- NAFTA 2.0 End Game Briefer
- Is the US happy with the deal?
- Will NAFTA 1.0 disappear if we don’t reach a deal by Friday?
- What’s the rush?
- What happens if Canada doesn’t go along with the new deal?
- Should Canada rag the puck?
- What does Canada have to do to cross the finish line?
- Highlights of the U.S.-Mexico Trade Deal
- Mexico and the United States Reach Preliminary Agreement in Principle in NAFTA Negotiations | White & Case LLP
- Preliminary Agreement in Principle
- Pending Issues: Steel and Aluminum Tariffs, Canadian Participation, and US Congressional Approval
- USMCA Trade Pact: What it Means for China, Key Stakeholders
- How different is the USMCA from NAFTA?
- US veto power targets China
- USMCA tightens country of origin rules, introduces minimum wage rule
- IP protections and digital trade
- Protection for governments from investor lawsuits
- US steel, aluminum tariffs to continue
- Sunset clause introduced
- USMCA still needs to get approved
NAFTA 2.0 End Game Briefer
I would give it a more than 50/50 chance. To be in the end game, two conditions must be met: Canada has to be able to live with the proposals worked out by the U.S. and Mexico over the past five weeks and there must be enough benefits across all sectors of the agreement to provide a landing strip for settlement.
- Condition 1, Autos and sunset clause – The major advancements made during the Mexico-U.S. talks focused on automotive rules of origin and watering-down the sunset clause – extending it to a 6 to 16 year configuration and removing the prospect of a deal cancellation. Early analysis indicates that the automotive proposal will raise the cost of vehicles in North America but, Canadian labor and automotive stakeholders have indicated that they can live with the new terms. Similarly, the new sunset clause proposal decreases investor certainty but is less bad that the original.
- Condition 2, Balance of benefits and concessions across a critical mass of sectors – When the trilateral meetings halted at the end of May, the three countries had settled 9 32 chapters. Easy issues such as support for SMEs were resolved but tough issues such as dispute settlement were outstanding. The USTR fact sheets on the bilateral deal (the only formal documentation released this week) show a smattering of progress across a range of sectors but much of the language is set out in very vague terms. What specific commitments there are tend to cut from previously agreed TPP texts, with a few exceptions discussed below.
The fact sheets do provide some directional arrows as to where the negotiations with Canada will be heading. For example, the threshold for duty-free treatment for low-value shipments across the border has been raised to $100 by Mexico. Canada has been holding out at $25.
Surprisingly, the fact sheets suggest that domestic supports in dairy, including supply management, would continue to be permissible as long as they are designed to have minimal trade distorting effects.
From what we know so far, the prospective deal is not as good as we hoped, but it is not as bad as it could have been.
Is the US happy with the deal?
It is important to remember that there are significant schisms between the White House and USTR on one side and Congress on the other, with farmers and business groups pushing back against the President’s most protectionist proposals. As soon as the U.S.
-Mexico deal was announced Monday, business groups and members of Congress began to weigh in on the inadequacies of the deal, from insufficiencies in labor to under-developed intellectual property protections.
It remains to be seen whether these interests coalesce into effective opposition to the USTR deal or whether these criticisms represent minority interests.
Will NAFTA 1.0 disappear if we don’t reach a deal by Friday?
Perhaps but not right away. Since the first days of his presidency, Donald Trump has threatened to launch a six-month notice of withdrawal. He might still do that but there are a number of Congressional hurdles as well as legal challenges that stand in the way of a full withdrawal.
What’s the rush?
If USTR submits a Notice of Intent to Congress by August 31, followed by a full text on September 30, then a deal could be signed by the U.S.
on November 29, but it could not be implemented until after about 105 days in the reporting and mark-up phase and then up to 90 days under congressional consideration. So, there is no possibility that a deal concluded this week would be considered by the current Congress.
However, this would provide Mexico with a ‘signed’ deal before President Lopez Obrador takes the Oath of Office on December 1.
What happens if Canada doesn’t go along with the new deal?
If Canada is not able to reach a deal with the other two Parties, the President has said he will submit the bilateral deal for consideration.
However, Congress could refuse to consider a US-Mexico deal because Trade Promotion Authority was given only for a three-party deal.
This would slow the process down by approximately 180 days as Congress considers whether to provide authorization for the two-party deal (too late to meet Mexico’s December 1 deadline).
Should Canada rag the puck?
Although Canada is not facing the same kind of political deadlines as the U.S.
– with the Congressional midterms in November – and Mexico – with the transition to a new President – the prolonged NAFTA negotiations and the associated tariff wars have created uncertainty in the minds of investors and manufacturers and had a dampening effect on the Canadian economy. Ragging the puck (strategic delays) will only prolong that uncertainty.
What does Canada have to do to cross the finish line?
Even though the USTR texts indicate that supply management might be maintained, President Trump has painted on a target on Canada’s Class 7 milk market and vowed to open it up to U.S. producers who, for a time, were able to export to Canada.
This issue is indicative of the kind of visible, politically popular ‘wins’ that the President will need to show his supporters that he delivered a great deal. Movement on the Chapter 19 review process for anti-dumping and countervail decisions will be trickier. These mechanisms are seldom used any more – except for softwood lumber. And we are in the middle of a lumber dispute.
Wiser legal minds suggest that there may be a way to introduce a review process that achieves similar results with fewer ruffled feathers, but I’ll leave that assessment to the lawyers. Government procurement continues to be a problem for Canada if the U.S. maintains its initial proposal, which would see Canada much worse off in future government contracting opportunities in the U.S.
Perhaps with procurement, as well as with the TN visa/movement of people, maintaining the status quo is the best that Canada can hope for right now.
It is pretty clear now what concessions Canada will probably have to make and that the main elements of the U.S.-Mexico deal are tolerable if not optimal.
Moreover, many of the areas of where consensus has already been reached, such as improved border clearance measures and benefits imported from the TPP on electronic commerce should be logged on the plus side of the ledger.
If sufficient benefits can be cobbled together in areas not discussed in this week’s public briefings, then Canada might well find a pathway to a deal sooner rather than later.
Highlights of the U.S.-Mexico Trade Deal
- Rules of Origin (ROOs)
- North American content increase from 62.5% to 75%.
- Other sectors facing tougher ROOs are Chemicals, Steel-Intensive Products, Glass, Optical Fiber, and Textiles
- Labor Value Added Content & Higher Wages
- 40-45% of auto content must be made by workers earning a minimum of $16 USD per hour. This will have the effect of shifting more production to U.S. and Canada.
- Rules of Origin (ROOs)
- Tariffs that are at zero will remain at zero.
- Non-discriminatory grading standards (aimed at Canadian grains)
- Attempts to roll back some recognition of EU geographical indications recently accepted by Mexico and Canada in their EU free trade agreements to allow continued access for U.S. users of GIs that are also common names (e.g. gorgonzola cheese)
- Biological drugs: 10 year protection
- Minimum Copyright term: 75 years (stronger than the TPP)
- Copyright safe harbors for Internet Providers:
- Notice-and-Takedown system vs. Notice-and-Notice System
- Similar to TPP, includes Prohibition of duties, electronic signatures, enforceable consumer protection, and prohibits data localization requirements.
- Mexico increases it from $50 to $100 USD
- Canada remains at $25 USD
- Agreement period set at 16 years
- A review will be conducted 6 years in to approve for another 16 years.
- Sudden death no longer on the table.
- Includes national treatment, MFN, and market access commitments
- Prohibition on local data storage requirements
- Eliminates comprehensive protection but provides ISDS for specific sectors: Energy, Telecommunications, and Infrastructure
- Dispute settlement for allegations of rules violation (Chapter 20)
- Panel review of national trade remedy decisions (Chapter 19)
- Government procurement (WTO government procurement commitments or NAFTA 1.0 could be maintained)
Sources: Thanks to all of our wonky friends in the verse, but especially @inumanak, @snlester, @lherman8, @JAHillman, and @chris_e_wilson.
Mexico and the United States Reach Preliminary Agreement in Principle in NAFTA Negotiations | White & Case LLP
On August 27, 2018, Mexican and US officials announced a breakthrough in the renegotiation of the North American Free Trade Agreement (NAFTA).
Mexican Minister of Economy Ildefonso Guajardo and United Sates Trade Representative (USTR) Robert Lighthizer announced a preliminary “agreement in principle” between the two countries, subject to finalization and implementation, on sensitive and non-sensitive NAFTA chapters, including new rules of origin for the automotive sector, the so-called “sunset clause”, seasonal agricultural exports, labor, and dispute settlement provisions. Canadian negotiators arrived in Washington, DC on August 28 to discuss the details of the new agreement with their US counterparts. Though the United States and Mexico have expressed their desire for Canada to join the agreement, the Trump administration (and the President himself) has indicated that the US Administration will begin the process of finalizing a bilateral agreement with Mexico if Canada does not agree to join the agreement by the end of this week.
We provide below an overview of the most sensitive issues covered by the new agreement in principle, and the next steps in the negotiations and implementation process.
Preliminary Agreement in Principle
Stricter Rules of Origin for Automotive Trade
- Regional value content (RVC) requirements will increase from 62.5 percent to 75 percent during a short transition period, i.e., automobiles must contain at least 75 percent originating content in order to qualify for preferential tariff treatment.
- A new “labor value content” rule will require that at least 40 percent of auto content and 45 percent of heavy truck content be made by workers earning at least $16 per hour in order to qualify for preferential tariff treatment
- According to the Mexican Secretariat of Economy, 68 to 70 percent of Mexican automotive exports to the United States comply with the new rule of origin, which will allow at least part of the automotive trade to continue to flow without disruption.
- Mexico and the United States will continue discussions regarding the United States’ ongoing investigation of automotive imports pursuant to Section 232 of the Trade Expansion Act.
- Two separate investor-state dispute settlement (ISDS) systems will be implemented. Under the first system, investors that have contracts in the telecommunications, energy generation, oil and gas, and infrastructure sectors will continue to enjoy the full protection of the existing ISDS system. However, investors in other sectors will have access to a limited ISDS system that only covers claims involving expropriation or failure to grant national treatment or most-favored nation (MFN) treatment.
- The United States and Mexico have agreed to eliminate Chapter 19, which provides for binational panel reviews of anti-dumping and countervailing duty determinations made by the governments of the NAFTA parties. However, Mexico will become eligible for exclusions from certain global safeguard remedies imposed by the United States pursuant to Section 201 of the Trade Act of 1974. Canada has previously insisted that Chapter 19 dispute resolution remain a part of any modified agreement.
- The United States and Mexico have agreed not to modify Chapter 20, which governs state-to-state dispute settlement between the NAFTA parties for controversies arising from the application of the agreement.
- The initial term of the agreement would be 16 years, with a review after year six. In the sixth year, the parties can decide to extend the agreement for another 16 years. Alternatively, if the parties do not decide to extend the agreement, they will hold reviews in subsequent years with a view to resolving any trade irritants.
- The agreement will include new, enforceable labor provisions requiring, among other things, that the parties (i) adopt and maintain in law and practice labor rights as recognized by the International Labor Organization, (ii) effectively enforce their labor laws, and (iii) not waive or derogate from their labor laws. USTR also has stated that the Labor chapter will include an Annex on Worker Representation in Collective Bargaining in Mexico, under which Mexico commits to specific legislative actions to provide for the effective recognition of the right to collective bargaining. The parties are expected to review the details of the new labor provisions in the coming days.
- The agreement will maintain existing duty-free treatment of agricultural products.
- A proposal by the United States to establish specialized procedures for trade remedy investigations involving seasonal and perishable goods was withdrawn and will not be included in the agreement.
- Specific provisions on biotechnology and other innovations in agriculture will be included in the agreement.
- The agreement confirms the recognition of “geographical indications” (GIs) for certain products. At the same time, USTR's fact sheet indicates that the agreement will not restrict market access in Mexico for US cheeses labeled with certain names. It is not clear how this would work in practice, or how it would be reconciled with Mexico’s commitments under other trade agreements.
Mexican and US negotiators also agreed to make numerous updates to non-sensitive NAFTA chapters, including (i) sanitary and phytosanitary (SPS) measures; (ii) transparency; (iii) good regulatory practices; (iv) technical barriers to trade (TBTs); (v) e-commerce; (vi) government enterprises; (vii) financial services; (viii) intellectual property; (ix) environment; and (x) energy cooperation.
Pending Issues: Steel and Aluminum Tariffs, Canadian Participation, and US Congressional Approval
US Steel and Aluminum Tariffs
Mexico and the United States will continue discussions in the coming weeks regarding the sensitive issue of US tariffs on steel and aluminum imports from Mexico.
Currently, Mexican steel and aluminum is subject to a 25 percent duty imposed after the Section 232 national security investigation, and Mexico has retaliated against certain exports from the United States. Mexico also has challenged the US Section 232 duties in the World Trade Organization.
The status quo apparently will continue until the governments come to some other agreement, which reportedly could include volume restrictions those applied to other suppliers, such as Argentina and Korea.
Canadian Participation in the Agreement
Canadian negotiators returned to Washington on August 28 to begin discussions with the United States regarding Canada’s potential participation in the agreement.
The Trump administration has indicated that, while it would prefer for Canada to join the agreement, it will begin the process of finalizing a bilateral agreement with Mexico if Canada does not agree to join the agreement by the end of this week.
Specifically, USTR stated that by this Friday, August 31, the Trump administration will notify Congress of its intention to sign either (1) a trilateral agreement with the NAFTA parties, or, if Canada refuses to participate (2) a bilateral agreement with Mexico. According to Ambassador Lighthizer, “ideally Canada will be in and we’ll be able to notify that.
If Canada’s not in then we’ll notify that we have an agreement with Mexico and that we’re open to Canada joining it.” Ambassador Lighthizer indicated that President Trump would sign an agreement (whether with Mexico only or with both parties) at the end of the 90-day notification period required under the Trade Promotion Authority (TPA) law (i.e., on November 29, 2018, if the notification is submitted on August 31).
Mexican officials have repeatedly expressed their “strong preference” for a trilateral agreement, but have declined to rule out the possibility of a bilateral agreement with the United States if Canada declines to join.
Mexican President-elect Andrés Manuel López Obrador’s representative in the NAFTA negotiations, Jesús Seade, stated that “The entire time it’s remained clear that [talks] were for a trilateral. It could be a bilateral if [the U.S. and Canada] don’t agree, but our strong preference is different[.
]” Mexican Foreign Minister Luis Videgaray similarly stated that “[w]e want Canada to be a part of this negotiation, part of this deal. However, we recognize there are variables we don’t control, that depend on third parties, that could yield a different result.
” He further stated that “[w]e will either have a new trilateral deal or a bilateral deal with the U.S … Mexico will have a free trade deal independent of factors that we can’t control.”
US Congressional Approval
The prospects for US congressional approval of a renegotiated NAFTA are uncertain, and the discussions are only beginning.
Congressional votes on free trade agreements historically have been contentious, but NAFTA (or whatever name a new agreement may take) faces additional uncertainties, given that the November mid-term elections in the United States may significantly alter the composition of the US Congress.
A bilateral agreement with Mexico faces additional uncertainties due to potential controversies over its eligibility for consideration under TPA legislative procedures.
Indeed, some have argued that a bilateral agreement with Mexico is not eligible for consideration under TPA procedures because the Trump administration notified and consulted Congress regarding its intention to negotiate a revised NAFTA with Canada and Mexico, not a bilateral agreement with only Mexico.
Others, including USTR Lighthizer, have argued that a bilateral agreement can proceed under TPA legislative procedures. This particular controversy may become moot depending on the outcome of ongoing discussions with Canada. However, as noted above, Congressional approval of even a trilateral agreement between the United States, Canada, and Mexico is far from guaranteed.
In the meantime, the business community will have to accept a period of uncertainty while these and other issues progress. An optimistic scenario is a new, trilateral agreement that could enter into force in 2019, with the current agreement remaining in place until then. There are many less optimistic scenarios.
Please follow this link for the full press USTR press release on the agreement in principle with Mexico.
Click here to download PDF.
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© 2018 White & Case LLP
USMCA Trade Pact: What it Means for China, Key Stakeholders
After more than a year of talks, the United States, Canada, and Mexico finally agreed to a new trilateral trade deal just before the Trump administration’s self-imposed deadline of September 30.
The new deal, which updates the 1994 North American Free Trade Agreement (NAFTA), is called USMCA – literally spelling out as the United States-Mexico-Canada Agreement.
The decision to drop ‘free trade’ in the pact’s name is telling – key concessions give into American protectionism, strengthen the US position on its escalating trade war with China, and generally push for less free trade.
While the details have been agreed to by negotiators, legislators in each country still have to approve the agreement. If the USMCA is passed, most of the agreement’s provisions won’t come into effect until 2020.
How different is the USMCA from NAFTA?
The short answer is not really. Renegotiating NAFTA was a key election campaign promise for US President Donald Trump, and the new deal is mostly a mix of the old NAFTA and the Trans-Pacific Partnership (TPP), which Trump pulled in January 2017.
Yet, a few changes introduced in the USMCA deal have huge implications for the automotive sector, besides provisions affecting the agriculture market, environmental regulation, intellectual property (IP), and digital trade.
More important though is the way the USMCA is upfront in its support of American trade and economic interests over free market principles.
Below we discuss some of the new provisions and Trump’s American pivot, which could affect trade partners around the world.
US veto power targets China
Most eyes have been on the inclusion of Article 32.10 in the USMCA deal, which lays out the consequences of negotiating an FTA with ‘nonmarket economies‘ – which most read as a code word for China.
What this means is that if either Canada or Mexico want to negotiate a trade agreement with China, they must inform the US three months prior. In case a bilateral FTA gets signed with China, any of the three trade partners could terminate the USMCA with just six months’ notice.
Many are looking at this ‘us or them’ clause as more symbolic than substantive.
Article 2205 of the previous NAFTA agreement already allowed any signatory to withdraw from the agreement with six months’ notice. wise, Article 34.6 of the USMCA also allows any country to withdraw from the USMCA with six months’ notice without needing justification.
Further, both Canada and Mexico are not anywhere close to signing such an FTA with China. While Canada, in particular, has explored the possibility of signing an FTA with China, both countries share many of the same grievances as the US. Mexico is also keen to strengthen its position as a cheap manufacturing and sourcing base, and potential alternative to China.
USMCA tightens country of origin rules, introduces minimum wage rule
The USMCA zeroes in on the automotive sector. Under the new deal, cars and trucks must have 75 percent of their components manufactured in the US, Mexico, or Canada to qualify for zero tariffs. The limit was 62.5 percent under NAFTA.
This will require automakers selling to North American consumers to stop sourcing some parts from cheaper destinations in Asia, including China, Vietnam, and India – to avail of tariff benefits, significantly adding to final market costs.
Further, a minimum wage rule has been imposed on the auto sector for the first time. The USMCA demands 40 to 45 percent of auto manufactures be produced by workers who earn at least US$16 an hour by 2023. Borrowing from the TPP, the USMCA will allow each country to sanction the others for labor violations that impact trade – though the process is quite complex.
In any case, the wage and country of origin rules disincentivize investment and production in Mexico (or China or Vietnam for that matter), where lower pay scales and cheap manufacturing have long resulted in the loss of US jobs and plants – something the Trump administration hopes to end.
At the same time, such higher wage standards and sourcing constraints will make North American cars less competitive in the international market; costlier production will directly result in higher prices of cars and trucks. This may reduce their exports to the rest of the world as automakers in Asia or Europe are not subject to American rules of origin.
If such a scenario were to materialize, foreign automakers would not be hard pressed to diversify their investments in non-North American markets.
China, for example, is still the largest car market in the world, despite recent slowdown in sales.
In fact, market analysts point to China’s maturing consumer standards, where interest in buying electric cars, German luxury, and Japanese brands continue to be leading trends.
IP protections and digital trade
The USMCA extends the terms of copyright from 50 years beyond the life of the author to 70 years beyond the life of the author.
In the biopharmaceutical sector, the new deal increases protections for biologics from eight years to 10 years – which will protect new drugs from competition from generic, cheaper manufacturers.
Finally, the USMCA introduces provisions targeting the digital economy – a major revision on the two decades-old NAFTA.
It includes no duties on products purchased electronically, such as music downloads or e-books and protections for internet companies so that they are not liable for content produced by users on their platforms.
Protection for governments from investor lawsuits
Chapter 11 in the original NAFTA enabled investors to sue governments over policy changes seen to harm their future profits.
This has been eliminated for the US and Canada; in Mexico it is restricted to a few sectors, such as energy.
The mechanism has been known to be used by companies to challenge health and environmental regulations.
US steel, aluminum tariffs to continue
Section 232 is a trade loophole that the Trump administration has been using to impose steel and aluminum tariffs on all its external competitors, including allies – Canada, Mexico, and the European Union, among others. This loophole will remain in the USMCA.
Section 232 basically allows the US to block imports of materials that are critical for national security and to ensure that the country has reliable supplies in the event of a war. Given that logic, the tariff impositions make little sense – the US gets much of its steel from its allies.
What the clause does is give legal heft to the Trump administration’s ability to impose such tariff protections on its domestic industries.
Sunset clause introduced
The USMCA contains a ‘sunset clause’ – the terms of the agreement will automatically expire after 16 years unless it is explicitly extended by the parties. The US initially wanted a five-year sunset clause.
Additionally, the deal will be reviewed every six years, at which point the US, Mexico, and Canada can decide to extend USMCA.
USMCA still needs to get approved
The USMCA pact must get approved by lawmakers in all three countries for it to come into effect. If there is push-back from any of the signatories, the deal might end up at an impasse.
The coming November will see mid-term elections in the US, which might shift party representation in Congress. Mexico will soon see a new government as outgoing president, Peña Nieto, leaves office on December 1.
Meanwhile, Canada’s concessions to the US on agriculture and steel and aluminum tariffs will ly become campaign issues as the country heads into an election year in 2019.