On September 30, 2018, the United States, Canada, and Mexico reached a new trilateral trade agreement designed to replace the existing North American Free Trade Agreement (NAFTA) that has governed North American trade since 1994.
The new “United States-Mexico-Canada Agreement” (USMCA) is based largely on the bilateral agreement in principle reached by the United States and Mexico in August, though it differs from that agreement in certain respects and includes new outcomes on specific bilateral issues between the United States and Canada (for a summary of the US-Mexico agreement, please refer to the White & Case US Trade Alert dated August 29, 2018). The three parties also have signed side letters to the USMCA concerning potential US restrictions on automotive imports, pursuant to Section 232 of the Trade Expansion Act of 1962, and potential future Section 232 proceedings.
The parties have published the draft legal text of the USMCA and are expected to sign the agreement in the coming months. We provide below an overview of USMCA and the likely next steps for the new agreement.
Overview of the USMCA
The USMCA is drafted as a new stand-alone agreement, rather than amendments to NAFTA. It includes transition provisions dealing with NAFTA, some modifications to those provisions taken from NAFTA, and a dozen new chapters. Whereas NAFTA included 22 chapters, the new agreement has 34 (see the Annex for a comparison of the chapter lists). The new chapters include those on labor, the environment, digital trade, and macroeconomic policy. The USMCA also includes annexes covering alcohol and proprietary food formulas as well as bilateral side letters on distinctive products, auto safety standards, biologics, cheese names, wine, water, research and development expenditures, and Section 232.
As noted above, the USMCA broadly resembles the preliminary agreement in principle reached by the United States and Mexico in August. Like the preliminary agreement, the USMCA includes more stringent rules of origin for the automotive sector, a scaled-back investor-state dispute settlement mechanism, and a “sunset” review clause with a sixteen-year term. It also includes non-controversial “modernization” changes covering, among other things, digital trade, state-owned enterprises, sanitary and phytosanitary (SPS) measures, transparency, good regulatory practices, technical barriers to trade (TBTs), financial services, and intellectual property. These chapters largely work from those completed by the Obama administration as part of the Trans-Pacific Partnership (TPP), but do contain some significant differences.
Some provisions of the USMCA differ from the preliminary US-Mexico agreement. For example, under the preliminary agreement, Mexico had agreed to raise its de minimis shipment value for purposes of customs duties and taxes to $100 USD, up from $50 USD. Under the USMCA, Mexico’s de minimis levels will remain at $50 USD for purposes of taxes and will increase to the equivalent level of $117 USD for purposes of customs duties.
The USMCA also incorporates a series of new bilateral outcomes negotiated by the United States and Canada, including the following:
Chapter 19. Chapter 19 of NAFTA, which provides for binational panel reviews of anti-dumping and countervailing duty determinations made by the governments of the NAFTA parties, will continue to apply to binational panel reviews related to final determinations published by a Party before the entry into force of the USMCA. Chapter 19 will not apply to determinations published thereafter. However, a similar binational panel review system set forth in Chapter 10, Section D of the USMCA will apply between the United States and Canada with respect to final determinations made by those governments after the USMCA enters into force.
Dairy compromise. A key sticking point in US-Canada negotiations has been market access for US dairy products. Annex 3-B to US-Canada agricultural trade grants access to US dairy farmers to approximately 3.59% of current market share, higher than the 3.25% negotiated under TPP, according to Canadian officials. The agreement also eliminates Canada’s Class 7 milk category—including milk powder and milk protein—which established a pricing scheme that would-be US exporters argued rendered their products uncompetitive.
In exchange for these market access concessions, the United States has agreed to provide new access to Canadian farmers for dairy products, peanuts, processed peanut products, and “a limited amount of sugar and sugar containing products.”
Cultural exemption. NAFTA’s “cultural industries” exemption, cited as a priority by Prime Minister Justin Trudeau, remains intact. USMCA Article 32.6 states that the agreement does not apply to Canadian measures governing such industries, including the production and distribution of written materials, film, music, and radio communications. However, the USMCA allows parties to “take a measure of equivalent commercial effect in response to an action by another Party” under the exemption.
Section 232 side letters and current tariffs
The agreement includes four bilateral side letters on the United States’ use of “national security” trade restrictions under Section 232. The first pair stipulate that Canada and Mexico will receive certain exemptions from potential US restrictions on automotive imports under Section 232. A Section 232 investigation of these goods is now underway. Specifically, should the US impose measures restricting imports of automobiles or automotive parts from Canada and/or Mexico, the United States agrees to exclude:
2,600,000 passenger vehicles per year from each country;
Light trucks imported from each country; and
Such quantity of auto parts amounting to $32.4 billion and $108 billion from Canada and Mexico, respectively.
While the US and Mexico had previously agreed under the Preliminary Agreement in Principle to continue discussions regarding the United States’ ongoing investigation of automotive imports pursuant to Section 232, the USMCA side letters represent the first official confirmation of granted exclusions.
The agreement also includes a pair of side letters stipulating that, should the United States impose any new tariffs or import restrictions on goods or services from Canada or Mexico under Section 232, there must be a 60-day period before enforcement during which the parties “shall seek to negotiate an appropriate outcome based on industry dynamics and historical trading patterns.” Additionally, should the United States take action under Section 232 inconsistent with NAFTA, USMCA, or the World Trade Organization (WTO) Agreement, Canada and Mexico may retaliate, and retain WTO rights to challenge such measures.
Notably, the USMCA is silent regarding the United States’ existing Section 232 tariffs on aluminum and steel. United States Trade Representative Robert Lighthizer has indicated in recent weeks that the United States would be willing to discuss possible exemptions for Canada and Mexico after the renegotiation of NAFTA is concluded. There has been some speculation that the US tariffs and Canadian/Mexican retaliation would be lifted upon the USMCA’s signing, but officials have not provided concrete signals in this regard.
The parties are expected to sign the USMCA on November 29, 2018 (the earliest date on which the US President can sign the agreement pursuant to the timelines set forth in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA 2015)). However, the USMCA will not enter into force until all three parties have completed their domestic ratification procedures. It could therefore be months or even years before the new agreement enters into force. The timing and outcome of the ratification process is far from certain, particularly given that the US Congress will need to approve legislation to implement the agreement before it can enter into force.
As discussed above, the legal text of the USMCA does not amend the existing NAFTA text, but rather constitutes a new, stand-alone trade agreement that is designed to replace NAFTA. As a result, US implementation of the USMCA will more clearly be governed by the requirements of TPA 2015. (Some observers had previously questioned to what extent amendments to an existing free trade agreement would be subject to TPA requirements.) However, the stand-alone nature of the USMCA sets the stage for a potential conflict between the Trump administration and Congress, wherein the Trump administration tries to withdraw the United States from NAFTA before the USMCA is in force and without Congressional approval, in order to pressure Congress to pass the USMCA implementing legislation. Indeed, it has been rumored that the Trump administration when signing the USMCA might also notify Canada and Mexico of the United States’ intent to withdraw from the original NAFTA pursuant to Article 2205 of that agreement (which provides that a party may withdraw from NAFTA six months after notifying the other parties). In theory, this strategy would force Congress to choose between ratifying the USMCA within six months or allowing US participation in NAFTA to terminate with no agreement in force to replace it. This strategy would face strong resistance from Congress, especially if Democrats win control of one or both chambers in the November midterm elections, and potential legal challenges from Congress or the US business community.
In Canada, any needed implementing regulations must be debated and adopted by the House of Commons and Senate through the normal parliamentary legislative process before the government can proceed to ratification. Once the implementing legislation is adopted, the government can proceed with its decision to ratify the agreement, a process which will require the issuance of an Order in Council by the Cabinet authorizing the signature of an Instrument of Ratification.
In Mexico, once the USMCA has been signed by the parties, the Executive will send the text of the agreement to the Mexican Senate for ratification. The first stage in the Senate ratification process will be a review of the text by the Senate Foreign Relations Commission. During this process, the Commission will review the agreement and identify any provisions that may contradict Mexican law or the Mexican Constitution. Once the Commission has approved the text, it will be sent to the full Senate for approval.
The title of Section D (“Review and Dispute Settlement in Antidumping and Countervailing Duty Matters Between the United States and Canada”) indicates that the binational panel review system set forth in that Section will apply only between the United States and Canada. However, some provisions in that Section (e.g., certain definitions set forth in Section D, Article 11) refer to Mexico. It is not clear whether these references to Mexico were intentional, or if they are drafting errors. This may be clarified following a legal review of the USMCA text.
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