NAFTA 2.0: The Wide-Ranging Impact of USMCA

Torys Quarterly: Sector Influences

The September 30 agreement that renegotiates NAFTA—United States-Mexico-Canada Agreement (USMCA)—updates the more than two decade old trade deal.

USMCA makes substantial changes to a number of NAFTA chapters. Below we discuss some of the key changes to the provisions regarding investment protections and dispute resolution, automotive manufacturing, privacy, digital trade, and intellectual property. We also comment on the continued steel and aluminum tariffs.

Investment Protections

Although the protections for investments and investors previously set out in NAFTA survive largely intact in USMCA, there are significant changes as to how breaches of those protections are resolved.

So, what are those protections? Broadly speaking, they are:

  • national treatment and most-favored-nation treatment, which require USMCA parties to treat investors from other USMCA parties “no less favourably” than they treat their own investors or investors from third states,
  • minimum standard of treatment, which requires USMCA parties to accord “fair and equitable treatment and full protection and security” to the investments of investors from other parties, and
  • expropriation and compensation, which prohibits USMCA parties from expropriating the investments of investors from other parties USMCA payment of fair compensation.

Although these protections largely remain in USMCA, the broad right that investors had under NAFTA Chapter 11 to invoke arbitration for breaches of these protections has been phased out (subject to the grace period described below). Previously, Chapter 11 permitted any investor from a NAFTA party with an investment in the territory of another party to bring a claim for loss or damages to the investment. Numerous investors have relied on that procedure to bring claims against Canada, Mexico and, to a lesser extent, the United States.

Chapter 14 of USMCA, which replaces NAFTA Chapter 11, maintains an arbitration procedure between the U.S. and Mexico, but completely excludes Canada. As a result, Canadian investors in the U.S., U.S. investors in Canada, Canadian investors in Mexico, and Mexican investors in Canada, will not have access to arbitration for breaches of USMCA’s protections. The only recourse open to these investors under USMCA is a claim against the host state on their behalf by their home state under Chapter 31.

While broader, the right of U.S. and Mexican investors to claim against those governments has likewise been narrowed in USMCA. Investors’ claims will be limited to disputes regarding certain “covered government contracts” in specified sectors, including oil and natural gas, transportation, and telecommunications.

USMCA includes transitional provisions for legacy investment claims and pending claims. Legacy claims (i.e., claims in respect of investments made before USMCA enters into force) may be commenced up to three years after USMCA enters into force. Investors in Canada, and Canadian investors in the U.S. 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.

Privacy

USMCA does not require Canada to strengthen its existing privacy regime, as it was under CETA. USMCA provides a flexible approach to the type of legal framework that would satisfy its privacy requirements. A party therefore complies if it adopts or maintains measures such as a comprehensive privacy law, sector-specific laws, or laws that provide for the enforcement of voluntary undertakings by enterprises relating to privacy.

Interestingly, USMCA encourages cooperation between the parties’ privacy regulators on investigations and developing mechanisms for users to submit complaints. This approach is in line with the global trend steering away from competing over jurisdiction.

Digital Trade

Chapter 19 contains most of USMCA’s digital trade provisions. It specifically prohibits parties from imposing duties on digital products transmitted electronically or according less favourable treatment to digital products produced by another party. USMCA brings safe harbour provisions into Canada, which don’t hold companies—such as internet providers—liable for content posted by third parties or their good faith removal of objectionable content. Chapter 19 also enacts anti-spam provisions similar to those that already exist under Canadian law.

USMCA significantly relaxes geographical restrictions on data storage which will greatly help e-commerce businesses.

Chapter 19 includes other provisions that further ease the conduct of business. For instance, parties are required to treat e-signatures as having equivalent legal validity to a physical signature, except where prescribed by law. Canada’s permissive provincial and federal e-signature regimes are therefore in line with these USMCA requirements.

USMCA significantly relaxes geographical restrictions on data storage. This will greatly help e-commerce businesses, which will no longer be required to have a physical presence in a particular jurisdiction as a condition of doing business there. However, there are a few limitations: for example, under Chapter 17, parties can adopt measures requiring financial services organizations to get regulatory approval before outsourcing information management to vendors.

Intellectual Property

When it takes effect, USMCA will make a number of important changes to intellectual property protections in Canada. This article focuses on extended terms of data protection for new biologic drugs and a new patent term adjustment mechanism.

Biologic drugs are products produced using biotechnology processes, such as vaccines, antibodies, toxins or genetic therapies, and are unlike the chemical (small molecule) compounds that are the active ingredient in many pharmaceutical products. Biologics are complex molecules and the process of making a biologic drug is typically proprietary; however, it can be difficult to enforce patents directed to production methods, so, arguably, other tools are needed to encourage innovation into biologic development.

Presently, “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 (with a six-month extension for pediatric indications). Data protection is independent of patent protection—it is an exclusivity period during which Health Canada will not approve a generic or biosimilar (a copy) of the innovative drug. The current eight-year period of exclusivity applies to both new biologic drug products and new small molecule drugs. When it enters into force, USMCA will add an additional two years of exclusivity for biologic drug products, meeting the current definition of innovative drug. This is still less than the 12-year period for biologics granted by the U.S. Food and Drug Administration. New small molecule drugs will continue to be entitled to only eight years of data protection.

The timing of changes to IP rules depends on the uncertain timing of the ratification and implementation of USMCA.

Under USMCA, Canada will also provide a mechanism to adjust the term of a patent to compensate an applicant for unnecessary or unreasonable delay in processing a patent application (later than five years from the date of filing a patent application, or three years from the date a request for examination of a patent application). Patent term adjustment has been available in the U.S. for some time. Several exclusions under USMCA make it uncertain how “unreasonable delay” will be applied in practice by the Canadian Intellectual Property Office (CIPO) (i.e., it appears that CIPO will be able to “stop the clock” in various circumstances), so it is unclear at this time how many patent applications will benefit from an adjustment. USMCA does not specify a maximum term for the patent extension.

These changes are significant and bring Canada more closely in line with U.S. IP rights. It is notable that Canada has been on the “watch list” of the Office of the United States Trade Representative as a country that does not adequately protect or enforce patent rights. The timing of changes to IP rules depends on the uncertain timing of the ratification and implementation of USMCA. It is also still unclear whether these changes will apply retroactively to any previously approved biologic drug products or previously issued patents; however based on past reform in this area, drug manufacturers and patentees should not expect that these benefits will be applied to approved drugs and/or issued patents as of the coming into force date.

Steel and Aluminum Tariffs

The 10% tariff on steel originating in Canada and 25% tariff on aluminum originating in Canada, imposed by the U.S. earlier this year on “national security” grounds under the Trade Expansion Act of 1962, remain in place under USMCA. The equivalent tariffs imposed by Canada on steel and aluminum originating in the U.S. also remain in place.

These steel and aluminum tariffs were not addressed in the main body of USMCA. Instead, they are the subject of a “side-letter” between Canada and the U.S.; the so-called U.S.-Canada 232 Side Letter, acknowledging that the U.S. may impose future measures under section 232 of the Trade Expansion Act of 1962. However, if it does, the U.S. “shall exclude from the measure”:

  • 2,600,000 passenger vehicles imported from Canada on an annual basis;
  • light trucks imported from Canada; and
  • such quantity of auto parts amounting to US$32.4 billion in declared customs value in any calendar year.

Under the Side Letter, Canada’s ability to submit claims related to section 232 measures to state-to-state dispute resolution under NAFTA Chapter 20 or USMCA Chapter 10 (whichever is in effect at the time) is limited. Specifically, Canada’s ability to do so is limited to claims with respect to whether the U.S. excluded the number of passenger vehicles and light trucks, and the value of auto parts, as set out above. In practice, this gives the U.S. fairly wide latitude to impose steel and aluminum tariffs in the future, and limits Canada’s ability to submit those tariffs to dispute resolution.

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

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