Even NAFTA supporters who were wary of President Donald Trump's repeated threats to withdraw from the accord acknowledged that the deal was likely in need of a facelift. The changes cut across a variety of areas, including cars, dairy, dispute settlement and digital trade, with each side making concessions to bring the deal across the finish line.
NAFTA even has a new name, with officials looking to rebrand the deal as the U.S.-Mexico-Canada Agreement, or USMCA, in the hopes of mollifying critics who have long associated the deal with job losses and the erosion of American manufacturing.
Lawmakers, industry associations and other interested parties will be poring over the text in the coming weeks to learn more about the agreement, but for now Law360 fills you in on the changes you need to know about.
That New Car Smell
Perhaps the single most significant change the governments agreed to in NAFTA is a bid to encourage more automotive sector production within the region.
The move primarily involves a tightening of NAFTA's rules of origin, which dictate how much of a car must be manufactured in a NAFTA country in order to earn a tariff cut. The new agreement sets that level at 75 percent, up from 62.5 percent under the old agreement.
Another new rule requires a certain amount of labor required to make a car to be done by workers earning at least $16 an hour. That wage threshold begins at 30 percent in 2020 and will gradually rise to 40 percent by 2023, according to the text.
The deal also contains something of a life preserver for Canada and Mexico if the U.S. decides to follow through with national security-based car tariffs that are currently under consideration. Under the new deal, Canada and Mexico would be spared from any tariffs unless exports top 2.6 million units during the year.
No Crying Over Spilled Milk
The thorniest market access issue looming over the NAFTA talks was the U.S. push to make inroads into Canada's highly protected dairy sector, which remained a sticking point up to the final hours of the negotiation.
Under the new deal, much of Canada's supply management system that tightly regulates the dairy market will remain intact, but Ottawa has agreed to drop its controversial "Class 7" pricing scheme for items like milk protein concentrate, skim milk powder and infant formula.
What's more, Canada will assign new tariff-rate quotas to U.S. dairy producers on a slew of items like cheese, cream and yogurt to provide a measure of relief from Canada's hefty tariffs, which exceed 300 percent for certain dairy items.
Changing the Dispute Settlement Game
Investor-state dispute settlement, or ISDS, which allows companies to arbitrate grievances against foreign governments, has become a lightning rod for controversy in recent years. Critics have seized upon ISDS as a tool for companies to beat back a sovereign nation's environmental, labor or consumer protection rules.
The Trump administration appears to have taken those arguments to heart. The deal will fully eliminate ISDS with regard to Canada and keep it in place with Mexico only for certain sectors like oil and gas, infrastructure and telecommunications.
However, the administration came up short in its effort to toss out NAFTA's separate dispute settlement process focused exclusively on anti-dumping and countervailing duties.
A Sunset off in the Distance
The early phase of the NAFTA talks saw the U.S. side trot out a mostly unprecedented and controversial proposal to terminate the agreement in five years unless all three countries voted to keep it in place.
The DNA of that idea lives on in the new agreement, but in a form that is much more palatable for NAFTA's supporters. If implemented, the provision will renew NAFTA for 16 years. During the sixth year, the parties will convene to discuss possible amendments and updates. If they reach an agreement at that time, the deal is renewed for another full 16 years.
The so-called sunset proposal drew fire in its early, more aggressive form, with critics saying that trade agreements only work when businesses have certainty on the nature of the supply chain. The new review mechanism allows the U.S., Canada and Mexico to make sure the deal is working like it ought to while also reducing the likelihood that it gets abruptly terminated.
Prepping for the 21st Century
At the core of the administration's push to revisit NAFTA was the need for the agreement to take into account the rapid development of business and technology since the deal took effect in 1994.
To that end, negotiators included a brand new chapter covering digital trade. Those rules bar duties on e-books and other goods distributed electronically and ensure the free flow of data across the North American region, among other provisions.
The intellectual property prong of the deal also saw an upgrade in the new agreement, as the U.S. mostly looked to install its domestic protections for patents, copyrights and trademarks.
Specifically, the U.S. was able to secure 10 years of market protection for expensive drugs known as biologics. That is short of the 12-year exclusivity period provided for in U.S. law but more than what the U.S. was able to secure in the Trans-Pacific Partnership before Trump withdrew from that deal.
An Eye Toward China
Even as the U.S. was striking a deal with its North American allies, it secured provisions ostensibly meant to counter the Trump administration's most prominent trade nemesis, China.
Chapter 32 of the new text contains a passage that sets rules around situations in which one of the NAFTA countries looks to sign a new trade agreement with a "non-market country," a facially neutral term that nevertheless implicates Beijing.
The text effectively serves as a warning against pursuing a trade deal with China, as doing so would allow the other NAFTA parties to boot the China partner out of the trilateral deal.
"Entry by any party into a free trade agreement with a non-market country, shall allow the other parties to terminate this agreement on six-month notice and replace this agreement with an agreement as between them," the text says.
--Editing by Brian Baresch and Breda Lund.
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