The United States-Mexico-Canada Agreement (USMCA) and NAFTA: The impact on Canadian goods and services exports

On October 16, 2018, Posted by , In International Analysis,

Available | Disponible : French

On September 30th 2018, Canada, Mexico and the United States signed the United States-Mexico-Canada Agreement (“USMCA”). The text must then be reviewed by legal experts then translated in French and Spanish before it is submitted for ratification under each country’s respective legislative processes. It will then come into effect and replace the North American Free Trade Agreement (“NAFTA”) three months after its ratification by all three countries.

For Canadian exporters, this agreement puts an end to the uncertainty of the last months with regards to the renegotiation of NAFTA and to the threats of the US administration to sanction Canada if it did not agree to its demands.

To measure the impact of the USMCA, a comparative analysis as to the differences with NAFTA can be made which will be classified according to four themes: Maintaining market access, Modifying and Modernising various provisions, and identifying the Threats to North American competitiveness in global trade.

Thus, compared to NAFTA, the USMCA:

  1. Maintains:
    • Market access to American and Mexican markets which existed under NAFTA for the trade in goods and services;
    • The review mechanism by special binational groups of decisions related to the imposition of countervailing and antidumping duties, which Canada refused to abandon despite US pressure;
    • Provisions on the temporary entry for business immigration, which facilitates the obtaining visas at the border for Canadian exporters and their employees; and
    • The “cultural exemption” which allows Canada to promote and protect its cultural industry, including in the digital space.
  2. Modifies:
    • Investments, by abolishing Investor-State arbitration between Canada and the United States. Investor-State arbitration under the Comprehensive and Progressive Trans-Pacific Partnership Agreement (“CPTTP”) will apply between Canada and Mexico. The state-to-State dispute settlement mechanism will also apply in case of violation of the investment provisions of the USMCA between all three parties;
    • Government Procurement: Canada will no longer have preferential access to US and Mexican government procurement under the USMCA. Access to US government procurement for Canadian companies will be governed by the rules of the World Trade Organization (“WTO”). This change will raise the monetary thresholds for government procurement that Canadian companies will have access to. Canadian companies will only have access to federal government contracts for products and services of more than $ 230,000 CAD and for construction work of more than $ 9 million CAD; and to State and public corporations contracts for products and services of more than $ 640,000 CAD and for construction work of more than $ 9 million CAD. Access for Canadian companies to Mexican public procurement will be governed by the CPTTP, which contains the same thresholds as the WTO.
    • Intellectual Property by increasing the term of protection for new biologic drugs from 8 to 10 years, thereby delaying the use of generic products, and the copyright term of 50 to 70 years after death for literary and artistic works, and 70 to 75 years for performers and sound recordings. The new provisions provide for the imposition of pre-established damages to limit counterfeit goods as well as the strengthening of border controls for counterfeited and pirated goods; and
    • Agricultural trade: Canada has agreed to (i) an increase in tariff-free dairy quotas to 3.6% of the dairy market, (ii) allow the importation of additional quantities of eggs and poultry, (iii) open the Canadian market to milk protein, milk powder and other US products through the elimination of classes 6 and 7, and (iv) apply national treatment and labeling standards to beer, wine and spirits. As small comfort for Canadians, Americans agreed to open their market to sugar, sugar-containing products and some Canadian dairy products in the form of tariff quotas.
  3. Modernizes by adding new provisions with regards to the following issues:
    • E-commerce by integrating a comprehensive chapter that builds on the CPTTP and covers a range of elements from signatures, electronic contracts to limiting restrictions on the flow of personal data and data localization requirements;
    • Internet purchases: Online purchases delivered by commercial courier valued at less than $ 150 CAD may enter Canada duty-free, and those valued at less than $ 40 CAD will be tax-free. Currently, only online purchases valued at less than $ 20 CAD may enter Canada without duty and taxes. This threshold remains unchanged for online purchases delivered by regular mail;
    • Internet service providers will have to send notices to their users if they are aware that the latter are violating the intellectual property of a third party;
    • Employment and the environment: new provisions (i) oblige the parties to respect international treaties and principles and (ii) enable a party to apply the dispute settlement mechanism between States in the event of non-compliance with these provisions by another party; and
    • Gender equality, indigenous peoples, small and medium-sized enterprises (“SMEs”), competition, corruption and exchange rate manipulation.
  4. Threatens:
    • The competitiveness of the North American automotive industry by (i) raising the value of North American car content to 75% (from 62.5%) and the value of basic parts (e.g. engines, transmissions), (ii) imposing the use of 70% North American steel and aluminum in cars and (iii) fixing the proportion of labor so that 40 to 45% of the automotive manufacturing operations are to be performed by workers earning at least US$ 16/hour;
    • The trade in steel and aluminum while maintaining US tariffs of 25% and 10% respectively, although the parties did agree to try to resolve this situation;
    • Access to the US market through the ability of the United States to impose tariffs on the grounds of preserving national security (section 232 of the US Trade Expansion Act), although Canada considers the imposition of these measures as contrary to the rules of NAFTA and the WTO. The United States agreed to regulate this practice by granting Canada an exemption period of 60 days from their adoption. In the automotive sector, the United States will only be able to levy these duties on US imports of vehicles from Canada in excess of 2.6 million vehicles per year and automobile parts exceeding US$ 32.4 billion per year, well above the current number of vehicles exported from Canada to the United States;
    • The duration of the USMCA by providing for its dissolution in 16 years unless extended for an additional term of 16 years following one of the official examinations every 6 years; and
    • The possibility for one party to conclude a free trade agreement with a country that another party considers not to have market economy status (e.g. China), by imposing an obligation of notification and consultation to the other parties and the possibility for the other two parties to exclude from the USMCA the party that has concluded a free trade agreement with such a country.

In short, this new agreement does not overly improve the access of Canadian companies to the US and Mexican markets relative to NAFTA, but it provides greater certainty as to the outcome of the concessions that Canada and Mexico were forced to give in order to continue their business relationship with their most important trading partner.Given the context, the Canadian representatives at the bargaining table worked with extraordinary energy and did an excellent job in defending the interests of Canadian companies, including SMEs, which seem to stand to gain the most from the USMCA.

For more information on the USMCA and the potential impact that this agreement may have on your activities and practices, do not hesitate to contact Bernard Colas or one of our other CMKZ lawyers specializing in international trade law.

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