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Understanding USMCA: What to Expect from the ‘New NAFTA’

December 18, 2019Alerts

On December 10, representatives from the United States, Canada and Mexico signed an amended United States-Mexico-Canada Agreement (USMCA) that incorporates revisions negotiated by House Democrats and agreed to by the Trump administration. The USMCA is not yet a “done deal” and must still be ratified by the three countries before it takes effect. At that point, USMCA would replace the now 25-year-old North American Free Trade Agreement (NAFTA).

Obtaining approval by the Democrat-controlled U.S. House of Representatives was generally viewed as the primary hurdle in getting the USMCA ratified. We expect to see ratification by the three countries in the coming weeks. In the United States, the amended deal is expected to be put up for debate and a vote in the House later this week, with the Senate taking it up in January.

Key features of the USMCA include strengthened provisions for oversight to ensure that Mexico abides by its commitments and is subject to penalties for noncompliance, and a mandate that Mexico relax its labor laws in order to allow for easier workforce unionization, which in turn will drive up labor value. Additional major changes are as follows:

Automotive Industry

The automotive manufacturing industry will arguably experience the most significant, far-reaching changes from NAFTA to USMCA. They include:

  • North American value content for vehicles must be 75% (increased from 62.5% under NAFTA) in order to qualify as an “originating” product that is eligible for duty-free treatment.
  • At least 70% of the steel, aluminum and glass utilized in production of an automobile must originate in North America to allow the automobile to be eligible for duty-free treatment.
  • A New Labor Value Content requirement — a first for any U.S. trade agreement — requires 30% of work performed on automobiles manufactured in North America to be performed by laborers earning at least $16 per hour (approximately three times the average for autoworkers in Mexico) in order to qualify for duty-free treatment. This content requirement moves to 40-45% by 2023.
  • Mexico must relax constraints to allow its autoworkers to form and join labor unions.

Pharmaceuticals

An original version of the USMCA included several benefits to pharmaceutical companies. These benefits have been stripped from the amended version of the deal, as outlined below. Various alternatives are being discussed to protect biologics.

  • Removed: A 10-year IP protection that would have protected pharmaceutical companies from competition with “generic” drugs for a period of 10 years.
  • Removed: An additional 3-year IP protection for new-use drugs (i.e., existing drugs that are qualified for treatment of new diseases).

Agriculture

Canadian barriers to U.S.-produced dairy and other agricultural products have long been on President Trump’s radar. With the amended USMCA, a number of barriers have been reduced or removed, including:

  • Allowance for increased dairy product sales to Canada
  • Allowance for increased egg and poultry sales to Canada
  • Canada to abolish the “Class 7” pricing system, which is a specialized tariff on ultra-filtered milk, a high-protein dairy concentrate used in making dairy products such as cheese and yogurt.

Businesses with North American operations that have been taking advantage of duty-free treatment under NAFTA will need to completely re-evaluate their operations to ensure their products continue to qualify for status under USMCA as originating products of North America. Moreover, businesses with substantial operations in Mexico should expect to see increased costs and possibly competition associated with those operations. Although the current NAFTA rules will remain in place until the USMCA comes into force, businesses should prepare for the new rules in 2020. 

Fox’s experienced team of international trade attorneys is here to assist clients as they transition North American operations from NAFTA to USMCA.