The U.S. House of Representatives approved December 19 the United States-Mexico-Canada Agreement (USMCA) by an overwhelming margin of 385-41. The Senate is expected to do the same in mid-January. As everyone knows by now, USMCA is a revision and replacement for the 25-year-old North American Free Trade Agreement (NAFTA), a regional trade agreement that has generated over $1.3 billion in annual goods and services trade among the three nations. USMCA mostly follows NAFTA but makes significant changes or additions inter aliain automotive rules of origin, investor-state dispute settlement, intellectual property protection, digital trade, “sunset” provisions and protection of labor rights and the environment.
Whether USMCA overall is better or worse overall than the original NAFTA will not be fully clear until USMCA has been in force for some time, and different stakeholders (e.g., automotive producers versus labor unions, the United States v. Mexico) may vary in their assessments. What is perhaps most significant for the three NAFTA Parties and their stakeholders is that the USMCA assures that duty-free, quota-free trade within North America will continue for at least 16 years, more than long enough to outlast the Trump Administration. However, tighter automotive rules of origin and other regional content requirements may adversely affect industrial production, especially in the vehicle sector. Other changes affecting trade in goods are not highly significant, and agricultural trade is largely unaffected except for a modest opening for the United States of the Canadian milk solids market (about 3.6% of demand is promised for U.S. exports). Investor-state dispute settlement is reduced in scope with regard to U.S.-Mexico investment and eliminated entirely for U.S.-Canada investment disputes (Mexico and Canada remain part of the Transpacific Partnership Agreement (TPP), which included ISDS).
The USMCA would not have been approved by the House without a series of significant modifications. These changes were negotiated between the Trump Administration’s U.S. Trade Representative Robert Lighthizer, House leadership in the persons of Speaker Nancy Pelosi and Ways and Means Committee Chairman Richard Neal and, in the early weeks of December, Mexican Undersecretary for Foreign Affairs Jesus Seade. The USMCA Protocol of Amendment signed December 10 is the focus of this post.
Historically, Democrats have not been enthusiastic supporters of regional trade agreements. Less than half the Democrats in the House supported the original NAFTA, and only about 30 of them supported the Trade Promotion Authority legislation given to President Obama in June 2015, which was necessary to completion of the TPP (which President Trump repudiated a few days after taking office in January 2017) as well as to the USMCA. This time it was different, with nearly 200 House Democrats as well as the AFL-CIO and Teamsters’ unions supporting USMCA as modified by the Protocol, along of course with most House Republicans and the Trump Administration.
For Canada, the confluence of interests with the House leadership was strong, as we discuss herein. For Mexico, despite its sharing of some of the House’s objectives, the Protocol is much more controversial because of the labor enforcement provisions, including the “facility-specific rapid response labor mechanism” and provision in the implementing act for the creation of special labor attaches to be stationed in the American Embassy and American consulates in Mexico to monitor violations. This feature has generated considerable unease in Mexico.
The USMCA Protocol of Amendment
What changes did the Protocol make to the USMCA? First, in two areas where both Canada and Mexico failed in the original negotiations, the House prevailed. The Protocol eliminates the controversial ten years of protection for biologic drugs, a guaranty which could have made such drugs more expensive in Canada and Mexico (where the government is the major purchaser of prescription medications). Secondly, other protections for branded drug companies against generic competition are significantly modified to make it easier for generics to compete inter aliaby obtaining easier access to confidential test data. The modified provisions resemble those negotiated by the Democratic House and the Bush Administration in the May 2007 in the so-called “Bipartisan Trade Deal” which led to the passage of the U.S.-Peru Trade Promotion Agreement (2007) and ultimately the trade agreements with Colombia, Panama and South Korea (2011).
Third, the Protocol modified the USMCA’s state-to-state dispute settlement mechanism to make more difficult (although not impossible) for any Party (read “United States”) to block the formation of panels. Under NAFTA (and the text of the USMCA), it was feasible for the United States to delay or block dispute settlement proceedings against it simply by refusing to appoint standing rosters of potential panelists as required under Chapter 20 of NAFTA. Because of such actions, the US was frequently able to delay panel proceedings for 15 months or more (as in Cross-Border Trucking Services) or to block them completely (for 4 years in a case involving high fructose corn syrup and sugar). Under the Protocol the United States could still refuse to appoint its ten panelists, but this would no longer block panel formation. Rather, if the responding Party refuses to participate by designating panelists the complaining Party ultimately can designate both panelists and the chairperson from the rosters of panelists appointed by the other two Parties. This in and of itself is a massive improvement brought by the Protocol.
Fourth, the environmental provisions of the USMCA are strengthened in several respects with the inclusion of a list of seven multilateral environmental agreements (MEAs) such as the Endangered Species Convention within the USMCA. In the event of a conflict between the USMCA provisions and an MEA the latter will prevail. The Parties are also required to implement their obligations under these seven MEAs, and a provision enables adding additional MEAs in the future.
Fifth, the Protocol adds an annex to the state-to-state dispute settlement chapter and makes other changes in the labor chapter. Text changes also make it much easier to demonstrate that labor (and environmental) violations are related to trade—an issue in a recent case under CAFTA-DR. The burden of proof is reversed in both areas so that the responding government is tasked with demonstrating that the labor or environmental violations are notrelated to trade or investment. In addition, any production of goods or services meets the “related to trade” requirements if the goods are exported to other USMCA countries, or if they compete with imports from other USMCA countries in the home market.
The rapid response labor mechanisms (separate for the United States and for Canada) provide an accelerated arbitral mechanism to address alleged violations of Mexico’s labor obligations by specific Mexican enterprises, as reflected in both new Mexican labor legislation and the USMCA. (The legislative obligations relate primarily to a recent reform establishing unions that are independent from the enterprises their workers serve and from government influence and assuring effective collecting bargaining.) If successfully implemented, these arrangements would allow more effective collective bargaining in Mexico, presumably leading to higher wages and better working conditions, objectives shared by both President Lopez Obrador and the Trump Administrations for different reasons. Thus, a complaining Party will no longer be required to show a “persistent pattern of violations” as in many earlier U.S. free trade agreements. Sanctions such as increased tariffs are available for individual enterprises found to have committed violations and failed to correct them, again on a fast track.
Whether these procedures can be applied in an objective manner or will be used as a protectionist tool by commercial interests within the United States remains to be seen. Hopefully, the prospect of such actions will be sufficient to encourage most enterprises to implement the new rules, assisted by cooperative efforts by both governments to facilitate them.
Controversy over Labor Enforcement Provisions
For Mexico, the most controversial aspect of the labor rules was embodied in the United States’ USMCA Implementation Act, which provided for the appointment of up to five U.S. labor attaches to be stationed in the American Embassy in Mexico City and various consulates such as the one in Ciudad Juarez (a major center for Mexican manufacturing for export to the United States). A last -minute dispute arose over these provisions, which Mexican negotiators claimed—without persuasive evidence—that they did not know about in advance, threatened to delay ratification. Fortunately, the dispute was quickly resolved when the United States provided assurances to Mexican negotiators that the labor attaches would comply with all Mexican laws and would not be tasked as “labor inspectors.”
Here as elsewhere, the Mexican negotiating position was weak, given that more than 75% of Mexico’s exports go to the United States, meaning that prompt entry into force of the USMCA is essential if Mexico is to avoid a recession in 2020. (Canada is similarly dependent on the U.S. market, but has a stronger domestic market.) Whether the modified USMCA labor provisions will function smoothly remains to be determined.. The sensitivity of Mexico’s sovereignty concerns, potential obstruction by Mexican enterprises that wish to avoid collective bargaining because it would result in higher wage costs, and current union leadership that benefits from the existing situation in Mexico could greatly complicate effective implementation and enforcement. Only time will clarify the picture.
The Scorecard of the USMCA Protocol of Amendment could be summarized as follows: Happy Holidays from Nancy Pelosi and Richard Neal to Justin Trudeau and Chrystia Freeland, and (maybe) a lump of coal for Andres Manuel Lopez Obrador and Jesus Seade.
For anyone who believes that increasing the negotiating power of Mexican workers is a benefit for both the United States and Mexico, as is better environmental enforcement, the USMCA as modified by the Protocol of Amendment is a clear improvement over NAFTA. The state-to-state dispute mechanisms, addressing digital trade and intellectual property changes also in our view represent highly desirable upgrades and additions. While the USMCA steps backward from NAFTA’s rules of origin, investor protection or predictability (because of Sunset threats), on balance it is likely to be beneficial for its governments and most private stakeholders. Prompt entry into force, presumably by the end of March 2020, should resolve many uncertainties among North American enterprises about NAFTA’s future that have had a chilling effect on investment and hiring for three years. It should also help to ensure that North American business will maintain its competitiveness with Europe and Asia during trade wars with China and the European Union.