The Protocol of Amendment to the United States-Mexico-Canada Agreement (“USMCA”) is progressing toward ratification, with the implementation bill (“USMCA Implementation Act”) having been sent to President Trump for his signature.
On December 10, 2019, Mexico, Canada and the United States signed the USMCA,1 modifying key elements of the original texts signed on November 30, 2018. The USMCA, when entered into force, will replace the 1994 North American Free Trade Agreement (“NAFTA”).
On December 12, 2019, Mexico's Senate passed the revised treaty by a vote of 107–1. In the United States, the USMCA Implementation Act was passed in the US House of Representatives by a 385-41 vote on December 19, 2019 and by the US Senate without modification by a vote of 89-10 on January 16, 2020, and then sent to President Trump.2 However, the USMCA will not take effect until both Canada approves it when its House of Commons reconvenes on January 27, 2020, and then the three countries’ executive authorities conclude their entry-into-force procedures.
Below is a summary of major highlights.
Auto Sector – Rules of Origin
In order for cars and auto parts to be imported duty-free, the requirements under Rules of Origin in Chapter 4 of the USMCA must be fulfilled. Under the original USMCA text, 75% of cars or auto parts had to originate in North America, and 40-45% of auto content needed to be made in a place where employees make an average of at least US$16 per hour. The revised provision sets a higher bar by specifying the production method of steel and aluminum content, requiring at least 70% of the metal to be “melted and poured” in North America. This new rule will have a 7-year phase-in period for steel and 10 years for aluminum.
The revised USMCA does not alter the 2018 version with respect to the investor-state dispute settlement (“ISDS”) regime and the anti-dumping and countervailing duty dispute settlement system under Chapter 19 of the agreement (discussed in our 2018 Legal Update).
For state-to-state disputes, the revised USMCA removed language that could have permitted a responding party to block the formation of a dispute settlement panel, closing a longstanding loophole to dispute settlement in NAFTA. Furthermore, new rules of evidence were created under the Rules of Procedure for Panels, a first for a US trade pact.
Revisions to the USMCA largely contribute to the improvement in labor monitoring and enforcement. While Mexico commits to significant labor reform enshrining worker rights (such as collective bargaining), the United States will establish an interagency labor committee to monitor the implementation and maintenance of each country’s labor obligations under the USMCA and Mexico’s labor reform. The United States will also request enforcement actions for violations of such labor obligations. The United States will monitor protection to Mexican workers’ rights vigilantly by establishing another independent Mexico Labor Expert Board and Forced Labor Enforcement Task Force as the major monitoring bodies and appointing up to five Mexico labor attachés to “provid[e] technical assistance” to Mexico.3
The revised USMCA presumes that labor violations affect trade and investment, shifting the burden of proof to a party alleged to have violated USMCA labor provisions to prove otherwise. The revised USMCA also enhances labor enforcement mechanisms by introducing a new “rapid response” dispute resolution process for labor violations in areas of collective bargaining and freedom of association against individual facilities under specified sectors. In the United States, where the procedures have yet to be established, the USMCA Implementation Act establishes a mechanism to provide the public with recourse against potential labor violations by a USMCA country or at specific facilities.
Significant environmental commitments have been added to the revised USMCA, requiring parties to adopt, maintain and implement seven multilateral environmental agreements (“MEAs”) and consider additional MEAs in the future. The revised USMCA also adopts the same presumption as in labor violation disputes, such that environmental violations are presumed to affect trade and investment unless the responding party demonstrates otherwise.
Similar to labor enforcement, the United States will establish an interagency environmental committee to monitor each country’s compliance with USMCA environmental obligations and request enforcement upon violation. The USMCA Implementation Act also provides for mechanisms and resources to support environmental commitments under the USMCA, including authorization of the North American Development Bank to support financing of projects related to environmental infrastructure.
The revised agreement has removed the uniform 10-year period of data exclusivity for biologic drugs for all parties. Separately, patent protection for new uses, methods or processes of a known product were included in the initial USMCA but were removed by the Protocol of Amendment. Additionally, several provisions contained in current US law were added to the USMCA to promote the development of generic drugs.
USMCA contains a sunset clause requiring a “joint review” and agreement on renewal in year 6 of the agreement. The USMCA would automatically terminate 16 years later in the absence of mutual agreement during the joint review. According to the USMCA Implementation Act, Congress will be consulted but will not be given the opportunity to consider or vote on the question.
In addition, the USMCA provides a party with the right to withdraw based on a 6-month written notice. Similar to the decision of renewal, the USMCA Implementation Act does not provide Congress with involvement in a decision on withdrawal.