The USMCA & United States-Canada Trade Relations: The Perspective of a U.S. Trade Practitioner.

AuthorStewart, Terence P.
PositionProceedings of the 42nd Canada-United States Law Institute Annual Conference: Back to the Future: The Canada-United States Relationship at a Crossroads

ABSTRACT: This article is taken from a presentation given by Terence P. Stewart at the Canada-United States Law Institute 42nd Annual Conference, April 12, 2018. (1)

TABLE OF CONTENTS Table of Contents I. Introduction II. Some Changes from NAFTA Contained in the USMCA III. What Does the Completion of the USMCA Suggest for Other Trade Issues? A. Reform of Canada's dairy management system B. Global Excess Capacity in Steel and Aluminum C. Softwood Lumber D. WTO Reform IV. Conclusion I. INTRODUCTION

On September 30, 2018, the United States, Mexico, and Canada concluded negotiations on a new trade agreement to replace the North American Free Trade Agreement ("NAFTA"). (2) The new agreement, titled the United-States-Mexico-Canada Agreement ("USMCA" or "Agreement"), was announced after a thirteen-month-long negotiation period between the United States, Mexico, and Canada.

The Trump Administration identified revisions to NAFTA or withdrawal from the trilateral agreement as a top trade priority upon taking office. The President characterized NAFTA as one of the worst trade deals ever negotiated by the U.S., and many in organized labor and related NGOs had longstanding concerns about the effectiveness of NAFTA in improving standards of living for working class families and the loss of good paying jobs in America. (3) Much of the U.S. business community has been highly supportive of NAFTA, though many were equally supportive of updating NAFTA to reflect issues of importance to the business community in 2017-2018. The President's focus is largely premised on the large trade deficits the U.S. runs with Mexico and Canada, though much of the deficit with Canada over time has been energy related. In 2017, the U.S. trade deficit with Mexico was $70.95 billion, and the trade deficit with Canada was $17.05 billion. (4) Statistically, thousands of factories have closed in the U.S. since 1994 when NAFTA came into force, and large numbers of factories and jobs were transferred to Mexico, before larger movements to Asia. (5) As stated by U.S. Trade Representative Robert Lighthizer, NAFTA had "failed many, many Americans and needfed] major improvements." (6)

In setting out the goals of a new deal, Ambassador Lighthizer stated, "we need to ensure that the huge trade deficits do not continue and we have balance and reciprocity." (7) To advance reciprocity, he noted the need to reconfigure the rules of origin for autos to "require higher NAFTA content and substantial U.S. content." (8) With these U.S. aims in mind, the USTR engaged its neighbors to pursue an updated and potentially rebalanced arrangement. The Trump Administration envisioned a speedy process for the renegotiations.

While broad-based trade negotiations would normally take years to go through the wide variety of issues, the U.S., Canada, and Mexico had all been signatories to the Trans-Pacific Partnership ("TPP") Agreement which contained text on many topics of likely interest to an updated NAFTA. While the U.S. withdrew from the TPP after President Trump assumed office, many of the chapters of the USMCA draw heavily from the previously negotiated TPP text, using it as the baseline for what had been deemed acceptable for all three parties in that agreement. The updated USMCA reflects the updating of NAFTA through the addition of topics both contained in the TPP and new agreements. Whereas NAFTA consists of twenty-two chapters and the TPP consists of thirty chapters, the USMCA has a total of thirty-four chapters. (9) Several chapters are almost verbatim from the negotiated TPP text, such as those on Digital Trade (USMCA Chapter 19), Smalland Medium-Sized Enterprises (USMCA Chapter 25), Competitiveness (USMCA Chapter 26), Anticorruption (USMCA Chapter 27), and Good Regulatory Practices (USMCA Chapter 28). (10) The Agreement's only chapters without equivalents in the two prior texts were Chapter 12 Sectoral Annexes, largely devoted to defining standards and definitions of specific product groups within the individual USMCA countries, and Chapter 33 on Macroeconomic Policies and Exchange Rate Matters. (11) Chapter 33 will be discussed in a later section but it is worth noting that the USMCA is the first free trade agreement ("FTA") negotiated by the U.S. which includes provisions addressing currency manipulation and devaluation for competitive advantage, an issue of concern in recent years with certain countries, though not specifically with Canada or Mexico.

Because the U.S. was seeking in part a rebalancing to address the deficits it was running with Canada and Mexico, the talks were always going to be difficult. As is true of most negotiations, the prospect of failure was present up to the very end. While negotiations were trilateral for most of the period, the U.S. and Mexico worked through issues between themselves and announced an agreement in August 2018. (12) Whether Canada would be able to resolve outstanding issues with the U.S. in the timeframe permitted for a new trilateral deal made September 2018 an interesting month with a deal reached between the three countries late on September 30th. (13) Each country has its own process for considering the terms of the Agreement and whether the Agreement will be implemented into domestic law. In the U.S., the process of adopting implementing legislation has become challenging, although whether that will be true with the USMCA is yet to be seen. There will be groups in each country who have continuing concerns about the content of the USMCA. Most observers expect that the new Agreement, if implemented by each country, will go into effect in late 2019 or early 2020.

As is true in any negotiation, no trading partner gets all that it is seeking in a final deal, and many proposals made may be made specifically to have something to "lose" in the negotiations or with the knowledge that the end game will look significantly different than the starting position. Thus, not surprisingly, none of the three parties achieved all that it staked out to achieve, but each achieved significant results. Certainly each government has declared satisfaction with the USMCA, and there are also obvious issues that each country has flagged as critical to the successful conclusion of negotiations that are reflected in the September 30, 2018 Agreement. While Canada and Mexico are hoping to achieve a resolution of current Section 232 tariffs on steel and aluminum ahead of the signing of the Agreement on the sidelines of the G20 Summit in Buenos Aires on November 30, press reports indicate that both countries will sign the Agreement even if the 232 tariff issue has not been resolved by that point.

The aim of this article is to briefly outline some of the key changes to NAFTA contained in the USMCA, assess their relevance for the United States and Canada, and explore whether these successful negotiations will provide likely forward movement in resolving a number of other bilateral and multilateral trade issues.

  1. SOME CHANGES FROM NAFTA CONTAINED IN THE USMCA

    Some of the major improvements in the USMCA as compared to NAFTA are the inclusion of chapters to address advancements in technology and other issues of increased importance to economic development. (14) For example, the USMCA's Chapter 19 is a new provision, not to be confused with Chapter 19 in NAFTA, to address the advent of digital trade. (15) Under the new Chapter 19, parties are prohibited from imposing customs' duties, fees, or other charges on or in connection with the importation or exportation of digital products transmitted electronically between a person of one party and a person of another party. (16) Chapter 19 also provides that parties cannot prohibit or restrict the cross-border transfer of information if such transfer is for business and prohibits parties from requiring that computing facilities be used or located in their territory as a condition for conducting business therein. (17) These provisions are important for many businesses involved in e-commerce or digital trade.

    The USMCA also includes full chapters on labor, small- and medium-sized enterprise ("SME") development, and currency manipulation. (18) In the Labor Chapter (Chapter 23), the USMCA prohibits the importation of goods produced by forced labor, protects against labor discrimination on the basis of sex, sexual orientation, and gender identity, addresses violence against workers, and incorporates protections for migrant workers. (19) These provisions are fully subject to the dispute settlement provisions of the USMCA. (20)

    Chapter 25 also constitutes a commitment to fostering the dynamism and competitiveness of SMEs. (21) This chapter memorializes the parties' commitment to cooperating to increase trade and investment opportunities for such enterprises. (22) Accordingly, it asks that the parties establish an information-sharing mechanism, creates a "Committee on SME issues," and mandates the convening of an annual SME Dialogue to facilitate the exchange of information among the parties. (23)

    A first for the United States is the Agreement's inclusion of binding obligations among the parties as to currency manipulation and misalignment in Chapter 33. (24) The USMCA is the first U.S. free trade agreement to include such a chapter. In this provision, each party "confirms" that it is bound under the IMF's Articles of Agreement to avoid manipulating exchange rates and the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. (25) Each party should, pursuant to this chapter, "(a) achieve and maintain a market-determined exchange rate regime; (b) refrain from competitive devaluation, including through intervention in the foreign exchange market; and (c) strengthen underlying economic fundamentals, which reinforces the conditions for macroeconomic and exchange rate stability." (26) This chapter also includes numerous transparency...

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