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On September 30, 2018, the United States, Mexico and Canada reached a new trade agreement, the United States–Mexico-Canada Agreement (“USMCA”). This agreement maintains a free-trade zone between the three countries and could be signed prior to December 1, 2018. The remaining hurdle will then be for the USMCA to be ratified by each country, including a mandatory 60-day review period by the US Congress.
While the USMCA will usher in a number of changes to the US-Mexico-Canada trade dynamic, five changes are expected to have a significant impact on Canadians businesses.
1. Increased Access to Supply-Managed Industries
Under the USMCA, the US will gain greater access to key Canadian supply-managed industries, including the dairy industry. The USMCA stipulates that American farmers will have tariff-free access to 3.6% of Canada’s dairy market, resulting in hundreds of millions of dollars of product entering the Canadian market. Other important Canadian concessions include increased access to eggs, turkey, chicken and broiler hatching eggs and chicks.
Many Canadian producers are concerned that additional imports will result in a less captive domestic market and a downsizing in domestic production. While the concessions may negatively impact Canadian businesses in the form of increased competition from the US, they will likely result in a reduction in the cost of basic staple goods for Canadian consumers.
That said, Canadian businesses will benefit from increased export opportunities to the US and Mexico for products including refined sugar, sugar-related products and certain dairy products including milk beverages, cream, cheese and butter.
2. Investor Protections and Dispute Resolution Mechanism
Under Chapter 11 of NAFTA, an investor benefited from protections from other NAFTA parties that engaged in certain types of conduct (e.g., national treatment, most-favored nation treatment, etc.). An investor could bring an arbitral claim against another NAFTA party for actions that caused loss or damages to the investor’s investment in its territory. While the USMCA will continue to protect investors, it will significantly change the mechanisms for enforcing investor protection.
Under the USMCA, Canadian investors in the US and US investors in Canada will no longer be able to submit arbitral claims. Instead, any contravention of investment protections by Canada or the US will have to be addressed under state-to-state dispute settlement mechanisms under Chapter 31 of the USMCA. Interestingly, Canadian investors operating in Mexico and Mexican investors operating in Canada will benefit from the NAFTA Chapter 11 equivalent protections under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”), once it comes into force.
3. North American Automotive Content Requirements
Under NAFTA, the regional value content requirement in the rules of origin for automotive products was 62.5%. The USMCA will increase this requirement to 75%, which is expected to increase both the consumer cost of vehicles in North America and the compliance costs for automotive manufacturers.
Another change impacting the automotive industry is the USMCA’s requirement that to qualify as a vehicle of regional origin, 30% of labour costs associated with the vehicle must be generated by workers earning at least US$16 per hour. This requirement will, again, likely result in consumers paying more for North American manufactured vehicles in the future.
4. De Minimis Exemptions Increased
The de minimis thresholds for consumers had not seen a change since 1985 when brick and mortar stores dominated the retail market. Under NAFTA, orders under CAD$20 were exempt from duty and taxes. Now, with an increase in the de minimis exemption under the USMCA, Canadian consumers will not have to pay duty on orders under CAD$150 and will be exempt from both duty and taxes for orders under CAD$40. This change signals further growth potential for online shopping platforms and creates a further issue for businesses struggling to compete in the online marketplace.
5. Intellectual Property Protection Increased
Two key changes under the USMCA in relation to intellectual property include the extension of copyright in Canada and the increase in term protection for new “biologic” drug products.
Copyright Protection Changes
The copyright protections of CPTPP are largely replicated under the USMCA, extending the copyright protection for intellectual property such as music scores, computer programs, artwork, books and sound recordings to 70 years beyond the death of the person who created the works. The increase from 50 to 70 years brings Canada’s copyright protections in line with the US and European Union.
Biologic Drug Product Protection Changes
A significant concession on Canada’s part is the increase in the term of protection for new biologic drug products. Prior to the USMCA, “innovative drugs” in Canada that contained a medicinal ingredient not previously approved by Health Canada were entitled to an eight year term of data protection which could be extended for an additional six months for pediatric population submissions. Under the USMCA, this protection will be extended to 10 years. This change is expected to foster the R&D of innovative drug companies, however, it is likely to increase the consumer cost of drugs since the extension will restrict the ability of generic drug manufacturers to make “copy-cat” drugs at lower costs.
The USMCA brings significant changes to the broader North American trade landscape. In reviewing these changes, Canadian businesses should be specifically focused on adapting and optimizing their supply chain logistics to fit within the new trade framework and ensure that they are taking advantage of the new rules as much as possible.
Miller Thomson will continue to monitor developments related to the USMCA very closely and will be providing regular updates to ensure that Canadian businesses can respond quickly and effectively.