USMCA Replaces NAFTA: An Overview of Key Provisions

After 26 and a half years, the North American Free Trade Agreement (NAFTA) has practically ceased to exist as of July 1, 2020,¹ and has been replaced by United States-Mexico-Canada Agreement (USMCA).

Because many of NAFTA's obligations will survive identically under USMCA,² maintaining existing free trade access of goods and most services in the region, this Holland & Knight alert focuses on the new and amended provisions that will require immediate or midterm attention on behalf of USMCA private sector actors (current NAFTA users), acknowledging that many of the obligations under the USMCA are not addressed to the public but to the three USMCA government authorities.³ In addition, this alert briefly summarizes how the U.S. Customs and Border Protection (CBP) will be implementing the USMCA.

Rules of Origin and Origin Procedures

Chapters 4 and 5 of the USMCA contain the provisions that regulate the rules of origin and origin procedures that will apply to all goods exported within North America. USMCA relaxes rules of origin for certain sectors (i.e., chemical, Arabic gum, etc.), and tightens them for others (i.e., automotive, steel). Automotive rules of origin incorporate new requirements, such as a high percentage of regional steel and aluminum content, and a first-of-its-kind labor content rule with minimum wage requirements, which among other things constitute completely new requirements that were nonexistent in any previous free trade agreements.

USMCA will also increase the de minimis percentage from 7 percent to 10 percent of all non-originating materials to consider a product as originating (Article 4.12), and new products classifications such as "recovered material" or "remanufactured good"⁴ that were not covered by NAFTA are now introduced and will likely facilitate trade of such goods.

USMCA abandons the NAFTA certificate of origin prescribed format, allowing the use of invoices or any other type of document as long as it contains a set of minimum requirements (Article 5.2); a new special verification of origin mechanism is established for the textile sector (Articles 5.9 and 6.6); and under USMCA, importers may also complete the certification of origins of imported goods (Article 5.2).

Customs Administration and Trade Facilitation

USMCA refers to Express Shipments that require expedited customs procedures and will not be subject to customs duties or taxes if valued below fixed amounts of US$800 for the United States; US$117 for customs duties and US$50 for taxes, for Mexico; and CA$150 for customs duties and CA$40 for taxes, for Canada (Article 7.8)

Government Procurement

Chapter 13 of USMCA remains quite similar to NAFTA Chapter X, although it no longer applies to Canada. Chapter 13 now openly allows Parties to maintain measures that provide preferential treatment for small and medium-sized enterprises (SMEs), subject to certain requirements applicable to the extent possible and if appropriate (Article 13.20). As part of its modernization, USMCA recognizes the use of electronic means and electronic tendering procedures, and includes obligations against corruption, fraud or other wrongful acts including those from enterprises or natural persons, participating in government procurement (Article 13.17)

Labor

USMCA incorporates a Chapter on the labor provisions (NAFTA labor provisions were contained in a parallel side agreement, North American Agreement on Labor Cooperation or NAALC), allowing the use of the USMCA State-to-State dispute settlement mechanism (Chapter 31) if labor violations referred therein are recurrent and affect trade or investment activities.

USMCA labor provisions impose a significant shift from the outdated and longtime unused NAALC provisions, and is probably one of the most emblematic improvements of the USMCA, reaffirming each Party obligations as members of the International Labor Organization.

It allows for public submissions from persons of a Party on matters related to the Chapter, which shall be considered by each Party providing a public and timely response (Article 23.11).

USMCA emphasizes Mexico's obligations in terms of freedom of association and collective bargaining. Specifically, Annex 23-A sets out specific obligations for the effective recognition of those rights. Child labor and forced or compulsory labor is also addressed and provides for the effective abolition such practice; as well as the elimination of all forms of forced or compulsory labor. Private actors will have to be aware of this new obligations, particularly in Mexico.

Enterprises doing business in Mexico will have to ensure that they comply with all the obligations set forth in the Mexican legislation as specified in the USMCA. They will need to ensure that the collective bargaining agreements meet specific requirements (i.e., majority of workers support, through exercise of a personal, free, and secret vote). They will also need to provide workers with a copy of their collective bargaining agreement, which will need to be accessible to individual workers prior to any vote. They will also need to ensure compliance with obligations imposed on the employers (i.e., noninterference in union activities, avoidance of coercion against workers, nondiscrimination, prohibition of refusing to bargain collectively with legitimate union, etc.) and will also need to make sure to provide employees with specific rights (i.e., the right to organize, form and join the union of their choice, the right to collective bargaining, etc.).

Additionally, Annex 31-A establishes a "rapid response labor mechanism" between Mexico and the U.S., under which denial of free association and collective bargaining of workers under Covered Facilities⁵ can be subject to remedies, which will be lifted after remediation. "Remedies may include suspension of preferential tariff treatment for goods manufactured at the Covered Facility or the imposition of penalties on goods manufactured at or services provided by the Covered Facility." (Article 31-A.10) Annex 31-B provides for a similar mechanism between Mexico and Canada.

Intellectual Property

Considered as a high-standard Intellectual Property (IP) chapter, USMCA revamps the outdated 18 IP Articles under NAFTA Chapter XVII, with 89 new articles, plus annexes, contained in Chapter 20. This is probably the Chapter with more notable changes compared to its NAFTA predecessors.

Patents will have an additional protection if subject to "unreasonable" delays in patent examination; stronger protections for pharmaceutical and agricultural innovators were included; copyrights terms will be at least a life of author plus 70 years, or 70 years from publication of works (increasing by 20 years the World Trade Organization minimum standard); it will be possible to apply civil and criminal penalties for circumventing technology protections such as digital locks (often found in digital music, movies and books), and industrial designs will be able to obtain a 15-year extension of protection.

The IP Chapter contemplates rights on the internet, such as establishing copyright "safe harbors" to allow legitimate online internet intermediaries to continue their activities, meanwhile providing IP protection without being affected for users infringements; and recognizing the "notice and takedown" systems to allow the removal of contents infringing IP rights when notified by right holders or its representatives (Article 20.87-88).

IP Chapter will also protect Geographical Indications (GIs) (Geographical names that protect the quality, reputation and distinctiveness of a product from such regions, such as Florida oranges), maintaining a balance with the right to continue using generic or customary names, which may be protected in other jurisdictions, and which may be protected through a Trademark (Chapter 20,  Section E).

USMCA IP holders will also benefit from enhanced protection of trademarks, including non-traditional marks (such as sounds and scents), as visual perception is no longer required to protect a sign as a trademark (Chapter 20, Section C). The Chapter also demands ex officio protection against counterfeit or pirated goods under customs authority control (Article 20.82), and by criminalizing and imposing sanctions for unauthorized recording (camcording) of movies (frequently used to sell pirated movies online); and for satellite and cable signal theft (Article 20.84).

Finally, Section I of Chapter 20 establishes a comprehensive protection for trade secrets⁶ being used without authorization (including by state-owned enterprises).

Digital Trade

Chapter 19 was impossible to achieve at the time NAFTA was negotiated. USMCA digital trade provisions include prohibiting customs duties on electronically transmitted products (computer program, text, video, image, sound recording or other product that is digitally encoded, produced for commercial sale or distribution, and that can be transmitted electronically – See. Article 19.1 definitions as it does not include digitalized representation of financial instruments including money); and limits on source code disclosure requirements (Article 19.11), allowing for free data flows by prohibiting data localization requirements (Article 19.12).

The Digital Trade Chapter contains an interesting feature on trade administration documents (forms issued or controlled by a Party that must be completed by or for an importer or exporter in connection with the import or export of goods), requiring each Party to endeavor to accept a trade administration document submitted electronically as the legal equivalent of the paper version of that document. Although the language is not mandatory this will probably facilitate trade between the parties (Article 19.9).

Investment

Probably the most significant change made to the investment Chapter (XI under NAFTA, 14 under USMCA), is contained in the Investor-State Dispute Settlement (ISDS) provisions. USMCA contains more limited protections than those contained in NAFTA. Investors (except for those in certain industries such as oil and gas, power generation, telecommunications, transportation and infrastructure sectors that have signed government contracts with Mexico) will be subjected to a 30-month litigation period in Mexican courts before being able to bring an arbitration claim against the government.

Investors may still raise claims under NAFTA Chapter XI with respect to legacy investments up to three years after NAFTA's termination and the entry into force of the USMCA. Legacy investments are defined as investments that were made between NAFTA's entry into force (on Jan. 1, 1994) and its termination, that were still in existence when the USMCA entered into force. The three-year window does not apply to proceedings that are currently pending nor to any claims that have already been initiated.

Although the ISDS provisions does not apply for Canada, Mexican and Canadian investors will still have the option to recur to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) ISDS chapter to file disputes against each other (but there will be no USMCA disputes under Canada and the United States).⁷

Energy

Unlike NAFTA, which dedicated a specific section to the energy sector, the USMCA appears to limit its regulation to Chapter 8, focused mainly on the Mexican hydrocarbons sector. Under Article 8.1, the USMCA recognizes: a) Mexico's sovereign right to reform its legal regime (which implies due process to the existing one), and b) Mexico's ownership of all hydrocarbons. In this regard, subject to some caveats, hydrocarbons investments by U.S. investors will still be entitled to the full protection of the USMCA, as long as they are made through governmental contracts. Furthermore, future modifications to the legal regime may be limited in their application based on similar or parallel reservations that exist in other treaties already ratified by Mexico.⁸

In other sectors of energy, a case-by-case analysis would be necessary, as general protection to investments are in force, and the considerations for government procurement and activities of state-owned enterprises.⁹

Telecommunications

Unlike NAFTA, USMCA Chapter 18 covers mobile service providers promoting reasonable rates of international mobile roaming services (Article 18.25), and binds Mexico to its 2013 telecommunications constitutional reforms, which provides for an independent regulatory commission, established interconnection obligations, avoid anti-competitive measures and non-discriminatory repurchases rates (See Chapter 18, footnote 6). USMCA includes for the first time the term of "major supplier," which is defined as a supplier that has the ability to materially affect the terms of participation (having regard to price and supply) in the relevant market for public telecommunications services as a result of 1) control over essential facilities, or 2) use of its market's position. These provisions will guarantee major competitiveness in this sector.

Small and Medium-Sized Enterprises (SMEs)

This Chapter is a first for the United States, which attempts to promote cooperation to increase SME's trade and investment opportunities under the USMCA (Canada and Mexico already share similar obligations under the CPTPP). Chapter 25 is mostly cooperative and information sharing between USMCA Parties and SMEs with a robust trilateral Committee that may provide interesting results to benefit SMEs to take advantage of the USMCA provisions. SMEs representatives are envisaged to be part of an annual "dialogue" to provide views and information to the SME Committee (Article 25.5). Article 25.6 identifies obligations of the USMCA that also refer to enhance cooperation among the parties on SMEs.

Implementation

Implementation of the USMCA will proceed in phases. On the U.S. side, U.S. Customs and Border Protection (CBP) issued its final "Implementing Instructions" on June 30, 2020,¹⁰ which outline how CBP will implement the USMCA for the first six months until Dec. 31, 2020. As stated in the Implementing Instructions, "CBP understands that the trade may need time to adjust business practices to comply with the new requirements under the USMCA." So, for the first six months, CBP will "show restraint in enforcement" during this period – focusing instead on "supporting the trade's efforts to fully comply with USMCA requirements, including providing webinars and other outreach efforts to educate the trade on the new Agreement." CBP states that, in decided whether to initiate an enforcement action within the first six months, it will "take into account the difficulties importers may face in complying with the new rules, as long as importers are making satisfactory progress toward compliance and are making a good faith effort to comply with the rules to the extent of their ability." Brenda Smith, CBP's Executive Assistant Commissioner for Trade, has amplified this collaborative message in social media posts she issued July 1, 2020 – providing helpful instructions and links to the CBP implementation page on her LinkedIn profile.¹¹

In addition, on July 1, 2020, CBP published in the Federal Register its "Interim Final Rule," implementing the rules of origin provisions of the USMCA, and providing further guidance to the trade on how the U.S. will implement the agreement.¹² CBP also invites public comment on this Interim Final Rule, with comments due by Aug. 31, 2020. Canada has also issued new Uniform Regulations for Rules of Origin, as well as providing guidance on other aspects of the USMCA – on a website devoted to implementation of the new agreement.¹³

On June 30, 2020, Mexico published in the Mexican Official Gazette: 1) the General Rules regarding the application of the customs provisions of the USMCA¹⁴; 2) the rates of the import tax related to goods originating from North America¹⁵; the export and import quotas of non-originating textile and clothing goods, which may receive preferential tariff treatment under the USMCA¹⁶; and 3) the General Rules of International Trade for 2020.¹⁷

Conclusion

While the overall changes from NAFTA to USMCA are relatively minor, certain areas of trade did get needed upgrades. As discussed above, the changes can be significant for a particular industry or transaction. Reviewing these changes and factoring them into your business's plans for the future will be important in order to take advantage of positive changes, and to avoid compliance problems where additional burdens have been included.

For more information or questions about the USMCA, contact the authors or member of Holland & Knight's Mexico City office.