December 18, 2019

Is Your Company Prepared to Comply with the New USMCA?

Holland & Knight Alert
Carlos Vejar

Highlights

  • Final amendments to the United States-Mexico-Canada Agreement (USMCA) have been agreed to, clearing the path for its approval in the U.S., most likely during the first trimester of 2020.
  • Complete free trade on goods and services remains in place, with no clawback on tariffs or services reserves. However, USMCA is a 34-chapter Agreement, plus annexes and side letters, that comprise obligations related with many other disciplines such as intellectual property, e-commerce, labor, environment, anticorruption, investment, etc., where many new obligations can be found.
  • The USMCA will bring many changes to trade relations, so companies should give new chapters and disciplines an in-depth analysis, while reviewing cross references, footnotes, annexes and side letters as well as closely following new implementing legislations in the three USMCA countries.

 

Final amendments to the United States-Mexico-Canada Agreement (USMCA) were agreed to on Dec. 9, 2019, clearing the path for its approval in the U.S., most likely during the first trimester of 2020. Once approved by all three parties1, the Agreement would enter into force three months after, most likely in the second half of 2020 (unless the parties agree otherwise)2, securing more than $1.3 trillion in annual trade with Mexico and Canada, and an estimate of close to 3 million U.S. jobs.

Much has been said about how the USMCA improves upon the North American Free Trade Agreement (NAFTA) and how much of it is original text.3 This, of course, is debatable given that much of its text maintains NAFTA existing obligations and that many of the new obligations are similar to those of the original Trans-Pacific Partnership Agreement (TPP)4, although "few terms can have big repercussions," as stated in a University of Ottawa Faculty of Law analysis on this subject.5 The bottom line is that there are substantive changes under USMCA that will impact how businesses are conducted in North America.

For starters, complete free trade on goods and services remains in place, with no clawback on tariffs or services reserves. However, USMCA is a 34-chapter Agreement, plus annexes and side letters, that comprise obligations related with many other disciplines such as intellectual property, e-commerce, labor, environment, anticorruption, investment, etc., where many new obligations can be found.

Changes Likely to Impact Companies

Aside from new chapters on Good Regulatory Practices, Digital Trade, and Small and Medium-Sized Enterprises, as well as those chapters addressing unfair trade practices (i.e. Currency Manipulation, State-Owned Enterprises, Non-Market Economies and Anticorruption), other significant specific changes were made regarding Investor State, Dispute Settlement, Auto Rules of Origin, Agriculture, Customs and Trade Facilitation, Intellectual Property Rights (IPR), Labor, Environment, Financial Services, Barriers to Trade, and Sanitary and Phytosanitary Measures. All of these changes raise a lot of questions and should be of concern to many private actors.

For example, USMCA does not contain investor-state dispute settlement obligations between Canada (or Canadian investors/investments) and the United States (or U.S. investors/investments). Therefore, Canadian and U.S. investors may want to look into forum shopping to obtain protection under another treaty or look into establishing their businesses in Mexico.

USCMA is a significant improvement from NAFTA regarding its original Labor Side Agreement obligations, as specific obligations will be subject to review by third-party experts, which may result in tensions and require serious improvement in companies' existing labor conditions to avoid penalties or suffer the consequences of seeing their exports blocked. Export companies established in Mexico may want to seek for preventive compliance guidance.

The Rules of Origin Chapter will allow authorities to request all the accounting records of an exporter or importer to verify the USMCA rules of origin compliance, something not allowed under NAFTA unless authorities made a visit to a company's premises where they could require access to such records. Now, all of it could be required and provided electronically, raising serious questions about the authority's wide criteria to determine the origin based on a detailed review of up to thousands of documents. If the rules of origin are not complied with, payment of tariffs, fines and surcharges for exports made up to five years ago will be required. Exporters may want to revisit their exports under these new rules as well as any amendments made to the applicable rules of origin;

Contrary to what the new one-page chapter on Energy may suggest by reiterating Mexican Constitutional language ‒ Chapter 8 relating to Mexican sovereignty over hydrocarbons ‒ the USMCA will protect foreign investors and investments in Mexico in the energy sector. USMCA Article 32.11 remands6 to other existing treaties' existing protections (i.e., the CPTPP), incorporating by reference investment protections under the new USMCA, but such protection is not horizontal and some investments will have fewer protections than those they held under NAFTA.7 Investors should confirm what specific protections will be available to them.

In Customs Administration and Trade Facilitation, the so called de minimis margins will be raised both for Mexico and Canada, providing further certainties to express shipments. However, local implementation may present some additional burdens that exporters may need to examine.

Intellectual property obligations were revamped, and changes can be found in all major IP rights: Patents and data protection for biologic drugs and agricultural chemicals, copyright and related rights with mechanisms to avoid circumvention of technological protections, increased protection for trade secrets, confirming rights to use common names of products when conflicting with geographical indications, etc.

Conclusion and Considerations

The above are just a few specific examples of the many changes that USMCA will bring to trade relations (particularly with regard to new chapters and disciplines mentioned). Companies should give each a more in-depth analysis, while reviewing cross references, footnotes, annexes and side letters as well as closely following new implementing legislations in the three USMCA countries.

Holland & Knight's International Trade Group in Mexico and the United States will continue to provide timely follow-ups to alert clients about potential consequences arising from the USMCA implementation.


Notes

1 Mexico ratified the treaty on June 19, 2019, and its amendments on Dec. 12, 2019.

2 See text of the Protocol Replacing the North American Free Trade Agreement with the Agreement Between the United States of America, the United Mexican States, and Canada: "Each Party shall notify the other Parties, in writing, once it has completed the internal procedures required for the entry into force of this Protocol. This Protocol and its Annex shall enter into force on the first day of the third month following the last notification."

3 See "How much of the USMCA is from the TPP?", American Chamber of Commerce in Vietnam, Aug. 8, 2019.

4 As of Oct. 1, 2018, the USMCA was a total of 1,809 pages– 1,572 pages for the treaty itself, 214 pages for annexes and 23 pages for side letters. In comparison, NAFTA was over 1,700 pages – 741 pages for the treaty itself, 348 pages for annexes, and 619 pages for additional footnotes and explanations). It is estimated that less than 15 percent of the text is new USMCA text, which was not previously included in NAFTA or TPP, but even if minor original changes can be found, they could make a sizable impact. Although the U.S. is not yet a part of the renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), it did sign the finalized agreement that was mainly led by the U.S. under the very same trade promotion authority (TPA) guidelines that were applied for the USMCA negotiations. In addition, new automotive rules of origin have been widely discussed, complying with new labor and steel content requirements that will require a serious analysis and probably a reconfiguration of providers and investment decisions.

5 See "How much of the Transpacific Partnership is in the United States-Mexico-Canada Agreement?", Wolfgang Alschner and Rama Panford-Walsh, University of Ottawa Faculty of Law, Page 24, June 26, 2019.

6 See Article 32.11 of Chapter 32 Exceptions and General Provisions.

7 See Holland & Knight's previous alert, "Demystifying Energy Investment Disputes in Mexico Through the New USMCA," April 30, 2019.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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