When NAFTA entered into force back in 1994, it was the most comprehensive free trade agreement ever negotiated, containing several ground-breaking provisions on investment, intellectual property, and dispute resolution. Over the years, however, revolutionary advances in technology, telecommunications and e-commerce have combined to provide a strong rationale for modernizing and improving NAFTA to better reflect the way businesses now engage in international trade.
With this in mind, when the United States–Mexico–Canada Agreement was signed by leaders of all three countries on November 30, 2018, it was jointly announced that after more than a year of intense negotiations “a new, modernized trade agreement for the 21st Century” had been reached that will be “a mutually beneficial win for North American workers, farmers, ranchers, and businesses” and “result in freer markets, fairer trade and robust economic growth in our region.”
Meeting in Washington this summer to stress the importance of swiftly ratifying and implementing the USMCA, business leaders from all three countries vowed the renegotiated trade pact “will make the North American economy even more vibrant and competitive, drive investment and support the creation of high-value jobs.” Above all, they said, the USMCA “provides certainty for our region’s economic success.”
The following is a summary of a few of the new provisions of the USMCA:
Canada has agreed to increase its current de minimus threshold of $20—which has remained unchanged since 1985—for express courier shipments to C$150 for duties and C$40 for taxes. It should be noted, however, that this exemption applies to shipments coming from almost anywhere in the world, not just the U.S. or Mexico.
Canadian retailers have complained that the new de minimis thresholds provide an unfair advantage to foreign retailers, as they only apply to consumer purchases and not those made by retailers. Moreover, while the U.S. agreed to a US$100 threshold in the USMCA, seeing as there are no plans to repeal the current level of $800 already established by domestic law, the much higher figure will continue to apply to purchases from Mexico, Canada, as well as the rest of the world.
Both Chapter 19, the binational dispute settlement process used to address disagreements over the imposition of antidumping or countervailing duties, and Chapter 20, involving the state-to-state dispute settlement mechanism, remain unchanged in the USMCA (aside from moving to Chapter 10 and 31, respectively).
However, the controversial NAFTA Chapter 11 investor-state dispute resolution process that provides investors with recourse to an impartial tribunal to challenge government rulings affecting their investments will be phased out for claims against Canada or by Canadians in three years from the USMCA entering into force. Afterwards, Canadian or U.S. investors wanting to dispute rulings in either country will have recourse only at the government-to-government level or in each country’s civil courts.
Rules of Origin: Automotive Sector
To qualify for duty-free treatment under the USMCA, 75% percent of a vehicle must originate in North America; a significant increase from the 62.5% under NAFTA. The higher regional value content threshold for most passenger vehicles and light trucks is to be phased in over three years, beginning on January 1, 2020 at 66% (using net cost method) and increasing by 3% per year until it reaches 75% in 2023. Automotive parts will also be subject to regional value content requirements of between 65% and 75%.
Additionally, auto producers must be able to certify that at least 70% of their steel and aluminum purchases must originate in North America for their goods to qualify for duty-free treatment under the USMCA. Auto producers must also comply with a new “Labour Value Content” provision for their vehicles to qualify for USMCA treatment. The LVC requires that workers earning at least US$16 per hour must carry out 40 to 45% of an auto producer’s activities (i.e., manufacturing, technology, assembly).
Section 232 Tariffs
The issue of punitive tariffs authorized under Section 232 of the Trade Expansion Act of 1962 on the grounds of national security, such as those previously imposed by the Trump administration on steel and aluminum imports from Canada and Mexico, was not addressed in the USMCA.
However, in side letters to the agreement, the U.S. agreed to first seek a negotiated solution with Canada and Mexico for 60 days before applying any new Section 232 tariffs and made a concession to the auto sector with an assurance indicating that notwithstanding any such actions being taken in future, Canada will still have guaranteed duty-free access to the U.S. market for up to 2.6 million vehicles and more than $32 billion in auto parts (figures greatly surpassing current export levels).
Canada had largely exempted its supply-managed dairy industry from its general free trade obligations under NAFTA, but in the USMCA the Canadian government has agreed to provide new tariff rate quotas that will provide increased duty-free access for U.S. milk, cream, cheese, and a host of other dairy products equivalent to approximately 3.6% of Canada’s annual market.
Additionally, Canada has agreed to eliminate Classes 6 and 7 protein substances from the milk pricing structure under Canada's dairy supply management system, and to limit exports of Canadian milk protein concentrates, skim milk powder and infant formula.
These measures will finally end a heated dispute over so-called ultrafiltered milk that had prompted complaints from the White House of Canadian producers being “very unfair” to their U.S. counterparts. Under the USMCA, Canada will ensure that the price for skim milk solids used to produce nonfat dry milk, milk protein concentrates, and infant formula will be set no lower than a level based on the U.S. price for nonfat dry milk.
Other Agricultural Provisions
Canada has agreed to treat wheat imports the same as domestic wheat for grading and pricing, and Mexico and the U.S. agreed that all grading standards for agricultural products will be non-discriminatory.
USMCA is the first free trade agreement for the United States that addresses cooperation, information sharing and other trade rules related to biotechnology and gene editing. The agreement also includes provisions that aim to enhance science-based trading standards among the three countries as the basis for sanitary and phytosanitary measures for farm products.
Textiles & Apparel
USMCA eases the requirements to qualify for duty-free treatment for certain textile and apparel products, but tightens the requirements for other products. For example, the new agreement eliminates the NAFTA demand that visible linings must be sourced from member countries; however, USMCA adds more restrictive new requirements for narrow elastic fabrics, sewing thread, and pocket bag fabric.
Adjustments were also made to the Tariff Preference Levels, such as more than doubling the amount of U.S. cotton and man-made fiber apparel exports to Canada. Additionally, the USCMA establishes a new chapter dedicated to North American trade in textiles and apparel, including textile-specific verification and customs cooperation provisions that provide new tools for strengthening customs enforcement and preventing circumvention and fraud.
The USMCA aims to set a new global standard for e-commerce with a chapter setting out rules governing Digital Trade. Among the agreement’s provisions in this regard is a prohibition on customs duties and other discriminatory measures from being applied to digital products distributed electronically (e-books, videos, music, software, games, etc.).
The USMCA also bans restrictions on data transfers across borders and includes controversial new rules prohibiting so-called data localization policies, which for reasons of consumer privacy can require companies to store personal information within the local jurisdiction.
The intellectual property provisions in the USMCA are considerably more robust than those of NAFTA and largely mirror the Comprehensive and Progressive Trans-Pacific Partnership free trade deal that Canada signed in 2018.
The USMCA extends the duration of copyright in Canada by 20 years to life of the author plus 70 years, and 75 years for sound recordings. USMCA also extends the patent for biologic medicines such as vaccines to 10 years, an increase from the existing standard in Canada of 8 years and Mexico of 5 years.
A new provision in the USMCA also obligates the parties to offer multi-year extensions on patent terms when reviews by their regulatory or patent office take longer than terms deemed “reasonable” for the purpose of compensating the applicants for such delays.
In terms of the enforcement of IP rights relating to copyrights, trademarks and patents, the USMCA will enable customs and other law enforcement officers to stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any member country.
Non-Market Country FTA
The USMCA includes an unusual new provision related to free trade agreements with “non-market” economies such as China. Under this clause the negotiating country must provide the other two nations with the opportunity to review the full text of the agreement 30 days prior to be signed. Entry into such a free-trade agreement allows one or both of the other countries to then terminate the USMCA on 6-months’ notice and replace it with a bilateral agreement, at its discretion.
Another novel addition to the USMCA is a “sunset clause,” which provides for an automatic termination after a fixed period unless the agreement is explicitly extended by the parties. Although the U.S. was initially seeking a five-year sunset clause, the USMCA extends the period to a 16-year term, with a review required within the first six years of the agreement that could lead to a renewal for another 16-year term.
Need More Information?
Should you have any questions about any of the changes briefly touched on here or want to discuss any of the other new provisions in the USMCA and how they might affect your company once the new trade pact comes into force, don’t hesitate to contact us – our trade experts are here to help.