On January 16, 2020, the United States Senate voted by an overwhelming majority to pass the implementing legislation for the United States-Mexico-Canada Trade Agreement (USMCA) after months of tense negotiations with Democrats over revisions to the original agreement which had been signed by all three signatories on November 30, 2018.
The USMCA has been touted by its supporters as a comprehensive and modern trade agreement to replace the North Atlantic Free Trade Agreement (NAFTA). But how does the USMCA differ from NAFTA and what is so modern about it? The following is a brief overview of the notable differences between this 21st century agreement and its predecessor:
• Automotive Rules of Origin
For this post it has been possible only to point at a summary level to some of the high points in the automotive rules of origin area. We have been helping clients find their way through the thicket of these new, complex and unprecedented rules of origin for automotive products and could already write a book on the subject. Among the most troubling issues that remain is the actual methodology for doing the necessary calculations, which has not yet been agreed by the U.S., Mexico and Canada. Mexico reports that the governments have been negotiating about rules for these calculations for months and they are not yet resolved. There are reports that Canada will now take up USMCA ratification in February, but one hopes that the calculation methodologies will be fully agreed before the USMCA takes effect, which will be first day of the third month following Canada’s notification of its ratification.
For aluminum, the Protocol states that, 10 years after the USMCA enters into force, the parties “shall consider appropriate requirements that are in the interests of all three Parties for aluminum to be considered as originating under this Article.”
The USMCA requires that 70% of all steel and aluminum used in vehicles must be purchases from North America in order for the vehicle to qualify as originating. As finally implemented, the USMCA incorporates the terms of a Protocol of Amendment signed on December 10, 2019 which provides that, after seven years, for steel used in vehicle production to qualify as originating and count toward the 70% requirement all “manufacturing processes must occur in one or more of the Parties, except for metallurgical processes involving the refinement of steel additives. Such processes include the initial melting and mixing and continues through the coating stage. This requirement does not apply to raw materials used in the steel manufacturing process, including steel scrap; iron ore; pig iron; reduced, processed, or pelletized iron ore; or raw alloys.”
The USMCA will require that automotive products reach 75% North American content (up from 62.5% under NAFTA) and 40% high-wage content (at least $16 an hour) within five years in order to enjoy duty-free treatment. These levels are reached via a series of annual increments starting with 66% and 30% respectively in the first year, but producers can enter into alternative staging regimes with USTR provided they meet 75% and 40% respectively by year five. The legislation provides that within 90 days after enactment USTR will publish regulations establishing the procedure, calculation methodologies, timeframe, RVCs and other minimum requirements for alternative staging. An area of dispute has been a demand by the USTR that, in order to get their alternative staging regimes approved, manufacturers will have to agree to make even their U.S. production for the domestic market meet the USMCA rules of origin.
• Product Blocking
In accordance with the Protocol of December 2019, the USMCA will allow “product blocking” at the U.S. border in a narrowly defined situation. The relevant text is “in cases where a Covered Facility or a Covered Facility owned or controlled by the same person producing the same or related goods or providing the same or related services has received a prior Denial of Rights determination on at least two occasions, remedies may include … the denial of entry of such goods” (i.e., product blocking). Mexico accepted this because before product blocking can occur, the offending facility or another facility owned by the same company must first have been found in violation by labor panels in two different cases.
Some of the most significant differences between NAFTA and the USMCA are found in the labor provisions. The provision that has received the most media coverage is the one requiring Mexico to commit to legislation recognizing the right to collective bargaining. Under the December 2019 Protocol, the USMCA also introduces several enforcement mechanisms including a rapid response system comprised of independent panels to receive and investigate complaints about labor rights violations. Additionally, the U.S. will send up to five attachés to Mexico to monitor the country’s compliance with its obligations under the new agreement. The USMCA also includes new provisions prohibiting the importation of goods produced by forced labor and addressing violence against workers.
• Intellectual Property
Although NAFTA was the first trade treaty to include intellectual property protections back in 1994, since then technological advancements have come at a dizzying speed. The USMCA includes intellectual property provisions that are responsive to the increasingly rapid rate of innovation including protections for patents and trademarks in biotech and domain names—both areas that have advanced exponentially in the past 25 years. The recently passed version of the USMCA includes protections for biologic pharmaceutical products (specialty drugs made with living cells), but as a result of the December 2019 Protocol these protections are less substantial than those in the original November 30, 2018 version of the agreement. The USMCA also requires each signatory to maintain an online database of contact information for each domain name registrant and to implement a domain name dispute mechanism.
• Digital trade
Digital Trade is yet another field that is far ahead of where it was when NAFTA was implemented. The USMCA prohibits its signatories from establishing restrictions on cross-border information transfers by electronic means if the activity is to conduct the business of a “covered person” (defined as certain investments, investors, and service suppliers). The USMCA does, however, allow parties to impose some restrictions on such transfers to serve legitimate public policy objectives. USMCA signatories are further prohibited from requiring the disclosure of source code or algorithms as a condition for the import, distribution, sale, or use of software or products containing that software in their territories. Finally, the USMCA parties are prohibited from imposing liability on suppliers or users of interactive computer services provided on a cross-border basis unless doing so protects intellectual property or criminal law enforcement.
• Financial Services
The USMCA also includes a chapter on Financial Services in which the three parties agree to achieve and maintain a market-determined exchange rate regime, refrain from competitive devaluation, and strengthen underlying economic fundamentals. The chapter further provides that each party must grant financial institutions of another party established within its territory access to payment and clearing systems operated by public entities. NAFTA did not contain provisions comparable to these USMCA provisions. Further the USMCA prohibits any party from adopting or maintaining measures that would limit the number of financial institutions, cross-border financial service suppliers, financial service operations, or the total value of financial service transactions or assets.
The USMCA environmental provisions include commitments on the part of all three signatories to maintain procedures for assessing the environmental impact of proposed projects, preventing damage to the marine environment by ship pollution, and harmonizing air quality monitoring methodologies. The USMCA environment provisions, like the labor provisions, include the use of U.S. attachés to monitor Mexico’s compliance with the agreement’s environmental provisions. Finally, the USMCA includes enhanced customer verification to make sure that only legally harvested goods are being imported from Mexico.
The USMCA has a 16-year sunset clause, but it also provides for the parties to review the agreement after 6 years and decide whether to extend it beyond 16 years.
The USMCA is a revolutionary transformation of the basis on which manufacturing and trade have been conducted in North America for the past quarter century. Its many new concepts and open questions will inevitably spawn years of discussion, disagreement, negotiation and litigation. As always, your Sheppard Mullin Trade team is here to help you navigate this new, treacherous terrain.