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US, Mexico and Canada are one step closer to continued free trade in the region

Executive summary

On 30 November 2018, the United States (US)-Mexico-Canada Agreement (USMCA)1 was signed during a side meeting of the G-20 in Buenos Aires, Argentina. While key steps remain for the agreement to move into force, the signing provides a clear path forward to continued free trade.

 Key provisions in the new agreement include:

 Qualifying automobiles as duty free under the agreement by:

    • Increasing the North American content requirement to 75% from 62.5%, and
    • Requiring that 40% of a vehicle be made at higher wages traded tariff-free under the deal
  • Adding a clause for a regular review of the deal, with the first coming after six years
  • Modernizing the dispute resolution process by effectively eliminating investor-state panels but preserving dispute settlement panels
  • Expanding US dairy farmers’ access to Canada’s protected market

 Detailed discussion

 US President Donald Trump, Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau respectively signed the agreement, formalizing the preliminary terms reached by trade negotiators from all three countries on 1 October 2018. The Trade Ministers for each country have also signed the agreement, namely US Trade Representative Robert Lighthizer, Canadian Foreign Minister Chrystia Freeland and Mexico’s Minister of Economy, Ildefonso Guajardo.

 Now that the agreement has been signed, it must be subsequently ratified by the legislatures of all three countries before entering into force. In the US, an implementing bill must be submitted for Congressional approval and once the bill is introduced, Congress has a maximum of 90 days in session to enact it. A similar process is required in Mexico as such agreement must be submitted to the Senate to be considered and ratified. Finally, in Canada, after being introduced in the form of an implementation bill by the Government, the USMCA must first be put to vote in the House of Commons after a full review by Parliament, followed by supplemental legislation being passed where required.

 Further, on 1 December 2018, President Trump stated that he intends to submit a formal withdrawal notification of the North American Free Trade Agreement (NAFTA) to Congress, triggering a six-month time period in which both the USMCA implementing legislation will need to be approved and NAFTA formally terminated to permit facilitated trade to continue within and between the three countries.

 What to expect next

 Once ratified by the legislatures of the three countries, the USMCA will then enter into force no sooner than three months from the date of the last country’s notice. Therefore, the ratification process will likely continue during 2019. Until formally entered into force, the existing requirements under NAFTA remain in place and companies should continue to follow the rules and regulations for trade governed under NAFTA provisions.

 In the meantime, special attention should also be given to the status of the US investigation (Section 232) into imported automobiles and automotive parts, as the USMCA provides, via side letters, important concessions to Canada and Mexico that alleviate the potential application of punitive tariffs. Now that the USMCA is signed, it remains to be determined if the US will eliminate the punitive tariffs imposed on its counterparts on steel and aluminum and if similar actions will be taken by Canada and Mexico on the retaliatory tariffs imposed on US products.

 Companies should continue to monitor developments in this space for impacts that may come from changes to the steel and aluminum tariffs as well as retaliatory measures that were imposed by Canada and Mexico as a result. Finally, companies should be prepared to address the impact of any US move to take formal actions to terminate its participation in NAFTA, including developing an understanding of specific duties and costs that may be associated with such an outcome.

 Endnote

1. For background on the new USMCA including key provisions, side agreements and other details, see EY Global Tax Alert, United States – Mexico – Canada Agreement to replace NAFTA, dated 2 October 2018.

EYG no. 012302-18Gbl

Download this Tax Alert as a PDF file.

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