After over a year of negotiations, Canada, the United States and Mexico announced a United States Mexico Canada Agreement (USMCA) that builds on the agreement in principle announced between the US and Mexico on August 27, 2017. In this bulletin, we discuss what Canada wanted in these negotiations, what it got, how some of the key issues were resolved and negotiating results that may affect Canada's trade relations with other countries.
What Canada Wanted in a USMCA:
Canadian negotiators wanted to maintain the NAFTA Chapter 19 dispute resolution provisions that allow Canada to challenge US dumping and subsidy rulings before a neutral tribunal. This has been done: the USMCA replicates the Chapter 19 NAFTA rules.
Going into NAFTA negotiations, Canada wanted to reform the NAFTA Chapter 11 investor-state dispute resolution process that provides investors with recourse to an impartial tribunal to challenge government rulings affecting their investments. Canada wanted to ensure that governments have an unassailable right to regulate in the public interest. Although there is legal debate as to whether the NAFTA already permits this, the debate has been answered: For Canadian and US investors, other than for investments made prior to the USMCA entering into force, the USMCA no longer includes a Chapter 11 investor-state dispute resolution process. Canadian or US investors wanting to dispute US or Canada rulings will have recourse only at the government to government level or in each country's courts. Canadian and Mexican investor disputes involving Mexico or Canada rulings will be governed by the Comprehensive and Progressive Transpacific Partnership Agreement when this enters into force.
Canadian Cultural Exemption
Canadian negotiators wanted to preserve the Canadian cultural industries exemption, which expressly covers books, music, video and radiocommunications. Although there is legal debate about whether this really is an exemption or if it is needed to ensure that Canadian cultural industries are owned by Canadians, the cultural exemption has been preserved in the USMCA.
Canadian negotiators wanted to ensure that no NAFTA country weakens environmental protection to attract investment. Like the NAFTA, the USMCA says that countries recognize that it is "inappropriate to encourage trade or investment by weakening" environmental protection. Canadian negotiators also wanted rules that fully support efforts to address climate change, but the USMCA does not expressly address this issue.
Section 232 Tariffs on Steel and Aluminum
While no agreement was reached regarding the current use of 'section 232' national security tariffs on steel and aluminum, the USMCA provides that in the future, the US will not impose these tariffs for at least 60 days after a decision is made to levy tariffs. If no solution is negotiated during the 60 days, the national security tariffs may be imposed. The Canadian automobile industry receives special treatment: Canadian automotive exports of less than 2.6 million vehicles will be excluded from such tariffs. This number is 40% more than current Canadian production levels.
What Canada Wanted in a USMCA but Didn't Get:
Gender, Indigenous Rights and Business Labour Migration
Going into NAFTA negotiations, Canada wanted new chapters on gender and indigenous rights. Canada also wanted to modernize the list of professionals and business persons eligible for work visas, noting that the CETA, Canada's FTA with Europe, provides a model. There are no separate chapters on indigenous or gender rights, and any further liberalization on the cross-border movement of professionals must wait for another day.
Canada wanted deeper market access to US government procurements, calling the CETA a significant accomplishment. Although the USMCA does include a chapter on government procurement, it only applies as between the US and Mexico. Canadian access to US and Mexico government procurements will be determined by the rules under the WTO Agreement on Government Procurement. The USMCA does not protect Canada against future use of Buy America rules that restrict access to US government contracts to companies using US sourced products and materials.
Under the USMCA, Canadian consumers will be able to purchase up to C$150 in goods, up from the current C$20, without paying duty on the value of their purchase. Canadians must pay sales tax on purchases above C$40.
How Other Key Issues Were Resolved
The USMCA eliminates Canada's Class 6 and Class 7 pricing system within six months of the agreement coming into force. Class 6 and 7 products include milk protein concentrate, skim milk powder and infant formula, and non-fat solids used to manufacture these products. The price for these non-fat milk solids will be based on the US price for non-fat dry milk.
In addition, Canada agreed to limit exports of these dairy products. For instance, skim milk powder and milk protein concentrates will be capped at 55,000 metric tons in the Agreement's first year, and 35,000 metric tons in the second year. Exports exceeding this threshold face an export surcharge of C$0.54. The caps will increase by 1.2 percent per year.
Canada will also provide new tariff-rate quotas leading to increased market access for a host of other supply managed products coming from the US. For instance, the in-quota amount for cheese increases to 12,500 tons and will further increase by 1% per year for the next 13 years. Market access for poultry and egg will also be increased. For instance, the in-quota amount for chicken will increase to 57,000 megatons six years into the agreement, growing by 1% each year for an additional 10 years.
Automotive Rules of Origin:
To qualify for duty-free treatment under the USMCA, 75% percent of a vehicle must originate in North America. This is an increase of 12.5% from the current NAFTA rules. The rules will be phased in, starting at 66% on January 1, 2020 or the date the agreement comes into force and increasing to 75% in 2023. The agreement further specifies that 70% of the steel and aluminum used must originate in North America for a vehicle to be classified as a North American originating vehicle. The USMCA also requires that 40% of a vehicle must be made by labour earning at least $16/hour to be an originating vehicle. Subrules specify minimum and maximum levels for expenditure categories to which high-wage labour must or must not exceed. These rules will be phased in starting the date the agreement comes into force or January 1, 2020 until January 1, 2023.
An Unexpected Addition
The USMCA adds the requirement that any of the three countries must notify the other countries of its intent to negotiate a free-trade agreement with a non-market country. The USMCA defines a non-market country as a country that on the date of signature of this agreement at least one of the three countries has determined to be a non-market economy for purposes of its anti-dumping/countervailing duty laws and is a country with which none of the three countries currently have a free-trade agreement. China falls under this definition. The negotiating member must provide the other members with the opportunity to review the full text of the agreement 30 days before an agreement is signed. Entry into a free-trade agreement allows one or both of the other countries to then terminate the USMCA on 6-months' notice and replace it with a bilateral agreement, at its discretion.
US law requires the text of the USMCA to be published 60 days prior to signing, during which time Congress may review and either approve or reject the agreement. Assuming Congress approves the Agreement, the three leaders may sign the agreement before December 1, 2018, the last day of the current Mexican Presidency. Once the agreement is signed, each country must pass domestic legislation to give effect to the agreement provisions.
There are numerous other matters covered by the USMCA: digital trade, IP, services that may have a significant impact on companies and the way they do business. If there is one piece of advice to be given, it is this: read the rules and understand them. While reports in the media say not much has changed, that is not correct. The USMCA has changed the current North America trade and investment landscape. It is crucial that companies understand this new trading and investment environment and not assume that things that have been done in the past can be relied on to ensure compliance with this new legal and business environment.