Updated USMCA a Breath of Fresh Air in a Distressed Trading World

17 December 2019 Blog
Author(s): Alejandro N Gomez-Strozzi Marcos Carrasco Menchaca
Published To: Dashboard Insights Manufacturing Industry Advisor

The updated USMCA was signed on December 10, 2019.

These are not business-as-usual times in the trading world. As we know, there is the ongoing trade war with China, Brazil and Argentina are back in the steel and aluminum tariffs, and France will likely be commercially penalized due to its digital service tax.

OK, but what was signed regarding the USMCA on December 10, 2019?

The original U.S.-Mexico-Canada Agreement (USMCA) was signed November 30, 2018.  Since then, the U.S. House of Representatives expressed its intention to revise a limited number of issues in such Agreement, thus creating the risk of dragging on the final approval efforts.

Negotiations were undertaken, mainly between the United States and Mexico, with Canada in the back seat.  At the end, Mexico conceded on a number of issues that are even being presented by its authorities as a victory (more details below), and an update to several USMCA provisions was signed by the three countries on December 10, 2019.

And what were the actual changes?

The following issues changed: (i) the use of steel and aluminum to produce automobiles; (ii) State-to-State dispute settlement provisions; (iii) labor, particularly oversight of recently approved changes in Mexico; (iv) environment; and (v) intellectual property.

Here is a summary of the issues that were updated:

(i)  Steel and aluminum.

The requirement for 70% of originating steel to produce automobiles has been clarified to state that but for the metallurgical processing involving the refinement of steel additives, all manufacturing processes must occur in the territory of the parties.  The 5-year transition period to comply with this requirement has expanded to 7 years.  The same 70% requirement of originating aluminum use has been postponed for 10 years.

(ii) State-to-State dispute settlement provisions.

The November 2018 USMCA was updated to assure that these panels are automatically created; the original NAFTA provisions –which were carried onto the original USMCA- allowed for countries to, in practice, block the formation of dispute settlement panels.  

(iii) Labor. 

Mexico has recently approved important modifications regarding labor. Pertaining freedom of association and collective bargaining, both the U.S. and Canada have a facility-specific, rapid response mechanism that may then be revised by a panel of labor experts.  Violence against workers will be closely followed as well, and the burden of proof is on the defending party to demonstrate that a violation is not affecting trade or investment between the parties.  The figure of Mexico-based Labor Attachés is created, which will provide first-hand information regarding Mexico´s labor practices.

(iv)  Environment.

Just as in labor, burden of proof shifts for the defending party to demonstrate that an environmental violation does not affect trade or investment between the parties. Parties oblige themselves to implement the respective obligations under the multilateral environmental agreements they are part of.  As well, the figure of Environmental Attachés is created to monitor Mexico´s environmental enforcement, and exclusively legally harvested flora and fauna can be traded through the country. 

(v) Intellectual Property.

Parties agreed to remove the mandatory 10-year data protection for biologics, and to individually maintain their domestic policy priorities. 

Simply by looking at these updated USMCA issues, why is it being said that Mexico conceded on a number of issues?

Mexico has the burden of effectively complying with its newly passed labor provisions but, as long as it does, it should not have a problem.  We believe that Mexico was successful in transmitting its commitment to properly enforce approved changes, and in resisting tougher, U.S. and Canadian oversight within its borders.   

Does this mean that USMCA will be approved?

Yes, we believe that the aforementioned means that it will be approved. 

What is the timeline ahead of us for approval?

The Mexican legislature will likely be ratifying the updates made to the text in the coming days; as far as the United States is concerned, ratification process will likely take place after the Impeachment vote, or early 2020; and Canada would likely ratify the Agreement right after the U.S. has done so.

Pertaining entry into force, it will occur 3 months after all of the parties notify that they have completed their internal ratification procedures. 

Can this be considered a triple-win situation?

We believe it can.

The forthcoming approval by the three parties will likely occur sooner rather than later, and it will provide the much-needed certainty and stability for the North American region to build upon individual strengths and effectively compete globally as a single trading bloc.

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