January 31, 2020 | 13:49
USMCA… Almost All the Way
USMCA… Almost All the Way
When first crafted in Washington, it was called the USMCA (United States-Mexico-Canada Agreement). However, it’s called the CUSMA (Canada-United States-Mexico Agreement) in Ottawa and the T-MEC (Tratado entre México, Estados Unidos y Canadá) in Mexico City. Despite sporting different official titles, the texts are identical, apart from being translated into French and Spanish. The tri-named trade deal is now just weeks away from being ratified in all three jurisdictions, on the road to formally replacing the North American Free Trade Agreement (NAFTA). This comes nearly 2½ years after talks to replace the “worst trade deal ever” (President Trump’s description) officially began, and more than 14 months after the new agreement was signed by the three North American leaders.
Mexico was first to ratify the T-MEC in June 2019. President Trump signed the USMCA into law this week, after the Senate ratified the trade deal two weeks ago. The last two U.S. steps occurred quickly once the House of Representatives finally ratified the USMCA on December 19. The latter came after the Democrats and Administration agreed on amendments that also had to be signed off by Canada and Mexico. After the 2018 midterm election resulted in the Democrats taking control of the House in January 2019, the U.S. ratification process slowed as the Democrats sought—and eventually got—alterations to some of the USMCA’s labour, environmental and pharmaceutical provisions.
The Canadian parliament returned from its winter break this week, with the Liberal government re-introducing the legislation to ratify the CUSMA. The Liberals had reached the penultimate point in the process by last autumn and was waiting to pass enabling legislation alongside the U.S. government doing the same, but the October 2019 general election killed the bill. Although the Liberals no longer command a majority in the House of Commons, the opposition Conservatives have indicated some willingness to support the bill, albeit not necessarily in an expedited fashion. Once the CUSMA becomes law, the agreement will go into effect in all three countries on the first day after the third month. June 1st is looking like the earliest possible effective date.
Autos: For light vehicles to be duty free, 75% of the content must be manufactured in North America. The regional value content (RVC) was 62.5% in the NAFTA. When the USMCA was completed and signed (autumn 2018), it was envisioned that the RVC requirement would start at 66% in January 1, 2020, rising to 69% in 2021, 72% in 2022 and 75% in 2023, but the progression’s commencement will now likely be pushed back to at least January 1, 2021.
Furthermore, 70% of the steel and aluminum must come from North American sources, and either 40% (for passenger cars) or 45% (for trucks) of the labour value must come from plants paying at least US$16 per hour. The labour value content (LVC) requirement will also be phased in alongside the RVC requirement (e.g., 30%, 33%, 36% and 40% for passenger vehicles). Individual auto parts have phased-in RVC requirements of 65%, 70% or 75%.
Unfortunately, the USMCA will be kicking in when the North American industry is already contending with slowing vehicle sales and production, and this could overwhelm any USMCA-prodded boosts to U.S. or Canadian output, employment or investment in the industry.
Agriculture: Canada will raise its tariff rate quotas (TRQs or duty-free amounts) for U.S. dairy and poultry (including egg) producers. This is above and beyond what Canada currently permits under WTO TRQs (which are small but available to U.S. producers in some cases) and, of course, under CPTPP TRQs (only available to signatories of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership). The quotas will mostly be lifted over six years, at which time, it is estimated, for example, that U.S. dairy producers will get access to an additional ~3.6% of the Canadian market, along with egg producers getting access to an additional ~1.3% and chicken producers getting access to an additional ~1.0%. After six years, quota amounts will increase 1% per annum.
After six months, Canada will eliminate its milk price classes 6 and 7 (the slim milk solids used to make nonfat dry milk, milk protein concentrates and infant formula), and set its domestic price no lower than the U.S. price. Canada will also begin capping its exports of nonfat dry milk, milk protein concentrates and infant formula.
Also, Canada will change its grading rules to put U.S. wheat on an equal footing, and British Columbia will permit U.S. wine on grocery store shelves. Canada will get greater access to the U.S. dairy, sugar, peanut and cotton markets.
Dispute settlement: The investor-state dispute settlement (ISDS) process between the U.S. and Canada will expire after three years. Between the U.S. and Mexico, a scaled-back version is retained in the areas of oil and gas, telecommunications, power generation, transportation and other infrastructure. ISDS between Canada and Mexico is covered under the CPTPP.
The dispute settlement mechanism for countervailing and anti-dumping duties is retained, along with the state-state dispute settlement process. The latter was strengthened in the December 2019 amendments (now harder for countries to block the process), with the amendments’ more stringent labour standards for Mexico and environmental standards for all parties in mind. Part of increased stringency reflects a shift in the burden of proof compared to the NAFTA or the original USMCA. It is now presumed that violations of labour and environmental provisions affect trade and investment, and it’s up to the defending party to prove otherwise.
Sunset clause: The USMCA will last for at least 16 years. At a six-year review, the three countries can either extend the agreement for another 16 years from that point or begin formal negotiations to fix any irritants. In the latter case, at any point during the annual review period that could run for as long as 10 years, the agreement can be extended for another 16 years. There will always be a six-year review after any extension, and the potential to extend again for another 16 years. However, as before, any party can still decide at any time to exit the agreement after six months’ notice.
De minimis: Canada will raise the threshold value of imported goods purchased online (or via mail order) that qualify for duty-free access from C$20 to C$150. Imported goods valued at less than C$40 will also be exempt from sales taxes.
Intellectual property: Copyrights will be extended to 70 years after death from 50 years. For pharmaceuticals, the December 2019 amendments no longer require increased data protection for biologics (to 10 years) or for new indications of existing drugs.
The above measures make up a small but important part of the USMCA. Before the December 2019 amendments were added, the agreement was already a whopping 1,809 pages long, including annexes and side letters, all crafted to ensure that North American interregional trade can continue in a free and fair fashion (the latter from the U.S. Administration’s perspective). Total U.S. trade with Canada and Mexico, i.e., combined U.S. exports and U.S. imports of goods and services, was more than $1.4 trillion in the year ending September (Charts 1 and 2). Canada’s two-way trade was $719 billion—the most for any single country—a distinction Canada ceded to China in 2016 only to take it back this year (owing to the trade war). Mexico’s two-way trade was $687 billion. This means, in a year, about $2.0 billion worth of goods and services crosses the U.S.-Canada border every day, with about $1.9 billion crossing the U.S.-Mexico border. The USMCA should allow this to continue, if not expand further.
 For more detail, see our original assessment, “NAFTA 2.0: How Do You Spell Relief? U-S-M-C-A”, https://economics.bmo.com/en/publications/historical/3ea5eaca-d606-4104-91c5-90f198c43829/. [^]