United States, Canada, and Mexico Announce New Trilateral Trade Agreement to Replace NAFTA

On September 30, 2018, the United States, Canada, and Mexico reached a new trilateral trade agreement designed to replace the existing North American Free Trade Agreement (NAFTA) that has governed North American trade since 1994.

The new "United States-Mexico-Canada Agreement" (USMCA) is based largely on the bilateral agreement in principle reached by the United States and Mexico in August, though it differs from that agreement in certain respects and includes new outcomes on specific bilateral issues between the United States and Canada (for a summary of the US-Mexico agreement, please refer to the White & Case US Trade Alert dated August 29, 2018). The three parties also have signed side letters to the USMCA concerning potential US restrictions on automotive imports, pursuant to Section 232 of the Trade Expansion Act of 1962, and potential future Section 232 proceedings.

The parties have published the draft legal text of the USMCA and are expected to sign the agreement in the coming months.  We provide below an overview of USMCA and the likely next steps for the new agreement.  We will provide a full analysis of the USMCA's new provisions in the coming days.

Overview of the USMCA

The USMCA is drafted as a new stand-alone agreement, rather than amendments to NAFTA. It includes transition provisions dealing with NAFTA, some modifications to those provisions taken from NAFTA, and a dozen new chapters. Whereas NAFTA included 22 chapters, the new agreement has 34 (see the Annex for a comparison of the chapter lists). The new chapters include those on labor, the environment, digital trade, and macroeconomic policy. The USMCA also includes annexes covering alcohol and proprietary food formulas as well as bilateral side letters on distinctive products, auto safety standards, biologics, cheese names, wine, water, research and development expenditures, and Section 232.

As noted above, the USMCA broadly resembles the preliminary agreement in principle reached by the United States and Mexico in August. Like the preliminary agreement, the USMCA includes more stringent rules of origin for the automotive sector, a scaled-back investor-state dispute settlement mechanism, and a "sunset" review clause with a sixteen-year term. It also includes non-controversial "modernization" changes covering, among other things, digital trade, state-owned enterprises, sanitary and phytosanitary (SPS) measures, transparency, good regulatory practices, technical barriers to trade (TBTs), financial services, and intellectual property. These chapters largely work from those completed by the Obama administration as part of the Trans-Pacific Partnership (TPP), but do contain some significant differences.

Some provisions of the USMCA differ from the preliminary US-Mexico agreement. For example, under the preliminary agreement, Mexico had agreed to raise its de minimis shipment value for purposes of customs duties and taxes to $100 USD, up from $50 USD. Under the USMCA, Mexico's de minimis levels will remain at $50 USD for purposes of taxes and will increase to the equivalent level of $117 USD for purposes of customs duties.

The USMCA also incorporates a series of new bilateral outcomes negotiated by the United States and Canada, including the following:

• Chapter 19.  Chapter 19 of NAFTA, which provides for binational panel reviews of anti-dumping and countervailing duty determinations made by the governments of the NAFTA parties, will continue to apply to binational panel reviews related to final determinations published by a Party before the entry into force of the USMCA.  Chapter 19 will not apply to determinations published thereafter. However, a similar binational panel review system set forth in Chapter 10, Section D of the USMCA will apply between the United States and Canada with respect to final determinations made by those governments after the USMCA enters into force.¹
• Dairy compromise. A key sticking point in US-Canada negotiations has been market access for US dairy products. Annex 3-B to US-Canada agricultural trade grants access to US dairy farmers to approximately 3.59% of current market share, higher than the 3.25% negotiated under TPP, according to Canadian officials. The agreement also eliminates Canada's Class 7 milk category—including milk powder and milk protein—which established a pricing scheme that would-be US exporters argued rendered their products uncompetitive.

In exchange for these market access concessions, the United States has agreed to provide new access to Canadian farmers for dairy products, peanuts, processed peanut products, and "a limited amount of sugar and sugar containing products."

• Cultural exemption. NAFTA's "cultural industries" exemption, cited as a priority by Prime Minister Justin Trudeau, remains intact. USMCA Article 32.6 states that the agreement does not apply to Canadian measures governing such industries, including the production and distribution of written materials, film, music, and radio communications.  However, the USMCA allows parties to "take a measure of equivalent commercial effect in response to an action by another Party" under the exemption.

Section 232 side letters and current tariffs

The agreement includes four bilateral side letters on the United States' use of "national security" trade restrictions under Section 232.  The first pair stipulate that Canada and Mexico will receive certain exemptions from potential US restrictions on automotive imports under Section 232.  A Section 232 investigation of these goods is now underway.  Specifically, should the US impose measures restricting imports of automobiles or automotive parts from Canada and/or Mexico, the United States agrees to exclude:

• 2,600,000 passenger vehicles per year from each country;
• Light trucks imported from each country; and
• Such quantity of auto parts amounting to $32.4 billion and $108 billion from Canada and Mexico, respectively

While the US and Mexico had previously agreed under the Preliminary Agreement in Principle to continue discussions regarding the United States' ongoing investigation of automotive imports pursuant to Section 232, the USMCA side letters represent the first official confirmation of granted exclusions.