By Jill M. Hurley, Esq.
The review of the United States-Mexico-Canada agreement is now complete … or maybe just getting started?
If you’ve been following the lead up to the trade deal’s anticipated six-year review, you could be forgiven for feeling like you’ve just watched a movie with multiple plots that have no conclusive endings—and no promise of a sequel.
That’s because the July 1 decision by the United States Trade Representative (USTR), Jamieson Greer, to keep the USMCA intact but up for annual review over the next 10 years ultimately puts continental trade across North America in a state of purgatory with no end in sight.
What happened?
When the parties signed the USCMA at the close of 2019, they agreed the deal would be signed for a 16-year term but would be reviewed six years from the date of its implementation (July 1, 2020). The idea was that at time of the review, they would make one of three choices:
- Renew the agreement for another 16-year period (to July 1, 2042)
- Identify shortcomings and/or grievances and open it up to annual reviews for the balance of the current period (to July 1, 2036)
- Provide a six-month notice to exit the agreement altogether
As anticipated by most trade observers, the USTR ultimately chose to the second option.
What does this mean for business engaged in trade?
Ultimately, nothing. It’s business as usual with trade continuing under the same rules that have governed trade across the continent for the past 18 months.
That means the preferential duties and duty exemptions offered under the USMCA remain in place, as do the tariffs imposed under Section 232 (steel, aluminum, copper, furniture, etc.), and the customs rules and regulations in place surrounding all those tariffs and the USMCA. Nothing changes. Yet.
Why didn’t the USTR renew the trade agreement?
The U.S. government has made clear it maintains grievances with both Mexico and Canada, some of which are carryovers from the original USMCA renegotiation:
With Mexico, negotiations will focus on:
- The lack of U.S. access to Mexico’s nationalized energy sector
- The inadequate enforcement of labor provisions in the USMCA that require Mexican unions to create more transparency and to respond to worker complaints in a timely manner.
- Agricultural issues, such as the influx of certain Mexican produce in the U.S. that competes with U.S. producers, as well as Mexico’s restrictions on genetically modified crops coming from the U.S.
- As with the original USMCA agreement, the U.S. continues to demand greater automotive content be produced in the U.S.
- Concerns over the transshipment of Chinese-made products into the United States via Mexico
- Mexico’s rapidly growing trade deficit with the U.S.
With Canada, negotiations will focus on:
- Greater access to Canada’s supply-managed dairy market
- Transshipment of Chinese-made goods entering the U.S. via Canada (with particularly emphasis on electric vehicles)
- The proposed implementation of a digital services tax in Canada, which would tax U.S. tech companies headquartered outside the country but generating profits within it
- Tariffs on steel and aluminum put in place by both countries against both countries
What happens next?
The good news is that none of the parties chose not to bow out of the USMCA altogether. That indicates there’s a common understanding that the trade agreement provides value.
The challenging part for businesses that use the USMCA (and that’s many more than did 18 months ago), is that how and when the deal might be altered is not only unknown, it will be ongoing.
The USTR, which has been in talks with government officials in Mexico about the terms of trade across America’s southern border, will continue its discussions. When similar discussions begin with Canadian officials remains unknown.
These bilateral talks are anticipated to result in side letters to the agreement that will ultimately serve as addendums to the original trade deal, putting forward new terms that will govern trade around a particular commodity or service.
How quickly will changes take place once the parties have negotiated mutually agreeable terms?
This will ultimately depend on what’s been negotiated and how it impacts industries in the countries involved. There is the potential for some (or possibly all) of these changes to be litigated as the White House’s authority to negotiate new terms to a trade agreement without Congressional approval is somewhat ambiguous.
How can businesses looking to invest in or expand operations across North America feel comfortable doing so given the uncertainty?
The most critical thing business decision makers can do today and over the coming months and years is keep a close watch on whether the USTR or White House has flagged their industry (or a related one) as a point of concern and monitor developments closely.
As mentioned above, talks are taking place on a bilateral basis, meaning that a company looking to invest in Canada may not be impacted by discussions between Washington and Mexico City but heavily impacted by discussions between Washington and Ottawa.
Is there any possibility the agreement will ever be renewed for a full term again?
Yes. The agreement can be a renewed for a full 16-year term at any time. If the parties reach mutually agreeable terms on all fronts after a year or two or five, they can choose to bring the agreement up for a full renewal to offset investment uncertainty.
The long and short of it is that nothing is changing imminently, so businesses have time to plan and prepare for whatever changes may take place down the road. The downside is, it now becomes a waiting game with no definitive timeline beyond the 10-year balance of the current trade deal.
For many that might result in creating supply chain redundancies to avoid over-dependency on any particular market. For others, it might mean changes in supply chain configurations. And still for others it might mean putting a hold on expansion plans.
Exactly how businesses will respond, only time will tell.