NAFTA 2.0: The United States-Mexico-Canada Agreement

Canada, Mexico and the United States reached an agreement on a renegotiated North American Free Trade Agreement (NAFTA) on September 30: the United States-Mexico-Canada Agreement (USMCA). The USMCA updates the more than two decade-old agreement, and includes substantial changes to rules regarding, among other things, investment protection, intellectual property, and automotive manufacturing.

What You Need To Know

• Investment protections between Canada and the U.S. will no longer be subject to arbitration.
• Protections of Canadian investments in Mexico will be governed by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which contains substantially stronger protections than those that remain in the USMCA between the U.S. and Mexico.
• New biologic drugs will now be entitled to a 10-year term of data protection instead of eight.
• Copyright protection in Canada will be extended to life of the author plus 70 years.
• North American content for most automotive manufacturing will increase to 75%, and Canada and Mexico have secured tariff-free access of auto part exports to the U.S. market, up to a prescribed limit.
• The review mechanism of antidumping and countervailing duties by a bi-national panel, established in Chapter 19 of the NAFTA, has been preserved.
• The initial term of the USMCA is 16 years from entry into force, and is subject to trilateral review every six years.

Investment Protections Narrowed

The NAFTA created protections for investors from other NAFTA parties, chiefly: national treatment, most-favored nation treatment, fair and equitable treatment, full protection and security and protection from expropriation without compensation. Under Chapter 11 of the NAFTA, a qualifying investor could bring an arbitral claim against a NAFTA party for actions of that party causing loss or damages to the investor’s investment in its territory.

The USMCA preserves and updates the standards of treatment described above. However, it makes significant changes to the mechanism for enforcing those protections.

• Under the USMCA, the investor-state dispute settlement mechanism excludes Canada. Canadian investors in Mexico, and Mexican investors in Canada, will benefit from protections equivalent to those under the NAFTA through the CPTPP, once it enters into force.
• Canadian investors in the U.S., and U.S. investors in Canada, will not be able to submit claims to arbitration under the USMCA. Instead, any breaches of investment protections by Canada or the U.S. may only be addressed under the state-to-state dispute settlement mechanism in Chapter 31.
• Mexican investors in the U.S., and U.S. investors in Mexico, will have a narrower right to submit claims regarding certain types of investment to arbitration under the USMCA.

The USMCA includes transitional provisions for legacy investment claims and pending claims. Legacy claims—claims in respect of investments made before the USMCA enters into force—may be commenced up to three years after the USMCA enters into force. Investors in Canada concerned about treaty protections for their investments may want to consider how they can benefit from similar protections under Canada’s other investment protection treaties.

Intellectual Property Protections Expanded

The USMCA increases the term of protection for new “biologic” drug products (defined in the agreement) from eight years to 10 years. Currently in Canada, “innovative drugs” that contain a medicinal ingredient not previously approved in a drug by Health Canada are entitled to an eight-year term of data protection, which can be extended for an additional six months for pediatric population submissions. The USMCA would add an additional two years of exclusivity for biologic drug products that meet the current definition of innovative drug. The timing of this change depends on the uncertain timing of ratification and implementation of the USMCA. It is also uncertain whether it will apply retroactively to any previously approved biologic drug products.

Under the USMCA, Canada will also provide a mechanism to adjust the term of a patent to compensate an applicant for an unnecessary or unreasonable delay in processing a patent application (the later of five years from the date of filing a patent application, or three years from the date a request for examination of a patent application). However, several exclusions make it uncertain how “unreasonable delay” will be applied in practice. The USMCA does not specify a maximum term for the patent extension.

The USMCA increases copyright protection in Canada from life of the author plus 50 years, to life of the author plus 70 years for natural persons, and 75 years from the calendar year of the first authorized publication for copyrights held by non-natural persons.

Automotive Manufacturing: North American Content Increased

The regional content requirement for automotive manufacturing will be increased in stages under the USMCA. Passenger vehicles and light trucks must meet a 75% North American content requirement, increased from 62.5% under the NAFTA. Heavy trucks will be subject to a 70% North American content requirement. Vehicle manufacturers must now source at least 70% of their steel and aluminum from North America.

The USMCA also introduces a new rule requiring 40% of the value of passenger vehicles, and 45% of the value of light and heavy trucks, to be produced by workers paid at least US$16/hour.

Canada and Mexico have each obtained side letters from the United States which exempt certain of their auto exports from any tariffs the United States may impose. The side letters exempt from U.S. tariffs: light trucks; 2,600,000 passenger vehicles annually; and a defined value of auto parts (US$32.4 billion/year from Canada and US$108 billion/year from Mexico).

Binational Panel Review for Trade Remedies Maintained

The USMCA preserves the NAFTA system for reviews by binational panels of antidumping and countervailing duty determinations by state authorities (such as the Canadian International Trade Tribunal or the U.S. International Trade Administration). Canada has relied on these panels to challenge U.S. duties on imports of softwood lumber, among other things. The USMCA includes other related mechanisms, including review of statutory amendments to another party’s antidumping or countervailing duty legislation.

Aluminum and Steel Tariffs Maintained

Although steel and aluminum tariffs imposed by the U.S. earlier this year will remain in place, Canada obtained a side-letter from the U.S. providing for a 60 day “cooling off” period before any future U.S. tariffs enacted as “national security” measures will apply to Canadian imports. That letter gives Canada the right to retaliate against such measures if inconsistent with the NAFTA, the USMCA or the WTO Agreement.

Existing U.S. tariffs on Canadian aluminum and steel remain subject to separate negotiation outside the USMCA.

Additional Provisions

Various chapters and provisions of the USMCA, which did not exist in the NAFTA, modify the treaty in light of practices and issues that have emerged since 1994.

• Dairy: Canada is granting U.S. dairy producers expanded access to its dairy (milk, poultry and eggs) markets, to be phased in.
• Digital Trade: The USMCA prohibits parties from imposing duties on digital products transmitted electronically, or according less favourable treatment to digital products produced by another party. The agreement also includes provisions to ease the conduct of business electronically, such as deeming electronic signatures to have equivalent legal validity. The agreement enacts anti-spam provisions similar to the provisions that already exist under Canadian law.
• Privacy: The USMCA requires parties to adopt and maintain privacy laws that provide for the protection of personal information and data.
• Cultural Industries: The USMCA maintains protections for Canada’s cultural industries, which include publications (newspapers, books and periodicals), film, television, radio and music.
• Duty and Tax Free Retail: Canadian retailers will be required to adapt to higher minimum thresholds for duties and taxes to be applied to Canadian online consumer purchases of U.S. goods (threshold for duties raised from C$20 to C$150, and taxes from C$20 to C$40).
• Government Procurement: The USMCA government procurement provisions apply to the U.S. and Mexico only. Government procurement between Canada and the U.S. is governed by the WTO Government Procurement Agreement. Government procurement between Canada and Mexico will be governed by the CPTPP after it enters into force.
• Energy Proportionality: The NAFTA “energy proportionality” clause, whereby the ratio of energy exports to domestic supply could not be decreased, has been eliminated.
• Non-Market Countries: The USMCA requires parties that propose to enter into a free trade agreement with a “non-market country” to provide the other USMCA parties with an opportunity to review the full text of the proposed agreement. The other USMCA parties will have the right to withdraw from the USMCA with six months’ notice and replace the USMCA with a bilateral agreement if desired. This provision may have implications, among other things, for any future trade negotiations between Canada and China.
• Currency Devaluation: The parties agree not to manipulate exchange rates to gain an unfair competitive advantage, and to publicly disclose relevant foreign exchange information.
• Corruption: The USMCA sets out anti-corruption obligations, aimed at combatting both international and domestic corruption.
• Term and Review: The initial term of the USMCA is 16 years from entry into force, and is subject to trilateral review every six years.

Stepping Back

The USMCA is expected to be signed by December 1, 2018 at the latest, after which it will be subject to each country’s domestic ratification procedures. The timing for entry into force is uncertain, as ratification will fall to the next U.S. Congress, which takes office in January 2019.

The USMCA helps preserve Canada’s access to the U.S. and Mexican markets. It represents one of several evolutions in Canada’s international trade and investment framework, which includes trade agreements with all G7 economies:

• CPTPP: Canada and 10 other countries, including Japan, Australia and Mexico, signed the CPTPP in January 2017. The CPTPP will enter into force for Canada after it is ratified by Canada and five other countries (currently Japan, Mexico and Singapore have ratified the CPTPP; Canada has introduced in Parliament ratification and implementation legislation).
• CETA: Canada has also signed the CETA with European Union member states (ratification by member states is ongoing; portions of CETA are provisionally applied pending entry into force).
• FTAs: Canada is a party to 11 bilateral free trade agreements.
• FIPAs: Canada is a party to 37 bilateral foreign investment promotion agreements.