We Have a Deal! USTR Publishes Text for US-Mexico-Canada Agreement Slated to Replace NAFTA

For the past weeks, a few contentious proposals remained for the three countries to resolve. For better or worse, they have been addressed or deferred. The result is the USMCA, an agreement slated to replace the 24-year-old NAFTA with what the Parties call a “a 21st century, high-standard agreement.” While the USMCA text has answered many questions, there are a number of issues that will need to be fleshed out during the implementation phase of the agreement.

Now that the negotiations are over and the USTR has published a text of the Agreement, the US ratification process moves into the legislative arena where deadlines are uncertain and subject to political calendars. Under the Trade Promotion Authority, the earliest that the President can sign the Agreement is November 29, 2018. While there is no legal obligation to sign on this date, the President as expressed an interest in ratifying this Agreement during the term of Mexican president Enrique Pena Nieto. The new Mexican president will be sworn in on December 1, 2018, leaving a very short window of time for signature. 

President Trump’s signing of the Agreement will set into motion a series of procedural events that must occur before the Agreement can be introduced to Congress for ratification. Upon completion of all internal procedural requirements, the Parties must notify each other, and the USMCA will enter into force on the first day of the third month following the last notification. Note that the various USMCA side letters, such as the US-Canada and US-Mexico automotive side letters, do not need to go through the ratification process and will take effect upon the parties signing. The higher Regional Value Content requirements established in the USMCA for automotive vehicles cannot go into force before January 1, 2020.

The following is a summary of a few of the key provisions of the USMCA:

Duties: As expected, the USMCA provides that, with certain exceptions, originating goods from the three signatory countries shall be duty free, existing customs duties may not be increased and new duties may not be adopted on any originating good. Additionally, the USMCA maintains a series of duty-free entry provisions comparable to some of the US Chapter 98 provisions, including provisions for temporary admission of certain goods, and duty free entry of commercial samples and articles exported for repair.

Rules of Origin: The USMCA maintains the NAFTA criteria for originating goods: (a) wholly obtained or produced; (b) product-specific rules of origin (tariff shift, RVC and/or specific processing requirements); (c) produced exclusively from originating materials; (d) and unassembled parts rule. Additionally, the Chapter on Rules of Origin addresses the following:

• Retains the NAFTA transaction value and net cost methods for calculating Regional Value Content;
• Preserves rules relating to intermediate materials, indirect materials, accumulation, and fungible goods;
• Increases the de minimis exception to 10 percent, subject to exceptions for certain products;
• Sets forth a special rule for sets classified pursuant to GRI 3, a provision allowing for a set that meets certain criteria to be classified in a single tariff number for duty purposes. Under the special origin rule, a set is originating only if each good in the set is originating and both the set and the goods meet the other applicable requirements; except that a set may be originating if the value of all non-originating goods does not exceed seven percent of the value of the set;
• Provides that the “Shipped Directly” requirement continues to apply;
• Defines “Non-Qualifying Operations” to include mere dilution, or production or pricing practice, the object of which was to circumvent the rules of origin;
• Increases the Automotive Regional Value Content Rule to require that 75 percent of auto content be made in North America; and
• Imposes a new Labor Value Content Rule, requiring that 40-45 percent of auto content be made by workers earning at least $16 per hour.

Origin Procedures: Unlike the NAFTA, an importer may make a claim for preferential treatment based on a certification of origin completed by the exporter, producer or importer. The certification need not follow a prescribed format, but the USMCA provides minimum data elements to be included in the certification. Origin certifications may be provided on an invoice or any other document, and may be completed and submitted in an electronic manner with an electronic or digital signature; however, as with NAFTA, the importer must have a valid certification of origin in its possession at the time the preference claim is made.

Also similar to the NAFTA, the USMCA retains the exporter and producer recordkeeping obligations for those parties in the transaction who have issued certificates of origin and preserves Customs’ ability to conduct verifications of claims for preferential treatment through written requests, verification visits, and any other procedure as may be decided by the parties. Under the USMCA, an importer must also maintain all the records necessary to demonstrate that the good is originating if the claim is based on an importer completed certification.

Trade Facilitation: To facilitate greater cross-border trade, the USMCA provides an increase of de minimis shipment value levels in Canada and Mexico. Canada will raise its de minimis level for the first time in decades, from C$20 to C$40 for taxes and C$150 for customs duties. Mexico will continue to provide USD $50 tax free de minimis and also provide duty free shipments up to the equivalent level of USD $117. Shipment values up to these levels would enter with minimal formal entry procedures, making it easier for small and medium-sized businesses to be a part of cross-border trade. Canada will also allow a period of 90 days after entry for the importer to make payment of taxes.

Digital Trade: The USMCA chapter on Digital Trade provides a foundation for the expansion of trade and investment in the innovative products and services where the United States has a competitive advantage. Among its key provisions is a prohibition on customs duties and other discriminatory measures from being applied to digital products distributed electronically (e-books, videos, music, software, games, etc.).

Additionally, the USMCA ensures that data can be transferred cross-border, and minimizes limits on where data can be stored and processed, thereby enhancing and protecting the global digital ecosystem. Furthermore, the USMCA aims to facilitate digital transactions by ensuring that suppliers are not restricted in their use of electronic authentication or electronic signatures, and by promoting collaboration on cybersecurity, to keep networks and services secure.

Intellectual Property: The Intellectual Property (IP) chapter provides protection and enforcement of IP rights relating to copyrights, trademarks and patents. Notably, the Agreement includes key enforcement provisions, including ex officio authority for law enforcement officials to stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any Party.

With regard to protection of trade secrets, the IP chapter of the USMCA includes various protections against misappropriation of trade secrets, including by state-owned enterprises. Such protections include civil procedures and remedies, criminal procedures and penalties, prohibitions against impeding licensing of trade secrets, judicial procedures to prevent disclosure of trade secrets during the litigation process, and penalties for government officials for the unauthorized disclosure of trade secrets.

Section 232 Auto, Steel & Aluminum Tariffs: The current tariffs on steel and aluminum have not been removed (though there continues to be talk of negotiations on this thorny issue). Within the new Agreement, a side letter between the US and Canada addresses Section 232 and provides a quantitative exemption for autos and auto parts in the event the US implements Section 232 tariffs on these goods. Additionally, should future 232 Tariffs on other goods be invoked, the side letter provides for a 60 day consultation period for Canada to work with the US to come to an agreement prior to the implementation of any future Section 232 measures.

The Sunset Clause: The USMCA shall terminate 16 years after the date of its entry into force unless the parties wish to renew for another 16 term. However, the USMCA provides that the parties shall conduct a “joint review” of the “operation of the Agreement” every 6 years. As part of this 6-year “joint review,” each Party must confirm, in writing, their desire to extend the Agreement for another 16 year term. If during any “joint review” the parties do not agree to extend for another 16 year term, a “joint review” shall be conducted every year for the remainder of the term of the Agreement or until the parties agree to extend for another 16-year period, at which point the 6-year “joint review” cycle will be reinstated.

In addition to the general provisions discussed above, the USMCA includes a series of provisions that represent critical milestones for various industries, including agriculture, automotive, and textile and apparel.

Agriculture: The USMCA represents a significant step forward for the agriculture industry, particularly the dairy sector. All food and agricultural products that have zero tariffs under the NAFTA will remain at zero. Since the original NAFTA did not eliminate all tariffs on agricultural trade between the US and Canada, the USMCA will create new market access opportunities for US exports to Canada of dairy, poultry, and eggs. In exchange, the US will provide new access to Canada for dairy, peanuts, processed peanut products, and a limited amount of sugar and sugar containing products.

Additionally, the top priority for America’s dairy industry in this negotiation has been for Canada to eliminate its program that allows low priced dairy ingredients to undersell United States dairy sales in Canada and in third country markets. As a result of the negotiation, six months after entry into force of the USMCA, Canada will eliminate what is known as its milk classes 6 and 7. By doing so, Canada will ensure that the price for skim milk solids used to produce nonfat dry milk, milk protein concentrates, and infant formula will be set no lower than a level based on the United States price for nonfat dry milk. Canada has also committed to adopt measures designed to limit the impact of any surplus skim milk production on external markets.

Automotive: While global automakers are worried about the challenges that the USMCA rules will pose, and the impact of these rules when compounded with the potential Section 232 tariffs on automotive goods, the North American automotive industry views the USMCA as vital to the success of the North American auto industry. As noted in the “Rules of Origin” discussion above, the automotive provisions raise the domestic content requirements for passenger vehicles, trucks and parts thereof. The Agreement provides for a staggered increase of the RVC requirement for passenger vehicles and light trucks, staring on January 1, 2020 at 66 percent under the net cost method and increasing by 3 percent per year until it reaches 75 percent in 2023. The Agreement further provides for specific RVC requirements for various auto parts, heavy trucks and parts thereof.

Additionally, the Agreement imposes a new Labor Value Content Rule, requiring that a certain percentage of auto content be made by workers earning at least $16 per hour. The percentage starts at 30 percent in 2020, and has a staggered implementation schedule that increases the LVC annually until 2023.

Textile & Apparel: The new provisions on textiles incentivize greater North American production in textiles and apparel trade, strengthen customs enforcement, and facilitate broader consultation and cooperation among the Parties on issues related to textiles and apparel trade. Specifically, the textile and apparel rules promote greater use of Made-in-the-USA fibers, yarns, and fabrics by limiting rules that allow for some use of non-NAFTA inputs and requiring that sewing thread, pocketing fabric, narrow elastic bands, and coated fabric, when incorporated in most apparel and other finished products, be made in the region for those finished products to qualify for trade benefits. Adjustments were also made to the Tariff Preference Levels. Additionally, the USCMA establishes a Textiles chapter for North American trade, including textile-specific verification and customs cooperation provisions that provide new tools for strengthening customs enforcement and preventing circumvention and fraud.