United States, Mexico and Canada Sign a New Trade Agreement (USMCA) to Replace NAFTA (North American Free Trade Agreement)
On January 29, 2020 the new United States-Mexico-Canada Agreement (USMCA) was signed into law by U.S. President Donald Trump.
After more than a year since the initial handshake between the three countries, ratification by the United States sets the path to upgraded norms for trade between the connected economies. Mexico approved the USMCA deal last summer and Prime Minister Justin Trudeau and the Canadian Parliament are expected to ratify it in the near future. The new USMCA brings changes and updates to the previous North American Free Trade Agreement (NAFTA) which had a twenty-six-year run promoting trade, duty-free cross-border cooperation and economic growth for all of North America making it one of the most successful trade deals in the world.
The new USMCA brings along opportunities for Mexican manufacturers to expand their businesses and presents Mexico as a strategic location for supply chain operations to serve the two large countries north of the border.
There are some major updates and differences between NAFTA and USMCA, here are some highlights:
Under the USMCA, it is required that automobiles have a minimum of 75% content made in the United States, Mexico and Canada to qualify for zero tariffs (under NAFTA, the requirement was 62.5%). It additionally includes a rule to encourage higher manufacturing wages by requiring 40 to 45% of automobile content to be made by workers earning an average base-wage of at least $16/hour by 2023. This requirement should not be interpreted as a drive to raise the wages for automotive workers in Mexico (where current wages are much lower) but as a measure to keep content manufactured in the US and Canada where wages are higher. It should also be noted that the salaries of engineers and technicians dedicated to research and development in the industry also count to reach the required percentage.
The implementation of these changes will be done over a course of 5 years with the required target of 75% by 2023, plus 2 additional years for certain models that can be negotiated with the importing country. For 2020, the content is only raised to 66%.
Agricultural and Dairy Sectors
The USMCA maintains agriculture tariffs at zero, and includes strong new commitments on biotechnology and science-based Sanitary and Phytosanitary measures, establishes mutual standards for geographical indicators and seeks to reduce trade-distorting policies.
The USMCA gives U.S. farmers greater access to Canada’s dairy, cheese and poultry markets. Specific to Mexico, the United States and Mexico agree to not restrict market access in Mexico for US cheeses labeled with certain names.
Customs and Trade Facilitation
The partner countries agree to raise their de minimis shipment-value levels for taxes and duties on lower value shipments, allowing these shipments to enter with minimal formal entry procedures. The agreement sets a new informal shipment level of US $2,500, so that express shipments under that threshold will benefit from reduced paperwork, making low-value shipments easier, faster, and less costly to trade.
Major changes were made in the USMCA to expand intellectual property (IP) rights with Canada and Mexico agreeing to strong intellectual property standards including strong enforcement provisions against counterfeiting and piracy, effective protection of trade secrets, and ex officio authority for law enforcement officials to stop suspected in-transit counterfeit goods. The deal extends the terms of copyright to 70 years beyond the life of the author (up from 50). It also extends the period that a pharmaceutical drug can be protected from generic competition and includes new provisions to deal with the digital economy, such as prohibiting duties on things like music and e-books, and protections for internet companies so they’re not liable for content their users produce.
The agreement adds a 16-year “sunset” clause — meaning the terms of the agreement expire, or “sunset” after 16 years. The deal is also subject to a review every six years, at which point the US, Mexico, and Canada can decide to extend the USMCA.
The USMCA establishes rules for digital trade and digital technologies such as e-books, videos, music, software and games. Much of these technologies didn’t exist and weren’t addressed when NAFTA went into effect in 1994. Other technologies that fall under the USMCA include electronic authentication and electronic signatures, protection against forced disclosure of proprietary computer source codes and algorithms, collaboration in addressing cyber security challenges, promotion of open access to government-generated public data, and consumer privacy and protections against unsolicited communications in the digital marketplace.
Enforcement of Environmental Standards
New to the USMCA are more detailed environmental requirements for the three countries. This includes commitment to enforce environmental laws and to be subject to dispute resolution. Additional major provisions are included for protecting coastal and marine environments, air quality improvement, conservation and prevention in the trafficking of wildlife, timber and fish, amongst others.
All three countries are required to adopt and maintain core labor standards recognized by the International Labor Organization, including freedom of association and the right to strike. Under the USMCA each country will prohibit the importation of goods produced using forced labor and child labor and that migrant workers need to be protected under labor laws.
Revised rules were added to incentivize use of regional inputs with requirements to source sewing thread, narrow elastic fabrics, pocketing, and coated fabrics from within North America. Updated rules of origin provide flexibility for textiles not generally available in North America and increases the minimum percentage of non-originating inputs allowed in qualifying goods from 7% to 10%.
Sources: U.S. Trade Representative website, Forbes, CBS News, Wisconsin State Farmer, Frisco Chamber of Commerce
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