You could hear a collective sigh of relief in some quarters when trade negotiators reached a compromise for a new US-Mexico-Canada Agreement (USMCA). The USMCA would replace the North American Free Trade Agreement (NAFTA). The USMCA deal agreed to on September 30, 2018 adds Canada to a US-Mexico agreement completed in August of this year.
What is Most Important?
Assuming legislative approval, there is still a free trade agreement among the US, Mexico and Canada.
Since NAFTA was implemented in 1994, trade volumes among the countries increased from $290 million in 1993 to more than $1.1 trillion in 2016. Closer trade integration has improved competitiveness through more cost-efficient supply chains, among other benefits. The recent threat to withdraw from NAFTA was a source of considerable anxiety and uncertainty.
Status Quo NAFTA or Something New?
While many of the NAFTA rules continue, the USMCA includes some noteworthy modifications that affect companies; all phased in over several years.
- Higher Regional Content for Vehicles
Under the USMCA, vehicles would need to have 75 percent of the regional value content sourced from the US, Mexico, and Canada to qualify for duty-free treatment, up from 62.5 percent in NAFTA. This change in the Rules-of-Origin is intended to force automakers to source more parts from US, Mexican, and Canadian manufacturers.
- High-Wage Factory Production Requirement
To qualify for duty-free treatment, the USMCA would mandate that a significant percentage of parts must be produced in high-wage factories to be eligible for duty-free treatment. By 2023, at least 40 percent of components must be made in factories where workers average at least $16 per hour.
- US Steel and Aluminum Tariffs Still Apply to Mexico and Canada
Recently imposed US tariffs on aluminum and steel have not been eliminated under USMCA, nor have the Mexican and Canadian retaliatory tariffs been removed.
- Cap on Vehicles Exported from Canada and Mexico to the US
Under the USMCA, both Canada and Mexico are limited to duty-free exports of 2.6 million vehicles to the US market. The US will charge duties of 2.5% on finished vehicles once the cap is exceeded. Mexico and Canada exported approximately 2.57 and 1.6 million vehicles, respectively to the US over the past during the past 12 months.
- USMCA is a 16-Year Agreement and a Review Every Six Years.
USMCA has a 16 year “sunset clause” where the agreement expires. Negotiators also agreed upon a review period every six years where each party can decide whether they wish to continue.
- Under-the-Radar Changes
The USMCA does provide for increased market access in the financial services and Canadian dairy industries. The agreement also enhances intellectual property protection, most notably for pharmaceutical companies. Finally, the USMCA also makes it easier for Mexican workers to join labor unions.
No Guarantee that USMCA Will Be Implemented
Trade negotiators did have a firm September 30 deadline to reach an agreement, so Mexico’s outgoing president Enrique Pena Nieto could sign the deal before leaving office December 1, 2018. However, legislatures must still ratify the USMCA, including a new US Congress starting in 2019. NAFTA passage was a difficult legislative feat in 1994, and we expect domestic political considerations may drive whether USMCA is ultimately implemented. Hold your breath!
For more information, contact Clayton & McKervey.