NAFTA to USCMA: What does it mean?
17 Oct 2018
NAFTA (North American Free Trade Agreement) has been replaced with USMCA (United States Mexico Canada Agreement).
Outside of the name change and some contentious provisions, the vast majority of the trade agreements made in NAFTA have been carried over in USMCA.
Below, we take a broad look at the new agreement. As more details become available, the Newmarket Chamber will provide an update to our members with an industry specific breakdown of the USMCA.
Changes to the Trade Agreement:
Auto Rules of Origin- For any vehicle to now be duty-free under the new trade agreement, 75% of the content has to originate in the U.S., Mexico or Canada. This is a significant increase under NAFTA rules of a 62.5% threshold. The point behind this is to boost auto parts manufacturing by forcing car companies to use parts made here vs. cheaper parts from Asia.
The goal is to boost auto parts manufacturing in North America by forcing car companies to use parts made here versus cheaper parts from Asia. This will likely increase the cost of cars and trucks for consumers.
An additional stipulation has been added that at least 40% of this content must be produced by workers earning at least USD $16 per hour. This is probably the biggest game changer because it will have a significant impact on any decision by a parts manufacturer as to which country to set up an automotive production facility. Most of the new rules of origin contained in the new agreement have been designed to be rolled out in four phases over a three-year period.
Protection against auto tariffs- The U.S. has threatened to impose auto tariffs under section 232 of the Trade Expansion Act. Under the USMCA, Canadian and Mexican exports to the U.S. will each receive exemptions for 2.6 million passenger vehicles annually and all light trucks with a certain dollar value on auto parts.
Canada’s Supply Chain Management- Whenever a new trade deal issue is negotiated, dairy is always a hot button issue for Canada. Under the new agreement, Canada’s supply management system will be opened to provide greater Canadian market access to U.S. farmers. In CPTPP (the Comprehensive and Progressive Trans-Pacific Partnership), members were given about 3.25% of access to the Canadian dairy market. Similarly, under the USMCA, the U.S. has been given access to 3.6% of Canada’s dairy market. The difference between the CPTPP and the USMCA is that the U.S. will be given almost double the access to Canada’s poultry market and almost triple the access to Canada’s egg market. What does that mean to Canadians? We can expect to see more U.S. exports lining the refrigerator shelves in Grocery Stores. The Dairy Farmers of Canada are not happy with these concessions but it was unlikely that we would have achieved this trade deal without agreeing to open up access to our supply chain.
De Minimis thresholds- What is the de Minimis threshold? It's the level at which Canadian consumers have to pay duties and taxes on imported goods from the U.S, whether through bringing items back on a trip or ordering them online and having them delivered by mail or courier. When NAFTA was first signed, the de Minimis threshold was set at $20 and has remained at that exact rate. Under the new USMCA, the threshold will increase from its current $20 threshold to a maximum of $150 for shipments allowing them to be exempt from duties. Shipments worth less than $40 will be exempt from sales taxes. This is good if you’re a consumer but slightly concerning if you are a business owner.
Intellectual Property- Under the new agreement, Chapter 20 ensures that most copyrights last 70 years after the death of the author—20 years longer than the current law. Patent protection for biologic pharmaceuticals will be extended from 8 to 10 years. The new agreement outlines criminal penalties for pirating movies online, prohibits duties on digital music, books, software, and video games that are distributed electronically, and provides for stronger intellectual property protections.
Chapter 19- The U.S . had proposed the removal of Chapter 19 which provides a dispute resolution mechanism relating to anti-dumping and countervailing trade remedies. What this chapter does is that it allows a country the right to challenge a member country’s anti-dumping and countervailing duty decisions before a tribunal composed of members from the two countries involved in the relevant dispute, instead of domestic courts (to prevent bias). Canada had insisted on the importance of this mechanism while the United States wanted to eliminate it from any version of a NAFTA 2.0 because it considered Chapter 19 as an infringement on U.S. sovereignty. However, the negotiations were successful in the regards that at the end of the day, Chapter 19 remains with minimal changes in USMCA.
Canadian cultural exemptions – This was a provision under NAFTA, largely created and designed to offer protection to Quebec’s Francophone arts. Under the new agreement, Canada’s exemptions regarding cultural industries, including film, broadcasting and publishing, remain unchanged.
Sunset Provision – When the NAFTA discussions started, one of the most contentious issues was the inclusion of a sunset provision. The original proposal by the U.S. was a five-year termination unless all three countries agreed to extend it. The Canadian Government had been adamant that a sunset clause would create too much uncertainty for businesses. However, to get the deal signed, both Canada and Mexico agreed to a provision requiring that the agreement be terminated 16 years after the date of its entry into force, unless each country confirms it wishes to continue the agreement for an additional 16-year term.
The 16-year term comes with a “joint review” of the operation of the agreement. The benefit here is that the USMCA will constantly be reviewed to reflect current business needs-something that NAFTA was significantly lacking.
Other Relevant Points
S. 232 Steel and aluminum tariffs – Unfortunately, the signing of the USMCA does not exclude Canada and Mexico from the current steel and aluminum tariffs, or offer some other compromise such as reasonable import quotas. None of that happened and the tariffs, and Canadian/Mexican retaliatory tariffs, remain. However, there is hope that negotiators can continue building on the momentum of the trade deal and work toward a resolution that would see the removal of those tariffs.
What happens now? There is a bit of a time delay between the signing of a trade agreement and it coming into force. The text needs to be translated into the second official languages of the two countries (French and Spanish) and requires a legal review of the legislation. The agreement needs to be ratified by the legislative assembly of each of the nations.
The whole process will likely take over a year and until USMCA is complete, NAFTA will remain in force. From a broader perspective, what does this mean for businesses? Well, there are provisions that have been inserted into the trade agreement to provide a transitional period for businesses to adapt to the new regulations.
While the threat of auto tariffs and a “scrapped NAFTA” has passed, there are signs of political uncertainty that may impede the successful adoption of USMCA. The U.S. Midterm elections could see a congress controlled by Democrats that may push back on the labour and environmental provisions contained in the USMCA.