After more than a year of negotiation, the United States, Mexico and Canada reached an agreement to update the North American Free Trade Agreement (NAFTA), which governed trade among the three nations. The new agreement may not go into effect until 2020 because leaders from the three countries must sign it and then Congress and the legislatures of Canada and Mexico must approve it – a process that will take months.

The three NAFTA parties are expected to sign the agreement on November 30. After signing, for ratification in the United States, Trade Promotion Authority (TPA) procedures require the U.S. International Trade Commission (USITC) to perform an economic analysis of the agreement, for which it can take a maximum of 105 days. If USITC takes the maximum allotted time, Congress could vote on the agreement in March 2019 (though it is possible for this process to be accelerated). The November midterm elections in the United States could have an impact on whether and when the agreement will pass Congress.

Functionally, the proposed U.S.-Mexico-Canada Agreement (USMCA) picks up elements of the Trans-Pacific Partnership (TPP) and tightens others relative to what NAFTA provided.  Essentially, the major accomplishment of the USMCA is to keep the three-country agreement in place, despite Trump’s threats to withdraw from the NAFTA.  Some think that President Trump could still threaten to withdraw from NAFTA as a means of pressuring Congress to act on the USMCA.

The USMCA makes a number of significant upgrades to environmental and labor regulations regarding Mexico. It also requires additional Intellectual Property protections. U.S. pharmaceutical companies are provided 10 years of protection against generic brands in Canada.

Some of the other key industry points in the proposed USMCA are that Canada made concessions on dairy in exchange for being able to keep in place Chapter 19, the dispute settlement mechanism for reviewing Antidumping/Countervailing Duty determinations. Canada has used this provision to challenge softwood lumber provisions.

Investor-state dispute settlement (ISDS) will phase out for Canada and be limited to certain sectors in Mexico – oil and gas; power generation services; telecommunication services; transportation services; and ownership or management of infrastructure.

Below is a breakdown regarding how the various industries might be affected:

  • Steel and aluminum tariffs – remain in place, as do Mexico’s retaliatory tariffs.  These industries are subject to additional discussion.
  • Autos/auto parts – The goal of the new deal is to have more cars and trucks made in North America. The side agreements with Canada and Mexico spell out how much trade would be excluded from any future section 232 tariffs in this sector, if imposed.  The auto and auto parts sector will have new rules of origin (with the hourly wage component of $16/hour or “labor value content” required initially for 30% of the work accomplished, phasing up to 40% over three years) that could affect supply chain decisions.  For example in order to qualify, a car or truck must have 75% of its components manufactured in the United States, Mexico, or Canada (this is up from the current 62.5% requirement).
  • Textiles/apparel – More North American content is required.  Tariff Preference Levels (TPL) allowing use of non-originating fabric will be more restrictive.
  • Chemicals – a new approach to rules of origin for chemicals spells out a number of methodologies that could apply. This was an approach that industry wanted and is expected to make it easier for chemicals to qualify under the agreement.  The industry had done a study under the NAFTA and found that only about half of chemicals transactions received duty-free treatment under NAFTA because the paperwork discouraged claiming the treatment.
  • Dairy – Canada agreed to increase access under the USMCA to 3.59% (from the 3.25% that would have applied under TPP), and to eliminate Class 6 and 7 price mechanisms. But Canada will be required to establish safeguards (through specified price surcharges) to prevent surges in shipments of milk protein concentrates, skim milk powder and infant formula

The deal among the countries must be reviewed in six years before it goes into effect for the full 16 years. It will then be reviewed in another 16 years.

 

 

 

 

 

 

 

On August 31, after a week of talks, Canada and the United States failed to reach agreement on a new NAFTA that aligns with the bilateral U.S.-Mexico agreement reached on August 27. Among the key outstanding issues is the U.S. objective of opening up Canada’s dairy market and the Canadian objective of maintaining Chapter 19 of the original NAFTA’s dispute settlement for antidumping and countervailing duty cases. Canada will resume negotiations with the U.S. on September 5.

Despite the breakdown in talks, the Trump administration notified to Congress its intent to sign an agreement with Mexico, noting also the possible inclusion of Canada if agreement is eventually reached. The notification begins the 90-day timeline under Trade Promotion Authority (TPA) after which the administration can, according to USTR, legally sign an agreement with both Mexico and Canada. Although there are some legal questions as to whether adding Canada after the notification would fulfill TPA notification requirements, it is not likely to face significant challenge (most would like to see Canada included in the agreement).

60 days prior to signature, however, the Trump administration is still required under TPA to publish the text of the new NAFTA agreement, meaning a text must be agreed to and released by October 1 in order to achieve the administration’s goal of a signed agreement before December 1, when Mexican President Enrique Pena Nieto’s term ends. This likely means that Canada and the U.S. would have to agree on terms by the start of October, if not before.

If no agreement with Canada is reached, it remains possible that the Trump Administration would seek to terminate the existing NAFTA and replace it with the August 27 bilateral U.S.-Mexico agreement. This of course would raise the significant legal and political concerns noted in our August 29 post.

 

On August 27, the U.S. and Mexico announced a “preliminary agreement in principle” on the renegotiation of NAFTA—a deal reached without Canada, which sat out the latest bilateral talks. Canada’s Foreign Minister, Chrystia Freeland, has joined negotiations this week in hopes of reaching a trilateral agreement by Friday, August 31. Despite the significant publicity around this announcement, the ultimate fate of NAFTA still remains uncertain, given that Canada was not part of the bilateral deal and many details have yet to be released.

Link to CNBC Squawk Box discussion on NAFTA with Ambassador Robert Holleyman, Crowell & Moring (8/29/18).

The parties are attempting to conclude negotiations to allow for the Mexican President Enrique Peña Nieto’s Administration to sign the deal before he leaves office on December 1. By statute, U.S. Trade Promotion Authority (TPA) procedures require the Trump Administration to notify Congress 90 days before it can sign any agreement, which it seeks to do while Peña Nieto is still in office. U.S. Trade Representative (USTR) Robert Lighthizer has said he will notify the agreement to Congress this Friday, with or without Canada.

While the U.S. President has the authority to negotiate trade agreements, he does not have the authority to implement trade agreements.  Once negotiations are complete, the President must notify Congress and then submit an implementing bill for approval by both houses of Congress (see TPA statutory timelines below). The vote under TPA is a yes or no majority vote on the negotiated agreement and amendments are not permitted.  The preliminary “agreement” with Mexico, or one to be reached with Mexico and Canada, has no legal significance until it is approved by Congress. This process is expected to continue into 2019.

Trade Promotion Authority Timeline

Source: Congressional Research Service

According to USTR fact sheets, the preliminary agreement with Mexico includes the following:

  • Market access: Maintains zero tariffs on originating agricultural and industrial products
  • Autos/Auto parts: Requires 75% of auto content to be made in Mexico or the United States and 40-45% of automobile content be made by workers earning at least $16/hour in order to qualify for duty-free treatment; it is unclear if existing facilities will be exempted from this requirement
  • Other industrial products: Strengthens rule of origin for other industrial products such as chemicals, steel-intensive products, glass, and optical fiber
  • Textiles: Limits rules that allow for non-originating inputs to qualify for duty-free treatment, including for sewing thread, pocketing fabric, narrow elastic bands, and coated fabric
  • Agriculture: Enhances rules for sanitary and phytosanitary standards and protects use of certain geographical indicators (GIs)
  • Intellectual property: Protects biologics data for 10 years, extends minimum copyright terms to 75 years, and enhances patent and trademark protections
  • Digital trade: Minimizes localization requirements on data storage and processing, limits requirements for disclosure of proprietary source code and algorithms, and limits civil liability of Internet platforms for hosting non-IP content

According to press reports, the agreement also includes the following:

  • Sunset clause: Requires the U.S. and Mexico to renew the agreement 6 years after entry into force, for the agreement to extend beyond a 16 year-period
  • Investor-State Dispute Settlement (ISDS): Limits ISDS protections outside of the oil and gas, energy, telecommunications, and infrastructure sectors
  • Autos/Auto parts: While not made explicit, reports suggested that Mexico could receive an exception from supplemental import duties arising from the national security investigation into autos and auto parts.  This suggests that the U.S. is still considering implementing new supplemental import duties on autos and auto parts pursuant to Section 232 of the Trade Expansion Act of 1962.

NAFTA termination and replacement?

In announcing the deal, President Trump suggested he could terminate NAFTA and replace it with the bilateral U.S.-Mexico agreement if no agreement is reached with Canada. Actually doing so would raise two immediate legal concerns: 1) whether President Trump can withdraw from NAFTA without Congress, and 2) whether the Trump Administration has legal authority to enter into a bilateral agreement with Mexico under TPA procedures, given that the Administration previously notified intent to renegotiate NAFTA in May 2017.

Termination:  The consensus is that President Trump can unilaterally terminate NAFTA – although not all of the provisions enacted as part of the original NAFTA implementing legislation approved by both houses of Congress and signed into law in 1993.  NAFTA is not a “treaty” from a constitutional perspective because it was not approved by two-thirds of the U.S. Senate in accordance with Article II, section 2 of the U.S. Constitution. NAFTA is an “executive agreement” approved through the adoption of ordinary legislation adopted by both houses of Congress under TPA.

Article 2205 of NAFTA provides that “[a] Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties.” The president shall have 60 days following the day of withdrawal to submit to Congress recommendations as to the appropriate rates of duty for those articles which were affected by the termination.

To date, there has been no litigation challenging the President’s power to withdraw from a trade agreement. A legal challenge may be made in U.S. courts on the basis that the President had exercised his delegated powers to negotiate trade agreements in a manner inconsistent with what the Constitution and/or Congress intended. As noted above, however, the legal consensus is that the President can withdraw from NAFTA given the explicit termination clause embedded in the agreement. Therefore, it is not likely that such a challenge will be successful.

 

Bilateral or trilateral replacement agreement: A Mexico-U.S. only agreement would face political difficulties: Mexico has thus far indicated a strong preference that Canada remain a part of any agreement, and leading U.S. lawmakers have also made statements in favor of a trilateral agreement.  Mexico has suggested that Canada could join the agreement during the 90-day period before it is signed.  Further questions also remain about whether Canada’s later entry would satisfy TPA notification procedures.