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

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?

One point all can likely agree on in these divisive times is that the Trump Administration’s international trade policy has been aggressive. Over the past four years, we have been clinging to our seats on the rollercoaster ride with some pretty challenging peaks and valleys:

  • Section 301 tariffs on over $370 billion worth of imports from China, under which over $68 billion in total duties have been assessed;[1]
  • Replacement of NAFTA with the United States-Mexico-Canada Agreement (USMCA);
  • Withdrawal from the Trans Pacific Partnership (TPP); and
  • Imposition of Section 232 steel and aluminum tariffs, under which over $9 billion in total duties have been assessed.[2]

Continue Reading Four Ways the Biden Presidency Could Impact Imports, Tariffs, and Trade Agreements

This article originally appeared in Risk & Compliance magazine in the UK, a publication of Financier Worldwide. The piece includes UK spelling and grammar.

Key Takeaways:

A wave is coming. An enormous wave of regulation will soon crash on Silicon Valley, Boston and other tech centres around the United States, and very few people have their surfboards ready.

Major technologies in exciting emerging fields (among them, biomedicines, virtual reality, and robotics) will soon be subject to strict export controls that will limit who can receive the technologies, who can use them, and even who can research them.

Forthcoming export controls will disrupt logistics planning, information sharing, R&D, and acquisition strategies for companies in the United States and all around the world. Continue Reading INTERNATIONAL TECH INVESTMENT ISSUE – A Wave of Export Regulation to Hit US Technologies

Key Takeaways:

  • Emerging technology sectors will soon be subject to new export controls.
  • Affected sectors include biotech, computing, artificial intelligence, positioning and navigation, data analytics, additive manufacturing, robotics, brain-machine interface, advanced materials, and surveillance.
  • New export controls on these sectors will likely require companies to obtain a license to export products to China and other destinations, and impose restrictions on sharing information with foreign nationals.
  • These sectors will also be added the list of industries subject to enhanced foreign investment scrutiny by the U.S. Committee on Foreign Investment in the United States (CFIUS).
  • The U.S. government has invited comments on the criteria to be used to establish new controls. The deadline for comments is December 19, 2018.

Export controls and other regulations often lag a step or two behind the times. That trend has accelerated with the pace of technological advancement. As a result, for many years, technical know-how in many cutting-edge technical fields has not been subject to export controls. This has meant that many commercial technical innovations could be freely exported without significant restrictions. As long as they were not designed for a military application, and no encryption technology involved, many new ideas developed in the United States were simply unaccounted for in the U.S. Export Administration Regulations (EAR).

But the U.S. Department of Commerce, Bureau of Industry and Security (BIS) is about to make up a lot of ground in a single, large leap. Continue Reading The Little Regulation That Will Make a Big Change in How You Do Business: Department of Commerce to Establish New Export Controls on Emerging Technologies

We’ll give him this: President Trump has an ambitious trade agenda. This fire has many irons in it, and some of them are getting hot. Here at the Global Trade Law Blog, we’ve been following trade law for approximately 250 years and we’ve never seen anything like it in breadth or scale. The administration asks us to trust that there is a disruptive and innovative grand strategy behind it, but to some of us it looks (particularly in comparison to a mostly orderly international trading system in place since 1945) like madness. The question of whether “yet there is method in’t” may only be answered by future historians. For the time being, herewith is our snapshot of the Trump trade agenda, late June 2018 edition. Continue Reading 5 Weird Things About the Trump Trade Agenda: Disruptive Innovation On a Global Scale

If your company is a U.S. consumer of imported steel or aluminum, the new tariffs announced by President Trump on March 8, 2018 are bad news. The good news is that you can petition the government for exclusions of certain products. Formal procedures for such petitions won’t be published until March 19. But there are steps you can take now to prepare. Continue Reading 5 Steps to Obtaining an Exemption under President Trump’s Steel and Aluminum Tariffs