October 3, 2018
By Daniel Dale
Canada, the U.S. and Mexico agreed Sunday on a new trade pact to replace NAFTA: the U.S.-Mexico-Canada Agreement.
The deal must be approved by the legislatures of all three countries before it comes into force.
Until then, NAFTA will stay in effect.
Experts are assessing the provisions of the deal. But a lot of it is familiar; despite President Donald Trump’s claim that the agreement is “brand new,” much of it is retained from NAFTA or borrowed from the Trans-Pacific Partnership from which Trump withdrew the U.S.
On the whole, the agreement makes incremental changes.
But several of the most significant changes are concessions to the U.S. by Mexico and Canada.
Here are some of the major components of the new agreement:
Auto manufacturing: To qualify for tariff-free sales, 75% of a car will have to be made with content manufactured in North America, up from 62.5% in NAFTA. Also, at least 40% of the car will have to be made by workers earning at least $16 (U.S.) per hour. There is no such wage provision in NAFTA.
The U.S. demanded the changes as Trump believes the new policies can wrest some auto manufacturing back from Mexico and from overseas.
Auto tariffs: The U.S. has guaranteed that the first 2.6 million Canadian-made cars imported by the U.S. every year will not be subjected to any future auto tariffs Trump imposes on “national security” grounds. The U.S. imports about 1.8 million Canadian cars in a year, so Trump has exempted all current imports from Canada, plus a hypothetical 800,000 more.
The U.S. gave similar ground on Canadian auto parts, protecting the first $34.2 billion (U.S.) in imports. That is about 40% higher than the current value of U.S. imports from Canada.
Dairy: Canada has retained its supply management system, which protects domestic farmers. But it will give the U.S. tariff-free access to about 3.6% of the domestic dairy market, according to Canadian officials. In the Trans-Pacific Partnership, from which Trump withdrew, Canada agreed to give its 11 partners access to 3.25% of the market.
The new agreement lets the U.S. export a certain duty-free amount of certain dairy products—milk, cheese, yogurt and more—to Canada every year, with the amount increasing steadily over six years. The U.S. will also get more Canadian access for its chicken and eggs.
And Canada has agreed to abandon the “Class 7” pricing system that had hurt U.S. suppliers of skimmed milk and protein concentrates.
Sunset clause: The agreement is set to expire in 16 years. But, six years into it, the three countries will have the option to extend it for another 16 years. If they do not agree to a 16-year extension at that point, they will meet every subsequent year to try to hammer out their issues so that they can agree to an extension then.
Steel and aluminum tariffs: The agreement does not resolve the issue of the steel and aluminum tariffs the U.S. has imposed on Canada or the tariffs Canada has imposed on various U.S. products in retaliation.
Chapter 19 dispute resolution: The agreement preserves the “Chapter 19” system that allows each country to challenge the other country’s duties at an independent panel, made up of adjudicators from both countries, rather than in the domestic courts of the country imposing the duty. Canada had made Chapter 19 a “red line” in the last stages of the negotiations.
Cultural exemption: The agreement preserves the “cultural exemption” that allows Canada to give preferential treatment to Canadian producers of artistic content.
Copyright terms: Works will have copyright protection lasting for the life of the author plus 70 years, up from “life plus 50.” The U.S. had demanded an increase, which Canada had previously resisted.
Chapter 11 investor-state dispute settlement: Canada and the U.S. will phase out the system that allows foreign investors to sue governments of the other country for allegedly mistreating them.
Online shopping: Canada will raise its low threshold, of $20 (Canadian), for applying duties and sales taxes on goods Canadians have purchased from the U.S. and get shipped to Canada. The new provision: duties will be applied above $150, and sales taxes above $40. In other words, the first $40 is free of both duties and sales taxes.
Biologics: Canada will provide 10 years of data protection for a class of pharmaceutical drugs called biologics, up from eight years. (The U.S. offers 12 years.) This means cheaper generic versions of these drugs will not be available as quickly.
TN visas: There is no change to the list of occupations eligible for NAFTA’s “TN” professional visas. Canadians living in the U.S. on the visas will not be affected.
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