By Bracewell, LLC
What just happened?
The US, Mexico, and Canada agreed to a revised version of the North American Free Trade Agreement (NAFTA. The new agreement is called “United States-Mexico-Canada Agreement” (USMCA). The Trump Administration framed the deal as a new model for trade agreements that balances the concerns of business groups that depend on the free flow of trade, and labor groups that traditionally opposed to such pacts.
What happens next?
The release of the USMCA text allows the Trade Promotion Authority (better known as “fast track”) process to continue, and the action last night allows the agreement to be signed before the current President of Mexico leaves office on December 1, removing potential pressure on Mexican President elect Andrés Manuel López Obrador to revisit the agreement to address outstanding controversies.
The USMCA cannot be enacted without Congressional adoption, and Congress is expected to take up the issue in the first quarter of 2019. Congressional leaders are expressing cautious optimism, and the next months will be marked by intense advocacy regarding many aspects of the USMCA.
Summary of USMCA
For most stakeholders, the USCMA will represent a welcome continuation of existing tariff-free treatment for trade between the US, Canada, and Mexico. What follows are some of the major areas that the USMCA addresses.
The agreement negotiated Sunday also included four side letters on tariffs. Canadian negotiators sought to address two particular issues: the Section 232 steel and aluminum tariffs and potential section 232 action on automobiles. Canada requested that the Trump Administration lift steel and aluminum tariffs on the two USMCA partners as part of the agreement, something the Administration declined to do. The US did agree, however, to exempt the current automobile and auto-part production capacity of both countries from any new Section 232 action. The Department of Commerce is still investigating potential harms from automobile imports and the Administration stressed that it has not yet decided to move forward with tariff action.
In a separate set of letters, the US committed to exempt both Mexico and Canada from any new Section 232 actions for 60 days after a measure is imposed in order to “seek to negotiate an appropriate outcome.”
Dispute resolution provisions have been controversial in several respects, ranging from how to settle trade-related disputes among the states themselves, to protections for investors doing business in member countries. Chapter 19, which governs intergovernmental disputes like the imposition of anti-dumping duties, was a major issue for Canada, which succeeded in retaining many of its protections. However, the USMCA contains significant restrictions on the investor-state dispute settlement (ISDS) process established in the original NAFTA.
First and foremost, the new agreement eliminates ISDS with Canada entirely, and what remains of it with respect to Mexico has been significantly curtailed. Investors’ ability to settle disputes with Mexico under USMCA is limited to specific sectors and types of contracts:
- The Agreement allows claims in three areas: legacy investments, breaches of national treatment or compensation provisions, and certain government contracts.
- The government contracts provision applies to specific sectors including oil and gas, power generation, transportation services, telecommunications, and transportation infrastructure. Protections are, however, subject to a number of conditions. Only claimants that are party to “covered government contracts” are able to engage in investor-state dispute settlement. “Covered contracts” are defined as written agreements between a “national authority” of a North American country and an investor. While “national authority” is defined as authority at the “central level of government” it includes persons or state enterprises exercising delegated authority. It is unclear what delegated central government authority means in practice and eventual guidance or clarification of this provision will have important consequences for investments in this sector.
Canada agreed to eliminate its controversial “Class 6 and Class 7” dairy pricing system which adjusts the price of domestic milk ingredients used to make cheese and yogurt. It also agreed to a number of other provisions that will allow US producers access to the Canadian dairy market and marginally restrict excessive Canadian exports. Negotiations on dairy were one of the main sticking points during negotiations over the weekend and the Agreement represents a key concession to the US
The USMCA contains a clause that the agreement will sunset after 16 years if it is not renewed or renegotiated. Under the Agreement the three North American partners would meet every six years to decide whether to renew or revise the pact. A vote to renew the Agreement would restart the 16-year clock, keeping he USMCA perpetually a decade and a half away from termination. This clause, however, is much less than the five-year sunset initially proposed by USTR. Multiple parties have argued that the uncertainty occasioned by sunset clauses harms investment decisions and future planning. The 16-year compromise is hardly ideal, especially if the discussions every six years are as tense as negotiations this year, but the longer horizon should help alleviate any broader uncertainty.
The agreement contained a key USTR demand to increase the North American content requirement for automobiles receiving duty-free status. The requirement will move from 62.5% to 75% and require that all “core parts” originate in North American countries. Additionally, the USMCA contains a provision sought by labor unions requiring that at least 40% of automobile contents be made by workers earning an average base wage of $16 per hour or more.
This weekend’s events represent the close of the negotiation phase of the NAFTA process, but there is still a lot of work to do before USCMA replaces NAFTA. Over the coming months, stakeholders in the US, Mexico, and Canada will be going through the details of the agreement and it is likely that new fights will arise as the nuances of compromises are better understood. Ultimately, the US Congress is most likely to serve as an obstacle for the USCMA, and members of Congress will be watching the coming midterm elections closely to gauge the public’s attitude towards the President and his trade deals.