USMCA Is Now Ratified: What’s next for NAFTA 2.0?

Representatives from the U.S., Mexico and Canada have signed off on changes to the USMCA trade agreement and now full ratification is in sight. What’s next?

After more than a year of ongoing discussions, the United States House of Representatives has approved an updated USMCA trade agreement, paving the way for ratification by early 2020. Approval from the House was the final hurdle of the deal, which had been approved by Mexico and Canada earlier this year. 

Representatives of all three countries signed an updated version of USMCA on December 10, 2019. However, final details are still emerging, including specifics around the changes made to labor standards and a final timeline for the deal to go into effect. 

While the full impact of the new trade deal will be better understood once it goes into full effect three years from full ratification, this latest approval does afford businesses and workers within the three countries new levels of certainty in trade relations. 

What is changing? NAFTA vs. USMCA

Because the final text of the agreement has yet to be posted publicly, the full extent of the changes is still subject to speculation. Based on discussions of the last few weeks and a fact sheet from Rep. Richard E. Neal, chair of the House Ways and Means Committee, there are some changes for which manufacturers can prepare today: 

1. Automotive North American content. As we’ve outlined in recent months, USMCA brings sweeping changes to automotive manufacturers due to the new rules of origin clause. By increasing the threshold of North American content, an automobile must contain from 62.5% under NAFTA to 75% under USMCA; the agreement aims to boost the production of vehicles in North America. Automotive component production is impacted as well; USMCA increases automotive parts thresholds to between 60% and 75% North American content, up from NAFTA’s requirement of between 50% and 60% North American content. The agreement also includes a first of its kind requirement that a percentage of each vehicle be made in North America. With automakers already reexamining the cost-effectiveness of China-based facilities, this stands to be good news for Mexico. 
2. Modernized intellectual property protection. USMCA aims to modernize many of the protections laid out by NAFTA, but IP protections are among the most significant updates. Chapter 20 brings existing IP protections into the modern age. Among many changes, the agreement broadens provisions for protecting trademarks, provides new protections for biologic pharmaceutical products and lays out new standards for protecting digital content. It also grants customs officials new authority in seizing suspected counterfeit or pirated goods being imported, intended for export, or in transit.
3. Support for smaller businesses. USMCA includes another first for a U.S. trade agreement, a chapter specific to protecting small and medium-sized enterprises. The chapter establishes information-sharing tools for SMEs and eases cross-border business logistics, making it easier for small businesses to share products and services with a broad global audience.
4. Labor impact of USMCA. Discussions in U.S. Congress over the past few weeks have largely been around labor. Because the White House has not yet released an updated copy of the USMCA, changes remain to be seen. However, union leader AFL-CIO commented in a press release, “For the first time, there truly will be enforceable labor standards—including a process that allows for the inspections of factories and facilities that are not living up to their obligations.” The Wall Street Journal cited Mexico’s undersecretary for North America Jesús Seade’s explanation these inspections would be led by a panel of labor experts with representatives from each of the countries involved, a typical arrangement in many trade agreements. Those experts would have responsibility for conducting site visits during an official trade dispute. The House Ways and Means Committee notes that the updated agreement removes language that might have allowed one country to block the formation of a dispute settlement panel. Other changes depended upon actions taken earlier this year by Mexico. On May 1, President Andrés Manuel López Obrador enacted a labor reform bill that ensures all workers can vote for union representation by secret ballot. The measure is a first step in improving pay and working conditions for Mexican workers and boost productivity for employers.

Timeline to passage of USMCA

The biggest unknown at this point is when the agreement will be fully ratified. While President Trump has urged for the passage of the bill before the end of the year, U.S. Senate majority leader Mitch McConnell has stated that it will likely be 2020 before the Senate is able to focus on passage. 

Once the bill is finally passed, there will be ample time to adjust to its requirements. The May 2019 version of the agreement laid out a three-year rollout, after which all countries are expected to fully adhere to the trade policies outlined. When the trade agreement does go into effect, it’s good for a full 16 years. However, a review and period for revision is scheduled for 2026. 

Because the trade agreement has passed its most significant hurdles, business owners can start today to set a plan in place for how to best meet tomorrow’s requirements. With ample advance planning, and advice from knowledgeable partners, businesses can create a roadmap to success in Mexico.