USMCA – Potential New Trade Agreement in the Works

Stephanie Henao      Oct. 26, 2018

In recent days, the United States, Mexico and Canada reached a new trade agreement called the United States-Mexico-Canada Agreement (“USMCA”); which will likely replace the North American Free Trade Agreement (“NAFTA”). Some of the purposes of this new deal, as expressed by its preamble, are “to preserve and expand regional trade and production, to support the growth and development of small and medium-sized enterprises; and to facilitate trade between the parties by promoting efficient and transparent customs procedures.”

The USMCA introduces a number of changes in the trade relationship among the parties. The Office of the U.S. Trade Representative has flagged the following as some of the deal’s “key achievements”: (i) additional market access for U.S. farmers to the Canadian dairy, poultry and egg market, (ii) requirement for auto content production, (iii) labor value content rule, and (iv) stronger rules of origin.

Canada, USA and México flags

The United States, Mexico and Canada reached a new trade agreement called the United States-Mexico-Canada Agreement (“USMCA”).

As part of the increased access into dairy, poultry and egg markets for U.S. farmers, Canada will create new, additional, “tariff rate quotas,” exclusively for the United States. In exchange, the USMCA provides that the United States will create “new rate quotas” for imports of “peanuts, processed peanut products, dairy, and a limited amount of sugar and sugar-containing products from Canada.”

The USMCA also provides that “75% of all auto content must be produced in North America,” in order to qualify for zero tariffs. The new deal also requires that “40 to 45% of auto content be made in North America, by workers earning at least sixteen USD$16.00 per hour,” as part of the new labor value content rule.

For the purposes of the USMCA, the term “North America” means the United States, Mexico, and Canada. Therefore, the 75% manufacturing requirement may be met by production in any or all three of the countries that are part of the agreement. In other words, in order to qualify for the zero tariff, the USMCA does not require that 75% of the production occur solely in the United States (nor that the production by workers earning $16.00 occur in the United States), but that it simply occur collectively within North America. This means that shifting production throughout Mexico, the United States, and/or Canada, could potentially satisfy the requirement and the zero tariff would apply.

Additionally, The USMCA contains stronger rules of origin than those under NAFTA. These rules include “new cooperation and enforcement provisions that simplify certification and facilitate the verification of rules of origin.” The rules apply to “automobiles and automobile parts, and to other industrial products such as steel products, chemicals, glass, and optical fiber.” The purpose of the rules of origin is to avoid the application of tariff breaks to imports or exports that do not comply with the minimum requirements set by the USMCA.

Finally, it is essential to highlight that the USMCA is not in force yet. The proposed deal must be approved by Congress before it can officially replace NAFTA; and it will likely still take several months before the agreement is approved by all of the parties internally. Therefore, as of today, NAFTA is still in force.

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