Introducing the USMCA: Goodbye NAFTA

written on behalf of Feigenbaum Law

After more than a year of negotiations and mere hours before a midnight deadline, Canada, the U.S., and Mexico have reached a tripartite trade deal. No longer known as NAFTA, the new agreement is called the United States-Mexico-Canada Agreement, or USMCA.

In a joint statement, Canadian Foreign Affairs Minister Chystia Freeland and U.S. Trade Representative Robert Lighthizer said, about the new agreement:

It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.

So, what’s new in the USMCA?

Timing

USMCA is expected to take effect around January 1, 2020. It must first be approved by Congress.

Auto Sector Changes

A major goal of the new agreement is to have more car parts made in North America.

Beginning in 2020, in order to qualify for zero tariffs:

• a car or truck must have 75% of its parts manufactured in the U.S., Canada, or Mexico (this is far more than the previous requirement of 62.5% under NAFTA);
• a significant percentage of the work done on the car must be done by workers earning, at minimum, $16/hour. Beginning in 2020, cars and trucks must have at least 30% of the work done on that vehicle done by workers making at least $16/hour. This increases to 40% by 2023.

Along with the new trade deal, the Trump administration has signed “side letters” allowing Canada and Mexico to essentially avoid auto tariffs imposed by the U.S. These letters stipulate that both Canada and Mexico can continue to send the same parts and vehicles across the border, without charges, regardless of whether auto tariffs are instituted in the future. Only parts above a certain quota would face tariffs.

Steel Tariffs Still in Place for Now

While Canada pushed hard to stop the 25% tariffs imposed by President Trump on Canadian steel, there has been no resolution thus far.

A Senior White House official told the Washington Post that this process is “on a completely different track.”

Sunset Clause

The U.S. had initially proposed a 5-year termination clause, however this was not accepted by Prime Minister Trudeau.

USMCA is set to last for at least 16 years. After 6 years, the three countries can conduct a joint review and then can agree to extend the agreement for an additional 16 years.

If the extension cannot be agreed to at the 6-year mark, they could meet again each year to see whether they could address their differences and negotiate an extension.

Chapter 11 Mostly Eliminated

Chapter 11 has been entirely eliminated for Canada and mostly eliminated for Mexico (except in key industries such as energy, oil, and telecommunications).

Known as an “investor dispute settlement mechanism”, Chapter 11 previously provided companies with a special process to resolve disputes with a NAFTA government.

Critics previously argued that Chapter 11 was being used as a means for large corporations to obtain taxpayer money. However, businesses and investors saw it as a means to resolve disputes arising from situations in which a significant sum of money was invested into a project and then a NAFTA government changed the rules (or a new government came into power).

Chapter 19 Remains Intact

The U.S. pushed hard to eliminate Chapter 19, whereas Canada pushed equally hard to keep Chapter 19 in place. The Chapter remains intact in the USMCA.

Chapter 19 allows Canada, the U.S., and Mexico to challenge one another’s anti-dumping and countervailing duties before a panel of representatives from each country. This dispute resolution process is generally easier than challenging a trade practice in court.

In the past, Canada has used Chapter 19 to successfully challenge the U.S. on softwood lumber restrictions.

These are only some of the changes pending under the USMCA.

We will continue to follow developments with USMCA, and will provide updates as they become available.  In the interim, if you have begun to anticipate what impact the new agreement will have on your business in Canada or the U.S., contact the knowledgeable team at Feigenbaum Tax Law. Our practice is based on offering personal, confidential service to individuals and corporations with all manner of cross-border tax and legal issues. We help clients with a wide variety of matters including business expansion to the U.S., personal tax planning, and corporate tax planning. To make an appointment, contact us online, or call our office toll free at (877) 275-4792.