It appears likely that the USMCA trade agreement will go into effect in the coming months. President Trump is likely to have signed the agreement by the time you read this, and passage by the Canadian House of Commons is a good bet — though not a sure thing given that Prime Minister Justin Trudeau’s Labor Party no longer controls the body. The majority Conservatives have said that they support the agreement in principle but that certain provisions need to be examined more closely.
After that, there’s work for each country to do to come into conformance with the rules of the agreement. The Mexican government will do the heaviest lifting: It’s required to improve environmental protections, increase wages for certain auto workers by three to four times and make provisions protecting workers’ rights to unionize. That won’t happen overnight, and until it does, NAFTA will remain in effect as it stands.
In fact, despite Trump declaring NAFTA “possibly the worst deal ever negotiated,” the USMCA is largely a facelift to the 25-year-old North American Free Trade Agreement. New sections modernize the pact, make it stricter with regard to labor and origin of materials and introduce provisions reflective of today’s business realities.
“Nearly 60% of the USMCA is the same language as in NAFTA or other existing trade deals, with a bit of a fresh, 21st-century look,” says Dan Ujczo, an international trade and customs lawyer and practice group chair at law firm Dickinson Wright. “Companies should review the agreement in areas such as chemicals, polymers, coatings and food/agriculture, which have added new color to facilitate the tariff-free movement of goods in those sectors.”
NAFTA Due For An Update
With negotiations for NAFTA dating back to 1992, the agreement was due for a refresh, particularly in regard to technology, intellectual property and ecommerce and data protections. Other revisions include rules around labor and the environment. The auto industry, which relies heavily on the free flow of parts throughout North America, is most affected. In addition to new wage and unionization requirements placed on Mexico, the USMCA stipulates that, to be imported under the agreement, a vehicle must have 75% of its parts made in North America, up from 62.5% under NAFTA.
Along with the requirement for more components to be manufactured in the bloc, the agreement makes it more difficult to use subcomponents that contain parts made outside of North America.
“The USMCA has a significant tightening of rules of origin,” says Ujczo. “Companies can no longer rely on such certificates from their suppliers. Every company will now need to go back and identify every supplier, and the suppliers’ suppliers, to verify that the product is actually North American-made under the new, stricter USMCA rules.”
These more onerous requirements may drive some parts makers to simply pay the tariffs. Even under NAFTA, producing certificates of origin is sometimes more work than it’s worth. USMCA’s new rules mean that verification of the origin of parts in the supply chain will be a continuing process, with little ability to rely on previous verifications. How burdensome the new rules actually are for manufacturers will likely come down to enforcement.
What’s more certain: Tariffs aren’t going away. In fact, the nonpartisan Congressional Budget Office says the updated trade deal will cost automakers some $3 billion in new tariffs.
This new tariff reality is a major worry for respondents to our latest Brainyard survey, falling just behind the talent shortage.
Also affecting the automotive sector, 40% of production processes must be performed by workers earning $16 per hour or more. That’s not a high bar for the United States and Canada, but in Mexico, auto workers make, on average, closer to $4 per hour. This was a major win for the Trump administration, which along with wage requirements has added environmental rules seeking to make it less attractive to move factories south of the U.S. border. The Mexican economy is now officially in recession, and that’s left President López Obrador in a weak position on USMCA negotiations.
New Provisions for Digital Products, Services
When NAFTA was negotiated, the World Wide Web was 3 years old, the iPhone was just a glimmer in Steve Jobs’ eye, ecommerce accounted for less than 2% of the U.S. economy and “biologics” wasn’t a word. The USMCA adds a 60-page chapter on protections for ecommerce; digital products, including music, ebooks and games; and intellectual property and data.
While experts agree these protections are much needed, the approach taken by the USMCA is not universally endorsed. Indeed, some of the treaty stipulations around data will be impossible to implement. In particular, a section forbidding data localization requirements (that is, a directive that data be kept within the borders of the country of origin) is in direct conflict with standing U.S. and Canadian laws on data locality in the financial, healthcare and other industries.
The USMCA applies only to laws passed after its passage and includes exemptions for public health, safety and security, provisions that likely gut the intent of limiting data-localization requirements. Further, privacy rules like those formed by the EU would run afoul of the USMCA, making it more difficult to protect the privacy of citizens.
The intent is to limit requirements on the transfer of intellectual property, but the result is unintended consequences that may be repeated in other bilateral trade agreements.
Next Up: Canada
Ottawa has yet to ratify the treaty, and the current text includes both wins and losses for Canadians. Two wins of note: Chapter 19 of NAFTA, which specifies how disputes are settled, remains intact. And dairy import restrictions to Canada remain mostly in effect.
Chapter 19 of NAFTA specifies that trade disputes will be resolved in arbitration. The section had been used by Canada successfully against the United States with regard to soft lumber trade, that is, lumber used primarily for building. The United States wanted Chapter 19 gone; that would have forced disputes involving all range of goods into the courts, where resolution could take years. Arbitration, in contrast, has been a fast and effective process for Canada.
Canada is highly protective of its farm industries, controlling production, prices and imports. With U.S. farmers producing more dairy than Americans can consume, that lobby sought freer access to Canadian markets. Canada gave in slightly, but for the most part retains its complex system of controls for dairy production.
Ottawa was also successful in eliminating extensions on patents for certain drugs, which would have required extending Canada’s current eight-year protection of pharma patents and Mexico’s five to 10 years. Congressional Democrats also fought patent extensions, which they believe would have led to higher drug costs.
Pharma aside, the USMCA provides for greater intellectual property protections versus NAFTA. The treaty largely requires that protections on digital goods come up to U.S. standards for copyrights and patents, for example.
One big win for the Trump administration is language limiting the ability of participants to manipulate their currencies. Chapter 33 of the USMCA specifically prohibits a government from holding its currency values low in an attempt to make its exports less expensive. Though the International Monetary Fund has similar rules, Chapter 33 calls for monthly reporting of central bank activity and any intervention in foreign exchange markets, among other things. Reaffirming IMF rules in the USMCA gives bloc countries another mechanism to go after currency manipulators in their midst.
Finally, the USMCA comes with a call to revisit provisions every six years. Whether or not NAFTA was a good deal, it has become outdated. Regularly revisiting the treaty should help to provide a framework for updates without requiring the multi-year process the USMCA has endured.
For now, Ujczo advises companies with operations in Mexico to be vigilant in managing human resource and labor issues and says technology and software firms will find something to like in the USMCA.
“[The agreement] protects Internet service providers from third-party liability and prevents, if not in the letter at least in spirit, the imposition of digital services taxes [a tax on local earnings for international internet companies not headquartered in the country] such as those proposed in France,” he says. “Similarly, the USMCA has a new customs and trade facilitation chapter that will support technology-based solutions at ports of entry to provide greater predictability regarding the movement of goods across borders.”
Art Wittmann is editor of Brainyard. He previously led content strategy across Informa USA tech brands, including Channel Partners, Channel Futures, Data Center Knowledge, Container World, Data Center World, IT Pro Today, IT Dev Connections, IoTi and IoT World Series Events, and was director of InformationWeek Reports and editor-in-chief of Network Computing. Got thoughts on this story? Drop him a line.