties with trading partners, re-opens the agreement, or works with members of Congress to modify draft implementing legislation, significant work remains to be done before Congress will be in a position to consider the agreement.
We discuss below in greater detail certain highlights of the USMCA in its current form, and offer the following initial takeaways:
The USMCA updates NAFTA and offers meaningful improvements for US commercial interests in a number of ways. For example, the USMCA dramatically strengthens existing rules on state-owned enterprises and enhances the labor and environmental obligations of the parties, including through labor obligations specific to Mexico. New disciplines have been introduced in digital trade and e-commerce, industries barely in existence at the time of NAFTA, and new obligations with respect to exchange rates have been introduced that make oversight of currency policies more effective. The Administration has even used the USMCA to address two of industry's strongest criticisms of the final Trans-Pacific Partnership (TPP) text, namely, the time period for data exclusivity for biologics and the exclusion of financial services from the scope of data localization restrictions, both topics that had little commercial relevance when NAFTA was signed.
Key Policy Departures
While not having transformed the US approach to trade agreements, the USMCA still departs from longstanding US policy in certain areas. In particular, the USMCA eliminates rights and market access opportunities negotiated under NAFTA by severely restricting the availability of Investor-State dispute settlement (ISDS) and reducing access to Canadian and US procurement markets. This policy reversal reflects the Administration’s views – unique to any administration in almost 40 years – that ISDS merely encourages offshoring and that the US procurement market should be largely reserved for US firms rather than negotiated away for access to foreign procurement markets.
No New Manufacturing Approach
Given the criticism leveled by the President at previous trade agreements, and his belief that the USMCA would "transform North America back into a manufacturing powerhouse," we might have expected the USMCA to comprise a fundamentally different systemic approach to manufacturing than previous FTAs. Instead, those innovative and commercially significant elements introduced by the Administration include revised rules of origin, primarily for autos, as well as the aforementioned limitations on ISDS and government procurement. Beyond the rules of origin and ISDS provisions, which alone are likely to have little impact on the manufacturing sector, most new disciplines in the USMCA bear considerable resemblance to those found in the TPP.
China on My Mind
The USMCA makes clear that, even when negotiating a North American trade agreement, China remains front of mind for this Administration. Like the TPP, the USMCA contains new provisions on currency and state-owned enterprises, which – although the United States has previously had concerns with the operations of state-owned enterprises in Canada and Mexico – appear more directly targeted at China's state-led economic model. Beyond this set of disciplines, however, the USMCA goes further to deny any Chinese-owned or -controlled firm standing to launch an ISDS claim, and to expressly identify one party’s negotiation of an FTA with a “non-market country” as a possible basis for the other two parties to terminate the USMCA and replace it with a bilateral agreement.
Contrary to the US push for a stronger dispute settlement mechanism during the Uruguay Round, and for more effective enforcement processes in recent FTAs, the USMCA does little to correct a flaw in NAFTA that allows a responding party to block the formation of a dispute settlement panel. Although dispute settlement under US FTAs has been limited, enforceability has long been viewed by Congress and stakeholders as critical to cementing the gains achieved through negotiation of strong substantive disciplines. The USMCA outcome appears to reflect the Trump Administration’s skepticism of the value of binding dispute settlement, perhaps driven largely by the US experience with certain disputes within the World Trade Organization (WTO) dispute settlement system.