1 Oct 2018

The New Modernized NAFTA – The United States-Mexico-Canada Agreement (USMCA)

The “NAFTA” will soon be the “USMCA”.  The preliminary text of the new 34 chapter trilateral trade agreement has been posted on the website of the United States Trade Representative (USTR):

USMCA Text

Greater Market Access for US Dairy Products

The USMCA provides greater market access to a range of U.S. dairy products in Canada through tariff rate quotas (TRQs). TRQs permit limited quantities of certain products to be imported on a duty-free basis, while prohibitively high rates of customs duties are imposed on any over-quota shipments. Some of the dairy TRQs are substantial. For example, an annual quota of up to 50,000 metric tonnes (MT) will be phased in over six years for imports of U.S. milk. While up to 85 percent of this TRQ will be used to import milk in bulk quantities for the food processing industry, at least 15 percent will be used for “any milk” — including milk for retail sale. The level of market access provided to the United States under this TRQ is equivalent to that provided to all of the CPTPP countries. Canada also provides new TRQs for imports of cream, butter, cheese (industrial and retail), different kinds of dairy powders, yogurt, ice cream and a number of other dairy products from the United States. These commitments add to the overall market access recently granted to imported dairy products under the CPTPP and the CETA.

Autos

The regional value-content in the rules of origin for automobiles will be increased. For example, in the case passenger vehicles, light trucks and parts thereof, the value-content using the net cost method will increase to 66 percent (2020), 69 percent (2021), 72 percent (2022) and 75 percent (2023).

A labor value content requirement is also imposed that, among other things, imposes thresholds for high-wage material and manufacturing, technology and assembly expenditures based, among other things, on a US$16/hour wage rate benchmark.

North American steel and aluminum purchase requirements also apply (see below).

The agreement includes 12 side letters, two of which address automotive trade issues with the United States. If the United States imposes a measure on passenger vehicles under Section 232 of the Trade Expansion Act of 1962, the United States is required to exclude from the measure 2.6 million passenger vehicles imported from each of Canada and Mexico on an annual basis and all light trucks imported from the two countries.  Canada will also receive a US $32.4 billion annual exclusion for auto parts and Mexico a $108 billion annual exclusion.

Steel and Aluminum

In addition to the rules of origin and value-content requirements for motor vehicles, the producers of the vehicles must purchase at least 70 percent of their steel and aluminum in North America in order for the vehicles they produce to be originating and benefit from the preferential duties.

The US steel and aluminum duties imposed under Section 232 of the Trade Act of 1974 are left untouched, a notable omission from the agreement. Side letters recognize the rights of Canada and Mexico to challenge the duties under the WTO and impose countermeasures of equivalent commercial effect.

Procurement

Chapter 13 of the agreement, which addresses government procurement, applies only as between Mexico and the United States. This is a significant change for Canada. Under NAFTA, the United States, Canada and Mexico all granted national treatment and non-discrimination to goods and services for a range of covered procurements. Canada and the United States are both parties to the World Trade Organization Agreement on Government Procurement (GPA) – which will continue to ensure access to certain procurement at the central government level. Mexico, however, is not a party to the GPA. When the Comprehensive and Progressive Trans-Pacific Partnership enters into force, it will secure mutually open government procurement markets for Mexico and Canada going forward.

Investor-State Dispute Settlement (ISDS)

The ISDS procedures under Chapter 11 of the NAFTA are being phased out under Chapter 14 of the USMCA. Once the NAFTA expires, investors will have three years to bring a claim under the NAFTA rules with respect to a “legacy investment” (i.e., an investment established while the NAFTA was in force and in existence on the date when the USMCA enters into force). After this three-year period expires, there will no longer be an international ISDS procedure for US investors in Canada or Canadian investors in the United States. Recourse will continue to be available to such investors under the domestic laws and before the domestic courts of the country in which their investment is located. Meanwhile, Mexican investors in Canada and Canadian investors in Mexico will have recourse to the ISDS provisions under the CPTPP.

As between the United States and Mexico only, the USMCA will provide for ISDS procedures covering certain investments relating to government contracts in “covered sectors”, including oil and natural gas, power generation services, public transportation services, and the ownership and maintenance of public infrastructure.

Macroeconomic Policies and Exchange Rate Matters

The agreement has a chapter on macroeconomic policies and exchange rate matters. The principal obligations relate to transparency and reporting of monthly foreign-exchange reserves data and forward positions, monthly interventions in spot and forward foreign exchange markets, quarterly balance of payments portfolio capital flow, and quarterly exports and imports. The dispute settlement mechanism can be invoked where a Party fails to carry out one or more of these obligations in a recurring or persistent manner and has not remediated that failure during consultations under Article 33.7. Failures to comply with these obligations could result in the complaining Party having the right to suspend benefits (i.e., retaliate).

China

The text of the USMCA includes a provision that allows the United States and Mexico to terminate the agreement after giving six months notice, replacing it with a bilateral agreement that excludes Canada, in the event that Canada enters into a free trade agreement with China. While Article 32.10 does not expressly identify China by name, it refers to a “non-market country”, which it defines as “a country that on the date of signature of this agreement at least one Party has determined to be a non-market economy for purposes of its trade remedy laws and is a country with which no Party has a free trade agreement”. The article requires a USMCA party to give notice to the other parties at least three months before the commencement of negotiations with a “non-market country”, provide as much information as possible about the objectives of the negotiation, and “provide the other Parties with an opportunity to review the full text of the agreement, including any annexes and side instruments, in order for the Parties to be able to review the agreement and assess its potential impact on this Agreement”. This article will have implications for Canada’s future trade negotiations with China.

Withdrawal and “Review” Provisions

During the negotiations the United States sought a five-year expiry provision that would terminate the agreement unless each of the Parties confirmed their wish to renew for a further five-year term. The “review and term extension” provisions in Article 34.7  specify a 16-year term for the agreement that may be renewed every six years through a “joint review” process. If the Parties confirm at the six-year mark their mutual wish to continue the agreement, this will reset the 16-year countdown. If one or more of the Parties do not confirm their wish to continue, then the clock will continue to count down to the 16-year expiry date. When this happens, however, the Parties will conduct a “joint review” process every year, and may agree to renew the 16-year term at any point before the expiry date.  This provides a “check and balance” that allows the Parties to address concerns about the agreement.

Tereposky & DeRose LLP regularly provides advice on the interpretation and application of international trade agreements.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Vincent DeRose
613.237.8862
vderose@tradeisds.com

Jennifer Radford
613.237.9777
jradford@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com