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The North American Free Trade Agreement (NAFTA) may have been replaced effective July 1, 2020 by the United States-Mexico-Canada Agreement (USMCA), but the rules of NAFTA remain alive and well in the halls of the enforcement agencies on both sides of the border.

Continue Reading Gone but Not Forgotten: The Continuing Importance of NAFTA Compliance

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.

  Labor
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.

  Environment
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.

  Sunset
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.

 

A tripartite agreement to save the North American Free Trade Agreement (NAFTA) has just been reached. Since June 2017, the United States, Canada, and Mexico have been renegotiating NAFTA. After over a year of negotiations, late on Sunday night, September 30, 2018, Canada agreed to sign the revised agreement. That agreement is called the United States-Mexico-Canada Agreement, or USMCA. Continue Reading The New NAFTA: the United States-Mexico-Canada Agreement (USMCA)

Boy, does it sound convincing when Mr. Trump states he will submit notice under section 2205 of NAFTA to let Mexico and Canada know that the U.S. will withdraw from NAFTA. The problem is, while the president-to-be is capable, we presume, of writing, signing, and sending (or possibly tweeting) such a notification, that notification would not have a legal significance because withdrawing from NAFTA, ab initio, is not a power accorded the President.

Continue Reading The Undoing Project – Why NAFTA Can’t be Undone, but Can be Re-Done

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A serious step up in civil and criminal enforcement of customs laws, including tariff evasion, is imminent. In a May 12 memorandum, the Department of Justice’s new Chief of the Criminal Division, Matthew Galeotti, counted as one of the “most urgent” threats to the country “[t]rade and customs fraud, including tariff evasion.” Earlier in the Administration, in a February 2025 speech, Michael Granston, Deputy Assistant Attorney General for the DOJ’s Commercial Litigation Branch identified, as a key example of new enforcement activity, efforts to enforce payment of customs duties on imported goods and reiterated that enforcement against “illegal foreign trade practices” would be a priority for the Administration. 

Continue Reading Department of Justice Tariff Enforcement Likely to Surge After Tariff Increases and the Administration’s Increased Focus on Protecting Domestic Business
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The second Trump administration has come flying out of the starting blocks on international trade policy actions—imposing and rescinding, shaping and reshaping tariffs, sanctions, and export controls. The executive orders and directives have come so thick and fast that it is not always simple for businesses to chart a consistent policy direction and develop their plans to account for what might be coming next.

Continue Reading A Roadmap for Export Controls? Project 2025 and the Future of U.S. Exports – Part III
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Author and futurist Peter Zeihan recently asserted that President Joe Biden has presided over “the most protectionist administration the United States has had in at least a century.” And Donald Trump reportedly plans to double down on protectionism if elected in November 2024. By the way, Zeihan is also the guy who predicts that The End of the World is Just the Beginning. His theory is that the global economic and political order the United States built and maintained since WWII is collapsing.

Continue Reading The End of the World Order and the Rise of Trade Regulation
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The North American and global automotive sector is watching closely to see how the United States ultimately responds to the decision of December 14, 2022, made public on January 10, 2023, which upheld Canada’s and Mexico’s position on an important issue for calculation of a vehicle’s regional value content (RVC) under the USMCA. In dispute was whether a Core Part or Super Core Part that qualifies as originating under Articles 3.7 to 3.9 of the USMCA Auto Appendix can then have 100% of its value count as originating content when calculating the RVC of the fully assembled vehicle. The United States had argued that there was a separate “origination requirement” for Core Parts and Super Core Parts which, once satisfied, had no input into the vehicle RVC calculation. Instead, the United States argued, the vehicle RVC calculation would need to proceed from scratch, without the “roll-up” represented by the 100% value of originating Core Parts and Super Core Parts entering the vehicle RVC calculation. One consequence of the U.S. approach would have been on producers’ use of Chapter 4, Article 4.8, which limits them to just one layer of intermediate material roll-up on self-produced intermediate materials.

Continue Reading A Closer Look at the Recent USMCA Automobile Disputes Panel Decision

In recent weeks we saw Canada, Mexico and the United States present their respective positions and legal arguments, often in sharply worded exchanges, about how the Auto Core Parts rules of origin under the U.S.-Mexico-Canada Agreement (USMCA) should be interpreted. It is a high-stakes issue because assembly operations for vehicles and their “Core Parts” (engine, transmission, etc.) inevitably involve lengthy bills of materials with components from many countries, and what is being disputed is whether Core Parts once found to meet the USMCA requirements to be “originating” can then have their value counted as originating value (i.e., “rolled up”) in the calculation of the regional value content (RVC) of the vehicle as a whole. 

Continue Reading Does the USMCA Mean What It Says? The Disputes Panel Hearing on the Auto Core Parts Rules of Origin

If your company is like many, your board of directors may be demanding that you put more effort into environmental, social, and governance issues, which have become known by the now-ubiquitous acronym “ESG.” Those demands don’t come from nowhere: consumers are demanding transparency and social responsibility. In particular, if your company does business internationally, regulators are focused on international social justice issues (such as the use of forced labor) more than ever.

Continue Reading Does Your Trade Policy Support Your Company’s Values?