United States Mexico Canada Agreement (USMCA)

Top Line

Late last night, Foreign Affairs Minister Chrystia Freeland and United States Trade Representative Robert Lighthizer issued a joint press release announcing a new trilateral North American Free Trade Agreement (NAFTA), also including Mexico. The updated NAFTA will be named the United States-Mexico-Canada Agreement (USMCA).  The Agreement comes after over 13 months of sometimes tense negotiations, presumed deadlines missed, and intense media and stakeholder attention.

Any way you cut it, concluding a ‘new NAFTA’ is a significant political milestone for Prime Minister Trudeau.  The Liberal Party is now assured of entering an election year having secured the continuation of Canada’s most important trade agreement and its most critical export market.  Additionally, armed with that certainty, the Government can now turn its focus to other priorities that took a back seat to a negotiation that was unexpected when the Liberals formed government.

Stakeholders should expect the Government to highlight USMCA as one of its most important economic policy accomplishments during the 2019 Election campaign.

In that context, and seeing an issue on which the Prime Minister could score political points heading into an election year, the main opposition parties were quick to highlight areas of USMCA for which there may be concern about what Canada gave up in order to secure an agreement.  NDP Leader Jagmeet Singh said that the new deal is worse than NAFTA, hurting farmers and making medications more expensive, while Conservative Leader Andrew Scheer criticized the Government for making concessions without securing an end to “Buy American” policies and U.S. tariffs on softwood lumber and steel.

Key Highlights

 Automobile Manufacturing

  • No hard cap will be placed on Canadian auto parts exports to the U.S.  Potential tariff measures will be limited to U.S. auto imports well above the current amount of Canadian exports to the U.S.
  • A vehicle built and sold in North America will only be tariff-free if 75 percent of it is made from North American parts (an increase from the current 62.5 percent, to be phased in over 5 years).
  • By 2020, 30 percent of the value of a vehicle built and sold in North America must be made in North America by workers earning $16 an hour or higher (this is approximately three times the average wage in Mexico), increasing to 40 percent in 2023.

Supply Management

  • Canada’s quota system for managing the market supply of a number of agricultural products will remain in place.
  • Canada will give U.S. producers access to just under 3.6 per cent of Canada’s current dairy market.  Prime Minster Trudeau committed to compensating the Canadian dairy sector for the loss of market share.
  • Canada will scrap a recent pricing system change that created a drop in domestic dairy product ingredient prices – a measure that was seen to undercut quota-exempt U.S. diafilitered milk imports.
  • USMCA will also increase U.S. market access in the other supply-managed industries.

IP Chapter

  • Protections for new biologic drug patents will be extended to 10 years.
  • Term of copyright will be extended from 50 years to 70 years after the artist or creator’s death.
  • Canada’s Notice and Notice regime, which requires Internet Service Providers to forward on to their customers any notice of copyright infringement received from creators or copyright holders, will remain in place.
  • Criminal and civil penalties will be imposed for the contravention of Technological Protection Measures.

Digital Products

  • Requirement of non discriminatory treatment of digital products.
  • Rules that facilitate the cross border transfer of electronic information.

Cultural and Indigenous Exemptions

  • The cultural exemptions in NAFTA will remain in USMCA, allowing Canada to keep its Canadian content restrictions for radio and television broadcasts, as well as ownership restrictions.
  • The Agreement does not prevent Canada from adopting or maintaining a measure it deems necessary to fulfil its legal obligations to Indigenous peoples regarding cultural protection.

Buy American

  • Sub-national government (state and local) policies that prevent Canadian firms from bidding on American government contracts will still be permitted.

China

  • USMCA includes a non-market economy clause giving any of the three signatories the right to exit the Agreement if another signatory enters into a trade agreement with a country that doesn’t have a market-based economy (i.e. China).

Chapter 19 Dispute Recognition

  • USMCA maintains the independent trilateral panels established under NAFTA for handling trade disputes between the three signatories, which was a priority for Canada during negotiations.

Energy Proportionality Clause

  • The NAFTA clause that required a fixed portion of Canada’s energy market to be made up of U.S. exports has been eliminated.

Investor State (Chapter 11)

  • The NAFTA provision that allowed a company to sue a signatory to the Agreement, if the company believed it had been unlawfully discriminated against, is being phased out for Canada and the U.S.

Sunset Clause

  • USMCA is automatically set to terminate after 16 years, unless renewed.  The signatories will meet every sixth year to conduct a joint review and decide whether to renew the Agreement for a further 16 years.

Steel and Softwood Lumber Tariffs

  • These tariffs remain in place, and President Trump said he sees them as separate issues to USMCA.

Reaction

The business community has largely been supportive of USMCA.  Reaction from organized labour has been mixed, with some labour groups celebrating the new Agreement and others, particularly those that represent workers in the steel industry, expressing disappointment.

Other negative reactions have come from supply-managed industries and some Premiers, notably Doug Ford and Quebec Premier Philippe Couillard, who both expressed concern for provisions that open up Canada’s agricultural markets.  For Mr. Couillard, the issue may even have an impact on his political future, as Quebec began voting in its Provincial election only hours after USMCA was announced.

What’s Next

Canada must table implementing legislation for USMCA in the House of Commons, and passing that legislation will now be one of the Liberal Party’s top priorities.  How Independent Senators, who are growing in number, treat that legislation will be an important factor in how quickly and easily it is passed.

With the ‘new NAFTA’ negotiations concluded, the Government will have more free resources to address other economic issues, as it prepares for Budget 2019 and the Federal Election next Fall.

Developments in both the United States and Mexico also bear close monitoring.  Since USMCA was tabled by October 1st, the current U.S. Congress will be able to vote to ratify the Agreement before its mandate expires at the end of December and the current Mexican administration will be able to ratify the Agreement before the new Mexican President-elect takes office in December.