New NAFTA Creates Opportunities for North American Businesses

by Lindsay L. Short and Brett W. Johnson

The United States, Canada, and Mexico have reached an agreement to update the North American Free Trade Agreement (NAFTA) after more than a year of negotiations. Rebranded as the U.S.-Mexico-Canada Agreement, or USMCA, the new agreement will implement significant updates to the 1994 trilateral trade pact.

The USMCA follows an August 2018 deal between the United States and Mexico, which largely updated NAFTA in the areas of the digital economy, agriculture, and labor unions. As Canada refused to make certain concessions, the White House imposed a September 30, 2018 deadline for releasing its agreement with Mexico. The three countries ultimately came to a new agreement late on September 30.

The USMCA includes several key updates to NAFTA:

Changes to Automobile Manufacture Requirements
Arguably the most significant development, the USMCA will more fully incentivize automobile production in North America. In updating NAFTA’s “rules of origin,” the new agreement now requires that 75 percent of an automobile’s components be made in North America to qualify for zero tariffs (up from the current 62.5 percent).

Additionally, to qualify for zero tariffs, the vehicle’s labor is required to be at least partially completed in a factory in which the average production wage is at least $16 per hour. The threshold will begin at 30 percent in 2020, and rise to 40 percent by 2023. This requirement is considered particularly significant for Mexico, where the typical wage is significantly lower—potentially spurring manufacturing in the United States and Canada. President Trump described the agreement as the “new dawn for the American auto industry.”¹ Ford Motor Company, for its part, stated that it was “very encouraged” by the agreement, which it said “will support an integrated, globally competitive automotive business in North America.”²

Loosening of Canada’s Dairy Market
The USMCA also addresses one of the sticking points in NAFTA negotiations: dairy. As background, the Canadian government restricts both the amount of dairy that can be produced in the country, as well as the amount of foreign dairy permitted to enter. President Trump frequently expressed frustration over Canada’s seemingly high tariffs on U.S. dairy products in the last year. 

Under the USMCA, the United States will now be able to increase its dairy exports to Canada. Specifically, Canada will eliminate its pricing scheme for “Class 7” dairy products, including milk protein concentrate, skim milk powder, and infant formula. The U.S. export market should open significantly for these products. 

Independent Dispute Resolution Remains
Known as Chapter 19, the system that permits the three countries to bring disputes to an independent panel of representatives will remain intact. Canada, in particular, insisted on retaining this provision.

Specifically, Chapter 19 gives each country the right to challenge another’s anti-dumping and countervailing duty decisions. Anti-dumping cases arise when one country claims that another is selling exports below fair value. Countervailing duty cases arise when a government imposes extra tariffs on imports of subsidized goods. 

The highest-profile Chapter 19 cases have involved Canada and the softwood lumber industry. Other notable cases have involved the fertilizer, steel pipe, and washing machines industries. With the USMCA, such disputes will continue before an independent panel, rather than one country’s domestic courts.

Increased Environmental and Labor Regulations
The USMCA also updates environmental and labor regulations, particularly focusing on Mexico. It states that Mexican trucks crossing the U.S. border are required to meet higher safety regulations, and that Mexican workers are required to have greater ability to form unions.

New IP Protections
One of the major aims of NAFTA negotiations was modernization. To this end, the USMCA contains a new chapter covering digital trade, which bars duties on e-books and other goods distributed electronically. It also updates protections for patents and trademarks, specifically for biotech, financial services, and domain names.

Tariffs Remain
One issue remains unaffected by the USMCA: steel and aluminum tariffs. The United States’ current 25 percent steel and aluminum tariffs remain in place on Canada and Mexico, pending future negotiations. U.S. Commerce Secretary Wilbur Ross has described those tariffs as “separate issues” from USMCA negotiations.³  

The key USMCA provisions will not be implemented until 2020, allowing for each country’s legislature to review and approve the agreement. In the United States, Congress is expected to vote in early 2019. Government agencies will also ultimately be promulgating USMCA implementing regulations. In the meantime, companies can consider providing input during the regulatory open comment period, likely beginning in early 2019, to ensure that the needs of their industry and specific business operations are addressed. Companies can also evaluate their existing North American supply chain controls and potential market opportunities that may arise from the USMCA’s implementation.