The United States and Mexico announced that they’ve reached a preliminary agreement, making key changes to parts of the North American Free Trade Agreement (NAFTA).
Key updated include:
Increased De Minimis Shipment Value Level
Mexico will increase its de minimis shipment value to US$100 (up from US$50).
This means that shipments with a value of up to US$100 will enter Mexico without being subject to duties and taxes, and with minimal formal entry procedures. This makes is easier for smaller businesses to take part of cross-border trade.
Increased protection of Intellectual Property
The agreement will require that enforcement authorities be able to stop goods that are suspected of being counterfeited from crossing the border; provides strong patent protection; establishes 10 years of data protection for biologic drugs, extends the minimum copyright term to 75 years for certain works, and more.
Comprehensive environmental provisions
The agreement includes a number of environmental provisions, including: obligations to combat trafficking in wildlife, timber, and fish; to strengthen law enforcement networks to stem such trafficking; and to address pressing environmental issues such as air quality and marine litter.
Automotive Rules of Origin
The following are the key elements of the agreed-upon auto rules of origin:
- A top-line regional value content of 75% (up from 62.5% in the current NAFTA)
- 70% of all steel, aluminum, and glass used in the production of the automobile must originate in North America
- Up to seven components, including most of the powertrain assembly, must originate in North America
- If a plant is used in the production of the automobile that provides less than the North American wage (approximately US$16.00), 40% (passenger vehicles) and 45% (light duty trucks) of that final vehicle’s assembly must be made with at least the North American Average Wage;
In calculating the final vehicle produced at the North American Average wage, up to 15% (20% for light duty trucks) of that requirement may include R&D, marketing, sales, etc. salaries. Otherwise stated, companies may not work-around the wage requirement by simply bolstering professional salaries as workers “on the line” must be part of the calculation.
The Agreement, in principle, also agrees that non-conforming passenger vehicles within the existing footprint, as defined by the passenger vehicle capacity per plant, will be subject to no higher than the most favored nation (MFN) rate of 2.5%. Non-conforming light duty trucks in the existing footprint will be subject to the current 25% tariffs.
Non-conforming autos and trucks produced at new investment locations will not be guaranteed the 2.5% MFN rate. As a result, in the event the U.S. imposes Section 232 auto tariffs, new investment in Mexico will have exposure to such tariffs. Contrary to other reports, Mexico and the U.S. did not agree to a fixed tariff rate higher than 2.5% for new investment.
Sunset clause
The United States and Mexico agreed to a 16 year sunset clause that requires the parties to review the agreement every six years and, if approved, renew the agreement for 10 years. If the parties are unable to agree to renew the agreement, they will attempt to work out all differences during the remainder of the term.
Next steps
Robert Lighthizer, the United States Trade Representative (USTR), intends to issue the formal notice to Congress on Friday, August 31, 2018, as required by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015). This will start the 90-day consultation period before the U.S. can sign the deal. The anticipated late November 2018 signing date provides Mexico with time to secure passage from its legislature and receive official signature before the transition to Mexico’s new President, Andrés Manuel López Obrador, on December 1, 2018. The U.S. will then proceed to ratification/implementation by Congress, which will not occur until after the next Congress is seated in 2019.
For more information about the preliminary agreement, visit: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/august/modernizing-nafta-be-21st-century