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 Vaughan 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. This change means a greater amount of processing operation and manufacturing of a product to determine its national origin. An additional stipulation has been added under Chapter 4 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 where 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 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, the dairy industry 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 (Comprehensive and Progressive Trans-Pacific Partnership), members were given about 3.25% of access to the Canadian dairy market. Similarly, under USMCA, the U.S. has been access to 3.6% of Canada’s dairy market. The difference between CPTPP and 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. Expect to see more U.S. exports linking the refrigerator shelves in grocery stores.
De Minimis Thresholds – The de minimis thresholds increase from their 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.
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 under 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. Canada’s insistence on the importance of this mechanism was a major sticking point in negotiations. 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 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.
Other Relevant Points
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, as well as 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 USMCA.