NAFTA 2.0: The USMCA – More An Evolution Than A Revolution

Author:Mr Joaquín Contreras, Scotty (Maryscott) Greenwood, Gordon D. Giffin, Paul M. Lalonde, James Moore and Michael Agosti
Profession:Dentons
 
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Overview

It has been 13 months since US President Donald Trump initiated the renegotiation of the North American Free Trade Agreement (NAFTA). During that time, officials under Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto have engaged in intensive negotiations, while managing rapidly-evolving political challenges. Despite these challenges, the US and Mexico finalized an Agreement in Principle on August 27, 2018, and just a day before President Trump's October 1, 2018 deadline, all three countries settled on what is now known as the US-Mexico-Canada Agreement (USMCA).1

We anticipate the three leaders will sign the USMCA at the G20 Summit in Buenos Aires, Argentina (taking place from November 30 to December 1, 2018). While the USMCA is a major milestone that strengthens confidence and integration in the North American market, the legislatures of each country will be required to ratify the deal. Until this time, the possibility that the US withdraws from NAFTA remains a risk.

Ratification of the agreement will not likely begin until 2019 due to the US midterm elections held in early November, which may pose unforeseen challenges should a new Democratic majority in Congress challenge the agreement. Leadership in Canada and Mexico will have to determine their own legislative timetable against the lead of their American counterpart. As this process could take months, the USMCA will likely not come into full force until early 2020.

The USMCA includes a number of significant changes in areas that will affect businesses across North America and beyond. The following brief explores these changes, and provides political perspectives from the US, Canada and Mexico.

This high-level overview will be the first in a series in which Dentons examines how different industries will be impacted by the USMCA.

The US-Mexico-Canada Agreement: Key takeaways

Sunset clause

US officials signalled early on in the NAFTA negotiations that they wanted to include a 'sunset clause' in the modernized agreement, which would require a full renegotiation every five years. Both Mexico and Canada rejected this outright, publically signalling it a 'red line' due to concerns that the inclusion of a sunset clause would significantly limit the certainty required for businesses to make mid-to-long-term investment decisions, and that the agreement would fall subject to political machinations of the day.

The compromise agreed upon in the USMCA, with noteworthy support from Mexican negotiators, is a review of the agreement every six years to determine whether it should be extended beyond its now 16-year lifespan.

Autos: Rules of origin

The US opened with a tough posture on autos, seeking a 50 percent US content requirement in all cars; though this demand was later dropped. What was agreed to in the USMCA is higher levels of North American components in cars writ large. The new North American content threshold is now 75 percent, up from 62.5 percent under NAFTA. A 70 percent North American steel and aluminum requirement is now also required for tariff free import. Governments anticipate these changes will further incentivize auto production and auto parts sourcing in North America.

Of significant importance in the USMCA is the new labour value content provision...

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