From NAFTA to the USMCA
On January 23, 2020, President Trump signed the United States-Mexico-Canada Agreement (USMCA) into law. As the name implies, the USMCA is a proposed free trade agreement negotiated among the United States, Mexico and Canada (the Parties) to update and replace their 1994 North American Free Trade Agreement (NAFTA). The USMCA carries forward many NAFTA concepts; however, in certain areas, the USMCA departs drastically from its predecessor, as summarized briefly below. Now that the USMCA is "real," manufacturers that participate in cross-border trade within North America would benefit from understanding whether the USMCA will help or hurt business.
What’s New?
The USMCA is extremely lengthy and substantially changes NAFTA. The notable outcomes include the following:
Automotive Rules of Origin - The USMCA includes fundamental changes to the automotive industry to incentivize production and source materials in the United States and North America by, among other things, (1) increasing regional value content (RVC) requirements, (2) creating new labor value content (LVC) requirements and (3) creating new steel and aluminum requirements.
- RVC - A three-year transition period will begin after the USMCA becomes effective to increase NAFTA’s current RVC requirement (62.5%) to 70%-75% (based on the type of vehicle and vehicle part).
- LVC - A new wage provision will require that 40%-45% of North American vehicle content be made by workers earning at least $16 per hour.
- Aluminum and steel requirement - A new provision will require that 70% of a vehicle’s steel and aluminum originate in North America and require that such metal be melted and poured within the region.
Agriculture - Canada will eliminate certain milk price classes shortly after the USMCA becomes effective, which should expand United States access to the Canadian dairy market by decreasing certain barriers for United States dairy imports into Canada. Canada also agreed to establish new tariff-rate quotas for several specific categories of U.S. dairy, poultry and egg products, allowing for an increase in U.S. exports of such products to Canada.
Environment - Unlike NAFTA, the USMCA requires the Parties to adopt, maintain and preserve environmental laws. The USMCA also includes new protections for marine species and enhanced provisions to combat trafficking in wildlife, timber and fish.
Intellectual Property - The intellectual property chapter is modeled after the intellectual property chapter in the Trans-Pacific Partnership (TPP), with specific parameters for copyright, trade secret, trademark and anti-counterfeit protections.
Labor - The labor chapter of the USMCA includes stronger and more enforceable labor provisions. The USMCA, unlike NAFTA, requires Parties not only to enforce their own labor laws but also to adopt and maintain laws on core worker rights; it prohibits importation of goods made by forced labor and requires commitments related to violence against workers, workplace discrimination and migrant worker protections. Notably, Mexico must enact legislation to, among other things, eliminate all forms of compulsory labor, protect the rights of workers to organize and form unions of their choice, and prohibit employer interference with such union elections and agreements.
Certificate of Origin - Eliminates the NAFTA Certificate of Origin and instead provides a list of minimum requirements to claim origin.
Non-Market Economies - A Party must notify the others of its intention to begin negotiations with a non-market country (e.g., China) three months prior to negotiations. The Parties may withdraw from the USMCA if another Party enters into a free trade agreement with such non-market economy.
Sunset Clause - To force the Parties to revisit the agreement periodically to ensure it is working as it should for all involved, the USMCA includes a clause providing for a 16 year initial term of the agreement unless the Parties agree to extend the agreement for another 16 years.
What’s Next?
Each Party to the USMCA must ratify the agreement in its own domestic legal system before the agreement is enacted in full force. With Mexico and the United States on board, Canada is expected to ratify the agreement in short order.
We will continue to assess the USMCA and monitor related developments. Please feel free to contact us with any questions.
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