The Trump Administration’s new trilateral trade agreement, rebranded as the United States-Mexico-Canada Agreement (USMCA), is meant to replace the North American Free Tree Agreement (NAFTA) and to set out a new framework for U.S. trade agreements, assuming it secures Congressional passage. U.S. Trade Representative Robert Lighthizer has called the USMCA a “paradigm-shifting model,” as the Trump administration looks to negotiate agreements with the European Union, the United Kingdom, and Japan.
While many USMCA provisions mirror the Trans-Pacific Partnership (TPP) negotiated by the Obama administration, USMCA reflects a different balance of priorities. Broadly consistent with the Obama administration, the Trump administration has prioritized the knowledge economy as befits American strengths, but the Trump administration has also sought to favor local manufacturing, shorten supply chains and set precedents for future trading rules addressing state-dominated economies.
Knowledge Economy: Digital Trade
USMCA would prohibit the imposition of customs duties on digital products that are imported or exported electronically and require parties to adopt online consumer protection laws to prevent fraudulent and deceptive practices in digital trade. USMCA would also restrict data localization rules that require local computing facilities as a condition for doing business in a territory. Finally, a safe harbor provision may limit liability for internet companies for content supplied by their users. The safe harbor would require that providers cooperate in good faith with copyright owners to deter unauthorized transmission of copyrighted material or to remove infringing content; however, providers would not be required to monitor for infringing content.
These digital trade provisions mirror terms negotiated by the Obama administration, most of which have been included in the current Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that includes all TPP members except for the United States. CPTPP similarly restricts data localization rules, but it carves out an exception for the financial services industry and for rules that are consistent with a non-discriminatory, “legitimate public policy.” A similar copyright safe harbor provision was also negotiated in the TPP, but was “suspended” in CPTPP. Aside from these variations, the digital trade provisions included in USMCA track terms negotiated by the previous administration for the TPP.
Knowledge Economy: Biologics
USMCA proposes a regulatory data protection term of 10 years for biologics, which would represent a significant increase of exclusivity in Canada and Mexico and goes beyond what the Obama administration negotiated in TPP. Biologic drugs are made from living organisms, and patents, so central to exclusivity of small molecule or chemical drugs, are often an ineffective means of exclusivity. Data protection prevents competitors from relying on the originator’s data during the regulatory approval process for close copies or bio-similars. Given challenges of patenting biologics, data protection is often the most effective form of market exclusivity protection for innovators.
The USMCA biologics provision reflects a different priority compared to the Obama administration, as well as a different negotiating context.
U.S. law provides 12 years of data protection, but President Obama argued annually in his budgets for a reduction to seven years as a means to reduce U.S. drug prices. The Trump administration, while critical of U.S. drug prices, wants to spread the burden of innovation to other markets. Currently, Canada and Mexico have shorter terms of eight years and five years, respectively. The United States, Mexico, and Canada previously agreed to the proposed TPP provision of five years of biologics data protection with the option to extend for three more years in TPP.
Knowledge Economy: Patents and Copyrights
USMCA would establish a copyright protection term of the life of the author plus 70 years after the author’s death. The agreement would require Canada to extend its copyright protection term by 20 years. With respect to patent rights, USMCA would also include provisions for adjusting the term of a patent subject to unreasonable Patent Office delays. Unreasonable delays are defined as a delay in the issuance of more than five years from the filing date or three years after an examination request, whichever is later. This type of term adjustment has already been incorporated into U.S. patent laws, but it will be a new policy for the Canadian Intellectual Property Office. Both the copyright and patent term provisions in USMCA also mirror provisions the Obama administration agreed to during TPP negotiations.
Manufacturing and Investment: Localization
USMCA would tighten requirements for automakers in Mexico and Canada to qualify for zero import tariffs when selling to U.S. consumers.
Notably, the updated rules of origin would eventually require a 75% regional value content in order to qualify for zero tariffs. This would represent a substantial increase from the previous 62.5% requirement in NAFTA. Additionally, USMCA would require that 40% of each vehicle must be produced by workers earning $16 an hour or more to avoid the tariffs. This provision was meant to discourage companies from shifting more production to Mexico, where wages are almost three times lower than this threshold amount.
USMCA would also drastically reduce the rights of private investors by curtailing investor-state arbitration. While NAFTA provided robust investor-state dispute settlement (ISDS) provisions, U.S. Trade Representative Lighthizer considered the policy to be a subsidy to business and questioned why it would be “a good policy of the United States government to encourage investment in Mexico. ” Accordingly, the USMCA would eliminate those rights for Canadian investors in the United States and Mexico, and for U.S. and Mexican investors in Canada. Investor-state arbitration under USMCA would still be available for U.S. investors in Mexico and Mexican investors in the United States, but only if they first try to resolve the dispute in domestic courts, and then only for certain types of claims in limited industries. Similar to the USMCA manufacturing provisions, the goal of limiting investor-state arbitration is to shorten supply chains and localize manufacturing.
These policies reflect a departure from previous administrations, and it is likely to be controversial during Congressional deliberations on the agreement. Additionally, it is not clear that future trading partners would be open to these types of provisions. European officials are particularly wary of the Trump administration’s agenda to shift auto manufacturing to the United States. Automakers like BMW, Volkswagen and Mercedes assemble many vehicles in Mexico with European engine parts, and pressure to produce their engine parts in the United States would put European jobs at risk.
State-Driven Economies: State Owned Enterprises
USMCA also addresses limitations on State Owned Enterprises (SOEs), or entities owned or controlled by the government to partake in commercial activities. USMCA would require SOEs to operate in accordance with certain commercial considerations and require non-discriminatory treatment of competitors. Although Canada has some remaining SOEs, known as Crown corporations, this provision was designed as a precedent for future agreements with countries that have a large state role in the economy.
USMCA definition of an SOE largely tracks the definition used in the TPP and expands it slightly. Unlike the TPP, the USMCA SOE definition accounts for indirect ownership by a party; indirect ownership refers to situations in which a party “holds an ownership interest in an enterprise through one or more state enterprises of that Party. At each level of the ownership chain, the state enterprise – either alone or in combination with other state enterprises – must own, or control through ownership interests, another enterprise.” Additionally, the USMCA definition was expanded to include enterprises in which a party holds the power to control the enterprise through any other ownership interest, including indirect or minority ownership. A Party has the power to control the enterprise if “it can determine or direct important matters affecting the enterprise.”
State-Driven Economies: Currency
USMCA includes a provision to reaffirm the parties’ commitment to market-determined exchange rates, and it confirms that the parties are bound under the Articles of Agreement established by the International Monetary Fund. Additionally, the provision requires disclosure by each party of monthly interventions in spot and forward foreign exchange markets, foreign-exchange reserves data and forward positions, quarterly balance of payments portfolio capital flows, quarterly exports and imports, along with other public disclosures by the IMF.
The interface between the international trading system and monetary policies has long been a subject of debate, with complaints that some
countries have sought to gain export advantages through maintaining devalued currencies. While the United States, Canada, and Mexico all maintain market determined currencies, USMCA might be viewed as a template for future agreements involving countries that may take more interventionist approaches.
State-Driven Economies: Non-Market Economies
In a provision targeted at China, USMCA would require members to inform the other parties at least three months prior to commencing negotiations for a free trade agreement with a non-market economy country. Should a party enter a free trade agreement with a non-market economy party, the two other countries are entitled to terminate USMCA on six-month notice and replace it with a bilateral agreement. Another provision in the USMCA already allows any party to withdraw from the agreement with six-month notice. Hence, the non-market economies provision is essentially symbolic. Still, the provision reflects the growing divide between the United States and China, and foreshadows the prospect of countries being forced to chose sides in the future.
USMCA reflects long-standing U.S. priorities around promoting the knowledge economy, even as it sets out new priorities on the manufacturing side for more on-shoring of production. Consistent with efforts of prior administrations, the Trump administration is also seeking to adapt the trading system to challenges presented by state-driven economies, but cuts a new path pointing towards a new containment strategy targeted at China. As the Trump administration proceeds with trade talks with the European Union, the United Kingdom, and Japan, the USMCA would provide a starting point for those negotiations.