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U.S. and Canada Reach Deal on New Tri-lateral Trade Agreement

Following weeks of intense bi-lateral negotiations, the United States and Canada struck a deal 30 September on a new, modernised tri-lateral trade agreement to replace the North American Free Trade Agreement more than a month after the United States reached a separate deal with Mexico. According to a joint press release posted on the Office of the U.S. Trade Representative’s website, the so-called United States-Mexico-Canada Agreement (USMCA) is a “high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region.”

The release of the full text of the USMCA on the USTR website allows the three heads of state to sign the agreement at the end of November, so that it can be submitted to the U.S. Congress for ratification in 2019. With the possibility that the 6 November U.S. mid-term elections could change the political balance in one or both legislative chambers, the USMCA may face ratification challenges in the legislative bodies of all three countries. If approved, the USMCA would be in place for a renewable 16-year term and the parties would be required to conduct a joint review of the agreement’s operation by the sixth year.

The USMCA includes a number of provisions of particular importance, many of which will be evaluated by analysts in considerable depth in the days and weeks ahead. Most notably, the North American free trade area will remain essentially intact under the new deal although it will be more difficult for a number of products to qualify for duty-free treatment. More stringent origin rules were pushed by U.S. negotiators in an effort to increase North American value content and limit the use of foreign components, including components made in mainland China. These rules could potentially have a dampening effect on exports of certain textile inputs, automotive parts and certain other products from Hong Kong and mainland China to the North American continent.

For example, beginning on 1 January 2020 new rules of origin for cars, light trucks and a number of key automotive parts would gradually raise the required regional value to qualify as originating from 62.5 percent currently to 75 percent as of 1 January 2023. In addition, at least 40 percent of annual passenger vehicle production as of 1 January 2023 would have to rely on workers earning at least US$16 per hour and auto manufacturers would be required to make at least 70 percent of their annual steel and aluminium purchases in North America. The agreed wage rate significantly exceeds the prevailing Mexican wage rate in the auto sector and critics anticipate that it may prevent any assembly of small cars in Mexico as well as any export of autos from Mexico to non-USMCA countries.

In separate side letters, the United States has also committed to exclude from any eventual Section 232 measures against foreign auto imports (i) 2.6 million passenger vehicles per year from Canada and another 2.6 million passenger vehicles per year from Mexico (these vehicles are classified under subheadings 8703.21 through 8703.90); (ii) light trucks of subheadings 8704.21 and 8704.31 imported from Canada and Mexico; and (iii) US$32.4 billion worth of auto parts imports from Canada per year as well as US$108 billion worth of auto parts imports from Mexico per year. An additional commitment secured by Mexico would also place ceilings on the most-favoured-nation rate assessed by the United States on non-originating passenger vehicles, light trucks and auto parts (i.e., in the case of passenger vehicles, the lesser of 2.5 percent or the MFN applied rate in effect at the time of the importation of the good).

The textile and apparel origin rules would also experience a number of changes aimed in part at limiting the use of mainland Chinese inputs. For example, any narrow elastic fabrics of subheading 5806.20 or heading 6002, pocket bag fabric, and sewing thread of headings 5204, 5401 or 5508 (as well as yarn of heading 5402 used as sewing thread) that are used in apparel production would have to originate in one or more USMCA parties in order for the otherwise originating apparel product to qualify for duty-free treatment. Currently, these inputs may be sourced from mainland China or any other foreign supplier. The sewing thread provision would apply 12 months from the date of entry into force of the new agreement, while the narrow elastic and pocket bag provisions would apply 18 months from that date (30 months from that date in the case of woven apparel made of certain blue denim fabric).

On the other hand, under the new agreement apparel would be able to incorporate visible linings of any origin, including mainland Chinese origin, and still qualify for duty-free treatment. Moreover, the de minimis threshold that currently allows the use of up to seven percent by weight of non-originating fibres and yarns in the component that determines the tariff classification of textile and apparel products has been raised to ten percent, provided the total elastomeric content of those foreign fibres and yarns does not exceed seven percent.

Encouragingly, the trade preference levels that allow up to 45 million square metres equivalent of non-NAFTA-originating cotton and man-made fibre apparel as well as up to 1.5 million SME of non-NAFTA-originating wool apparel from Mexico to benefit from duty-free treatment in the United States have been preserved. These TPLs allow apparel that is both cut and sewn in Mexico from yarns and fabrics of any origin, including mainland Chinese origin, to qualify for duty-free treatment. By contrast, the TPLs for such products as cotton and man-made fibre apparel from Canada, wool apparel from Canada, and cotton and man-made fibre fabrics and made-up goods from Mexico would be reduced.

Canada has agreed to change certain aspects of its dairy pricing scheme in an effort to open its market to outside competition, which was of special importance to U.S. dairy farmers. For example, it will provide new tariff-rate quotas exclusively for U.S. fluid milk, cheese, cream, skim milk powder, butter and cream powder, concentrated and condensed milk, yogurt and buttermilk, powdered buttermilk, products of natural milk constituents, ice cream and ice cream mixes, whey, margarine and other dairy. The United States, for its part, will provide reciprocal access on a tonne-for-tonne basis for imports of Canadian dairy products as well as new market access for Canadian peanuts, processed peanut products, and a limited amount of sugar and sugar-containing products.

No significant changes were made to the trade remedy dispute settlement or state-to-state dispute settlement provisions, according to USTR officials. The United States had sought to eliminate the trade remedy dispute settlement chapter on sovereignty grounds but this had been a high defensive priority for Canada, especially regarding their softwood lumber exports to the United States. Labour advocates wanted a state-to-state dispute settlement mechanism to enforce labour provisions and U.S. officials indicate the new agreement not only has stronger labour provisions than NAFTA but also the Trans-Pacific Partnership. 

The USMCA will give biologic drugs ten years of data exclusivity, an increase from the eight-year protections under Canadian law. U.S. officials indicate the agreement has provisions addressing currency manipulation and duty evasion and also has stronger disciplines than NAFTA on environmental standards and intellectual property rights. The agreement addresses a number of industries that hardly existed in 1993 when NAFTA was negotiated, such as digital trade, while IPR provisions also tackle financial services issues and domain names. Moreover, highly controversial provisions that allowed Mexican lorries to cross the border into the United States (which were delayed repeatedly by the United States and decried by U.S. unions representing lorry drivers) will now require Mexican lorries to meet more stringent safety standards. 

Fact sheets released by USTR state that the USMCA includes the following additional provisions.

  • Rules of origin for chemicals, steel-intensive products, glass and optical fibre have been strengthened.
  • New procedures streamline certification and verification of rules of origin and promote strong enforcement, including new co-operation and enforcement provisions that help prevent duty evasion before it happens.
  • New provisions are added for transparency in import licencing and export licencing procedures.
  • Parties are prohibited from applying (i) requirements to use local distributors for importation, (ii) restrictions on the importation of commercial goods that contain cryptography, (iii) import restrictions on used goods to remanufactured goods, and (iv) requirements for consular transactions and their associated fees and charges.
  • Provisions for duty-free temporary admission of goods are updated to cover shipping containers or other substantial holders used in the shipment of goods.
  • Textile-specific verification and customs co-operation provisions provide new tools for strengthening customs enforcement and preventing fraud and circumvention in this sector.
  • New provisions covering trade in information and communication technology, pharmaceuticals, medical devices, cosmetic products and chemical substances exceed NAFTA and TPP rules and promote enhanced regulatory compatibility, best regulatory practices and increased trade among the countries.
  • Full national treatment will be required for copyright and related rights.
  • A minimum copyright term of life of the author plus 70 years, or 75 years after first authorised publication for works with a copyright term not based on the life of a person, will be required.
  • Provisions for protecting trademarks, including well-known marks, are enhanced.
  • For the first time, a U.S. trade agreement will require ex officio authority for law enforcement officials to stop suspected counterfeit or pirated goods at every phase of entering, exiting and transiting through the territory of any party.
  • Protections against the misappropriation of trade secrets include civil procedures and remedies, criminal procedures and penalties, prohibitions against impeding trade secret licencing, judicial procedures to prevent disclosure of trade secrets during the litigation process, and penalties for government officials for the unauthorised disclosure of trade secrets.
  • A new digital trade chapter contains the strongest disciplines of any international agreement, including a prohibition on customs duties and other discriminatory measures being applied to digital products distributed electronically (e-books, videos, music, software, games, etc.) and measures to ensure that data can be transferred cross-border and minimise limits on where data can be stored and processed.
  • Canada will raise its de minimis level from C$20 to C$40 for taxes and will provide for duty-free shipments up to C$150. Mexico will continue to provide US$50 tax-free de minimis and provide duty-free shipments up to the equivalent level of US$117. Canada will also allow 90 days after entry for the importer to make payment of taxes.
  • Labour and environment obligations are brought into the core of the agreement and made fully enforceable.
  • Parties are required to take measures to prohibit the importation of goods produced by forced labour.
  • Parties are obligated to enhance the effectiveness of customs inspections of shipments containing wild fauna and flora at ports of entry and ensure strong enforcement to combat illegal, unregulated and unreported fishing.
  • Non-discrimination and transparency commitments were agreed regarding sale and distribution and labelling and certification provisions to avoid technical barriers to trade in wine and distilled spirits.
Content provided by Picture: HKTDC Research
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