Late on September 30, 2018, the United States and Canada reached a new trade agreement (the USMCA) that addresses many of the contentious issues that delayed Canada from rejoining the countries’ trilateral trade agreement (NAFTA).
In a joint statement, Canadian Foreign Affairs Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer said that the new agreement “will give our workers, farmers, ranchers, and business a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region. It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”
Key provisions of the USMCA include:
The U.S. was pushing for increased access to the Canadian dairy market. In an effort to sign the new agreement, Canada has agreed to open a larger portion of its dairy market to U.S. dairy farmers and eliminated its Class 6 and Class 7 quota and pricing system. This will allow more U.S. dairy products, such as milk protein concentrate, skim milk formula, and infant formula to be imported into Canada. The U.S. will be able to export dairy products roughly the equivalent of 3.6% of Canada’s dairy market.
Relatedly, Mexico has also agreed to allow the duty-free importation of certain types of U.S. cheeses.
Canada has granted more access to its chicken, turkey, and egg markets. The province of British Columbia has also agreed to sell U.S. wines at its state-owned liquor stores.
The U.S. issued a letter to Minister Freeland, promising that it would exclude certain auto parts and vehicles from potential Section 232 tariffs currently being contemplated by the U.S. government. In particular, the USMCA will exempt from such measures:
- 2,600,000 passenger vehicles imported from Canada on an annual basis;
- Light trucks imported from Canada; and
- Quantities of auto parts amounting to $32.4 billion U.S. dollars in declared customs value in any calendar year
Mexico agreed to a similar arrangement; however, Mexican companies can export up to $108 billion worth of auto parts to the U.S. without the imposition of any Section 232 tariffs.
As a general rule, for vehicles to qualify for duty-free treatment under the USMCA, they must be comprised of 75% of automobile parts from the U.S., Canada, and Mexico. The new agreement also requires that 40%-45% of automobile parts be made by workers earning at a minimum, U.S. $16 an hour. This provision is an incentive for automotive manufacturers to produce more goods in the United States, given its higher labor costs than those in Mexico.
Rules of Origin
With the exception of the regional increase from 62.6% to 75% for automobiles, the rules of origin from the USMCA maintain the same rules of origin as in NAFTA.
Aluminum and Steel
Currently, President Trump’s 25% tariff on Canadian steel and 10% tariffs on Canadian aluminum remain in place and have yet to be modified. But in concessions, the USMCA requires a 60-day comment period for consultations with Canada and Mexico before any new Section 232 tariffs are imposed.
Increase in De Minimis Levels
Both Canada and Mexico have agreed to increase their de minimis levels. For U.S. goods, Canada agreed to raise the threshold for applying duties to cross border purchases to $150 Canadian dollars ($117 U.S. dollars). Mexico will also increase its de minimis level for duty-free shipments to $117 U.S. dollars.
Commitment Not to Change Currency Levels
Under the USMCA, there was a mutual agreement to “achieve and maintain a market-determined exchange rate regime.” Though this does not have an immediate impact on the three members of NAFTA, there are potential future implications to outside nations.
Increased Protections for Intellectual Property
This new deal will extend the copyright period after the creator has passed away from 50 to 70 years. The period of exclusivity for biologic drugs (i.e. before generics can be produced) is set at 10 years. In addition, the agreement limits the three governments’ ability to enact data localization policies.
Review of Sunset Clause
The USMCA requires a review of the deal every six years, with a 16-year expiration date. Every six years during the review time, the agreement is eligible to be extended. In comparison to the NAFTA sunset provision, this clause is less strict in that it does not require each party to recertify the deal to keep it in effect.
The dispute settlement mechanisms of NAFTA, with respect to allegations of unfair trading practices, have not changed in the new agreement (USMCA). Under this system, each signatory country allows member countries to review antidumping and countervailing duty grievances against other members before appointed expert arbitration panels. However, the previous investor-state dispute settlement system, which allows investor companies to bring claims against member-country governments, will be phased out between the U.S. and Canada, while certain industries (such as energy, infrastructure, and telecommunications) will still be able to bring such cases against Mexico.
We will continue to monitor this situation. For more information please contact Robert Stang, Jeffrey Neeley, Beau Jackson, or Nithya Nagarajan.