United States: NAFTA Is Dead, Long Live NAFTA

Last Updated: October 29 2018
Article by Squire Patton Boggs LLP

On September 30, 2018, the US, Mexico and Canada announced the successful conclusion of talks to replace the North American Free Trade Agreement (NAFTA). The US-Mexico-Canada Agreement (USMCA) contains a number of chapters not included in the original deal, including sections on digital commerce, currency policies and state-owned enterprises (SOEs). Other standard chapters – such as Intellectual Property, Rules of Origin, and Sanitary and Phytosanitary (SPS) Measures – have also been updated to reflect the 21st century economy. Companies operating in North America must now closely examine the deal to determine how it could impact their supply chains.  (For an actual/prospective timeline for Congressional consideration of the USMCA, click here).

What Is New?

The Office of the US Trade Representative (USTR), which led negotiations on behalf of the Trump Administration, has characterized the new agreement as a "plus-ed up" version of the Trans-Pacific Partnership, adding this deal will serve as the "model" for future trade agreements negotiated by the US.

Companies operating in North America must closely examine USMCA to ensure they understand the impact of its changes on trade across the continent, which could range from domestic content requirements to legal recourses available for disputes to customs procedures and much more. These changes include the following:

  • Digital Commerce. USMCA contains provisions on digital trade, an issue not previously discussed in NAFTA. One provision would ban data localization requirements, or laws that regulate the collection, storage and international transmission of data collected within the country. Notably, USMCA does not exempt financial services firms from this prohibition. More in line with American policy, USMCA also contains language that would not hold internet companies liable for content posted from third parties. Another provision would establish that companies wanting to do e-business need not have a physical presence in a jurisdiction to operate there.
  • Rules of Origin. USMCA tightens rules of origin for a variety of "steel intensive goods," including – but not limited to – autos and auto parts. USMCA requires a 75% domestic content for auto inputs manufactured in North America in order for automobiles to qualify for preferential, duty-free treatment. This represents an increase from the current 62.5% requirement in NAFTA. Other, non-automotive steel goods would also be subject to more stringent requirements aimed at incentivizing the use of steel produced in North America.
  • Addressing China's Trade Practices and Policies. USMCA includes a number of provisions seemingly aimed not at North America, but eastward toward China. A first-ever for the US, USMCA addresses currency manipulation and monetary policy in the core text of a trade agreement, including requirements related to transparency in foreign exchange activity that would be subject to the deal's state-to-state dispute settlement mechanism. USMCA also contains a clause relevant to future free trade agreement negotiations with non-market economies, most notably China. USMCA would require the parties to give three month notice to the other parties if they seek to enter into new trade agreement negotiations with a non-market economy. The clause also provides that "Entry by any Party into a free trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice and replace this Agreement with an agreement as between them (bilateral agreement)."  Essentially, this provision would provide the US with a review mechanism should Canada or Mexico decide to seek a trade agreement with China, an act that could change the dynamic of trade among the North American partners.
  • Customs Procedures. The agreement modernizes and streamlines customs procedures among the three countries, which has the potential to save companies time and money as they transport goods across North American supply chains. USMCA also increases de minimis levels, or the value amount below which shipments will be exempted from customs duties or taxes. The US set its de minimis level at US$800, in accordance with existing law. Mexico and Canada agreed to set their de minimis levels at US$117 and C$150, respectively, for customs duties only; their de minimis levels for tax purposes remain low, at US$50 for Mexico and C$150 for Canada.
  • Investor-State Dispute Settlement (ISDS). USMCA would phase out ISDS between the US and Canada. Vis-à-vis the US and Mexico, ISDS protections currently in NAFTA would be preserved for five sectors: (1) oil and gas, (2) power generation services, (3) telecommunication services, (4) transportation services and (5) the management of ownership of infrastructure. The elimination of the provision for Canada and the pared back protections for specific investments in Mexico are likely viewed as a victory by US Trade Representative Robert Lighthizer, who continually expressed his belief that ISDS allows corporations to undercut a country's sovereignty and encourages outsourcing. However, this change could have an impact on US business support for the deal, as some sectors (such as chemicals and mining) are unhappy they were not included among the five sectors.
  • Oil and Gas Industry. USMCA (like NAFTA) will continue to prohibit tariffs on raw and refined oil and gas products. USMCA would also seek to harmonize customs procedures. This includes allowing for alternative documentation that certifies natural gas and oil have originated in Canada or Mexico upon entering the US. The agreement no longer includes the so-called "proportionality clause," which placed certain limitations on the ability of the three parties to constrain the export of energy products.
  • Pharmaceutical Industry. Canada agreed to a 10-year protection period for biologic drugs. The 10-year period goes beyond the maximum eight years that Canada agreed to in the Trans-Pacific Partnership, but is below the 12-year exclusivity period currently found in US law.
  • Future Review. Instead of the so-called "sunset" provision reportedly pursued by US negotiators originally, USMCA includes a six-year review mechanism and provides for a 16-year extension of the deal if no parties object.

What Is Next?

US President Donald Trump, Canadian Prime Minister Justin Trudeau and outgoing Mexican President Enrique Peña Nieto are expected to formally sign the agreement on November 30, at which point it must be approved under each party's domestic procedures. In the US, Congress will ultimately decide USMCA's fate. Trade agreements are not treaties under US law and, therefore, are not "self-executing." Instead, trade agreements must be approved by both chambers of Congress and signed into law by the President through implementing legislation under a process known as Trade Promotion Authority (TPA). The attached flowchart sets out timeline for congressional consideration of USMCA under TPA.

Trump Administration officials say they do not plan to transmit USMCA's implementing legislation to Congress until early next year, putting USMCA's fate in the hands of the new Congress (the 116th session). If Republicans maintain control of both chambers, they will likely advance USMCA on the President's schedule. However, USMCA could face some uncertainty if Democrats win a majority in either the House or the Senate and wish to further scrutinize the deal as negotiated by Trump officials. While some Democratic lawmakers have expressed concerns with aspects of the deal, Trump Administration officials point to USMCA's strengthened labor and rules of origin provisions as appealing to the left. Regardless, President Trump could initiate withdrawal from the original NAFTA deal in an effort to hasten congressional approval of the replacement deal.

How We Can Help

We can assist companies in examining their supply chains for potential USMCA impacts, particularly if higher domestic content requirements involve affected inputs imported from abroad. Our lawyers and policy experts can also provide advice as USMCA moves through the domestic review process. US domestic companies will have opportunities to comment directly on chapters that benefit or disadvantage their operations to Trump officials or through their members of Congress, who must ultimately implement USMCA into US law. We are well-positioned to provide strategic advice and practical assistance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions