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USMCA Replaces NAFTA

posted by Jennifer Diaz November 8, 2018 0 comments

USMCAAfter thirteen months of negotiations, the U.S., Mexico, and Canada have created a new trade agreement called the “United States-Mexico-Canada Agreement” (USMCA) on October 1, 2018.

What is the USMCA?

The USMCA is the new trade agreement that builds on and modifies the trade policies created in the North American Free Trade Agreement (NAFTA), which was signed in 1994. The purpose of the USMCA is to align the trade agreement with the current trade environment. Various industries may experience changes due to the USMCA, which could eventually affect individual consumers.

 

What Industries Will be Affected?

Agriculture

Canada’s dairy industry is likely to feel the biggest impact. These changes will increase competition amongst dairy farmer, which may result in lower prices for consumers. Some of the changes slated to occur are:

  • Class 6 and 7 milk—special domestic milk categories sold at very low prices—will be eliminated within the supply management system;
  • Component pricing of certain products (milk protein concentrate, skim milk powder and infant formula) will now be based on a U.S. reference price; and
  • Approximately 3.6% of Canada’s dairy market will now be opened up to U.S. milk producers

The Canadian dairy industry is not the only Canadian agricultural industry affected. Other changes to Canada’s agricultural industry have been proposed as well:

  • US-grown wheat registered in Canada will now receive an official Canadian grade;
  • Tariffs on whey powder and margarine will be eliminated; and
  • Canada has agreed that British Columbia will eliminate rules allowing only BC-produced wine to be sold in grocery stores.

Automobile

The USMCA will require that cars and trucks traded between the three nations meet the following requirements:

  • 75% of the components used in production must be manufactured in a member country (up from 62.5% under NAFTA);
  • 70% of total steel and aluminum used in production must be North American; and
  • 40% to 45% of automobile content produced in a member country must be made by workers earning at least $16 per hour.

The USMCA also offers a measure of protection for both Canada and Mexico, ensuring each country won’t be affected by any auto tariffs unless exports top 2.6 million units annually, which represents their current exports plus growth of at least 40%.

Section 232 Tariffs

The USMCA did not resolve the current 25% tariffs on Canadian steel and aluminum exports to the United States or the retaliatory tariffs that each country placed on them. However, the United States have agreed that no tariff applied under Section 232 could be imposed against Canada or Mexico for at least 60 days. This agreement was made to provide time for negotiations between the two nations prior to imposing that tariffs.

Digital Trade

The USMCA, now addresses digital trade; something the NAFTA did not do. The USMCA compels the three countries:

  • To avoid unnecessary regulatory burden;
  • To adopt and maintain laws to protect online consumers and personal information; and
  • To participate in the development of digital trade.

The USMCA includes rules on digital trade throughout various chapters and includes a separate digital trade chapter. The new rules would prohibit:

  • Customs duties on importing or exporting digital products transmitted electronically (although internal taxes, such as sales taxes, and other fees would be allowed);
  • Rules that require a business located in a particular country to locate its servers and storage devices in that particular country;
  • Rules that restrict the cross-border flow of information, provided it is conducted for business purposes; and
  • Rules that would require a business to provide its source code (or algorithms) as a condition to import, distribute or sell its software in a member country.

Energy

The USMCA removes the NAFTA’s “energy proportionality clause” which provided the United States with proportionate access to Canadian oil, natural gas, coal, electricity, and refined petroleum products. The clause provided that if Canada reduced its total production, of the aforementioned products, the United States would still be entitled to the same portion of the supply and Canadian consumers would have a smaller supply.

Intellectual Property

The USMCA intellectual property rules now reflect those included in the Trans-
Pacific Partnership Agreement and include:

  • Copyright terms in Canada have been extended to 70 years past death (up from 50 years) for copyrighted works and 75 years past death for performances and sound recordings;
  • Biologic drugs will now be protected from generic competition for ten years, instead of the previous eight (this extension does not affect chemical drugs);
  • Internet service providers will be protected from liability with respect to the actions of their users; and
  • Patent applicants must be compensated for unreasonable delays in the processing of patent applications.

How Will the Individuals be Affected?

Both Canada and Mexico agreed to raise the thresholds at which they apply duties to cross-border purchases, which means the value of goods an individual will be able to import has increased. Mexico raised its de minimis level to $100 from $50. Canada raised its to C$150 ($117) for duties, from C$20 earlier, and C$40 for sales taxes. Additionally, the USMCA provides for more protections to workers, including:

  • Updated labor provisions protecting workers against discrimination based on gender and providing the right to freedom of association and collective bargaining have been included; and
  • A general exception giving governments the ability to provide preferential treatment to indigenous people and indigenous-owned business has been included.

What Else Changed With the USMCA?

Sunset Clause

The fact that the NAFTA did not include an expiration date was a point of contention for the three nations. All three nations agreed that the new USMCA will last for a period of 16 years, with an opportunity to review and potentially extend the agreement taking place every six years.

Future Trade Agreements

The USMCA includes a new clause, which states that any USMCA member who enters into free trade negotiations with a non-market country, must notify the other USMCA members in advance. Additionally, USMCA members have the right to review the potential agreement and may also exit the USMCA six month after providing notice.

Dispute Mechanisms

The Chapter 11 provisions from NAFTA, which provided for investors to sue governments over policy changes that would harm future profits, have been eliminated for claims against Canada and the United States, and restricted in Mexico.

A free trade agreement is greatly beneficial to importers. Ensure your products correctly qualify for preference claims under the USMCA. Contact Diaz Trade Law for an assessment. Contact our office at info@diaztradelaw.com or (305) 456-3830 for assistance.

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