On December 10, the White House and U.S. House of Representatives agreed to move forward with the pending trade agreement between the United States, Mexico and Canada. The U.S.-Mexico-Canada Agreement (USMCA), which adopts many elements of the current North American Free Trade Agreement (NAFTA), will include updates in the areas of state-to-state dispute settlement, labor, environment, intellectual property, and rules of origin.The implementation of USMCA is meant to reinforce the strong economic ties between the three countries and enhance North American competitiveness globally. Importantly, the new Agreement preserves and enhances the integrated and virtually tariff-free market in North America by reducing red tape and lessening the administrative burden on importers and exporters.

State-to-state dispute settlement

The state-to-state dispute settlement chapter has been changed in a manner that strengthens enforcement, including in the areas of labor and the environment. Specifically, the Free Trade Commission will no longer be involved in the dispute settlement process, meaning that a panel will be automatically established upon request. Changes have also been made to ensure that a roster of potential panelists is created and to provide for additional clarity and transparency in the rules of procedure that provide guidance on the operation of panel hearings. Overall, this outcome provides important assurance to the U.S. that the Agreement’s operation will be supported by an efficient and effective state-to-state dispute resolution mechanism.

Facility-specific rapid-response labor mechanism

The United States has established a new bilateral mechanism with Mexico under the dispute settlement chapter with respect to specific labor obligations on freedom of association and collective bargaining. This facility-specific rapid-response mechanism will provide the U.S. with an enhanced process to ensure the effective implementation of specific labor obligations in covered facilities. If a signatory has concerns as it relates to freedom of association and collective bargaining, it can request an investigation by an independent panel of labor experts and, subject to a positive finding, it can take measures to impose penalties on exports from those facilitates. Canada has also established an equivalent mechanism with Mexico.

Labor chapter

The labor chapter has been further strengthened so that the parties have increased flexibility to pursue violations of the Agreement under the dispute settlement mechanism. This is made possible through the removal of the requirement that violations be committed “through a sustained and recurring course of action or inaction” when it relates to violence against workers. Additionally, the burden of proof has been reversed, in that failure to comply with an obligation in the chapter is now presumed to be “in a manner affecting trade or investment between the parties,” unless the defending party can demonstrate otherwise.

Environment chapter

The changes in the environment chapter will strengthen environmental obligations under the Agreement. Similar to the labor chapter, the burden of proof has been reversed in that failure to comply with an obligation in the chapter is now presumed to be “in a manner affecting trade or investment between the parties,” unless the defending party can demonstrate otherwise.

A new article has been added to recognize the three parties’ existing commitments to implement certain multilateral environmental agreements (MEAs) to which they are a party. Specifically, parties commit to implementing their respective obligations under those MEAs that they have ratified domestically. This means the U.S. is required to implement its obligations under the following MEAs, including any relevant reservations, exceptions and amendments:

• The Convention on International Trade in Endangered Species of Wild Fauna and Flora;
• The Montreal Protocol on Substances that Deplete the Ozone Layer;
• The Protocol of 1978 Relating to the International Convention for the Prevention of Pollution from Ships;
• The Convention on Wetlands of International Importance Especially as Waterfowl Habitat; and,
• The Convention for the Establishment of an Inter-American Tropical Tuna Commission.
• Convention on the Conservation of Antarctic Marine Living Resources
• International Convention for the Regulation of Whaling

Intellectual property chapter

The changes in the intellectual property (IP) chapter will affect certain patent and pharmaceutical provisions. Importantly, the parties have agreed to remove the obligation to provide 10 years of data protection for biologics. Additionally, parties have agreed to:

• remove a provision on the availability of patents for new uses, new methods or new processes of using a known product, as well as a provision on data protection for “new indications” of existing drugs, and
• include broader language on an exception related to regulatory reviews, and new language on how parties may meet obligations dealing with patent-term restoration, patent linkage and data protection for small molecule drugs.

These amendments clarify that all three parties maintain flexibility under the Agreement to pursue domestic policy priorities in these areas.

Rules of origin

Rules of origin are the criteria used to determine whether a good has undergone sufficient production in a free trade area to be eligible for preferential tariff treatment, ensuring that the benefits of an agreement accrue primarily to producers located in the member countries. The USMCA automotive rules of origin contain a requirement that 70% of the steel purchased by vehicle assemblers qualify as originating in the USMCA region. This requirement has been changed to clarify that all steel manufacturing processes must occur in one or more of the parties, except for metallurgical processes involving the refinement of steel additives, for purposes of meeting the 70% requirement.

Next steps

Each party will follow its domestic process toward ratification and implementation of the new agreement. For the U.S., this a likely upcoming vote in Congress and ratification by the White House. The United States remains strongly committed to working closely with its North American partners toward the timely ratification and implementation of the new agreement.