Introduction

The United States and Mexico announced an agreement on 27 August 2018 regarding key issues that have been the focus of trilateral discussions among the United States, Mexico and Canada for over one year. Although no text is yet available, the Office of the United States Trade Representative (USTR) has released fact sheets addressing certain aspects of the preliminary agreement in principle.

The three fact sheets address:

  • the rebalancing of the North American Free Trade Agreement (NAFTA) to support manufacturing;
  • the modernisation of NAFTA; and
  • the strengthening of NAFTA for agriculture.

The USTR has not provided a timeframe for releasing the agreement text; however, below is a summary of the key points from the three fact sheets.

Overview of agreement

Automobile production Under the proposed agreement, 75% of the content in automobiles must be sourced in North America to qualify for tariff-free treatment, up from 62.5% under NAFTA.

The agreement stipulates that between 40% and 45% of auto content must be produced by workers earning at least $16 per hour.

Automobiles that do not meet these requirements will be subject to 2.5% normal duties – and potentially Section 232 auto duties.

Rules of origin in other sectors New rules will also be put in place for industries such as textiles, chemicals, steel-intensive products and other industrial goods to qualify for tariff-free treatment.

Intellectual property Copyright holders will have full copyright protections in markets of all member countries.

Digital trade Tariffs will be prohibited for digital products that are distributed electronically (eg, e-books, videos, music, software and games).

Labour In addition to requiring higher wage factories in the automobile supply chain, the deal will require Mexico to take specific steps to recognise collective bargaining rights.

Sunset clause The deal calls for a 16-year agreement with a provision for review after six years.

Dispute settlement As part of the deal, the dispute settlement panels will remain only for certain industries.

Agriculture The United States and Mexico have agreed not to impose tariffs on each other's agricultural goods and not to use export subsidies.

Comment

Notably, the legislative bodies of the signatory countries must approve any agreement. In the United States, the Trade Promotion Authority (TPA) allows for a straight 'up or down' vote on the agreement and presents the best options for obtaining congressional approval of the agreement. In order to meet the TPA's requirements, the agreement must be presented to Congress 90 days prior to signing. However, when the TPA's authority was extended in 2018, it was based on the administration's efforts to renegotiate NAFTA as a trilateral agreement, and thus it is expected that submission of only a US-Mexico agreement would meet resistance in Congress.

Although Canada is currently in negotiations regarding the provisions of the US-Mexico agreement, it is unknown whether, or how quickly, an agreement could be reached by all three parties. One particular concern is that Mexico President Enrique Penna Nieto leaves office on 1 December 2018. In order for the United States to sign the agreement by that date, the agreement must be presented to the Congress by 31 August 2018. Thus, while it appears that the US-Mexico handshake is a big step forward in the NAFTA renegotiations, there are still a number of roadblocks and time considerations to the completion, approval and implementation of a new NAFTA agreement, whether it is bilateral or trilateral.

For further information on this topic please contact Teresa Polino, David R Hamill, Matthew Nolan or John Gurley at Arent Fox LLP by telephone (+1 202 857 6000) or email (teresa.polino@arentfox.com, david.hamill@arentfox.com, nolan.matthew@arentfox.com or john.gurley@arentfox.com). The Arent Fox LLP website can be accessed at www.arentfox.com.

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