January 14, 2020

H.R.5430 – United States-Mexico-Canada Agreement Implementation Act

NOTEWORTHY

Background: The United States, Mexico, and Canada renegotiated the North American Free Trade Agreement in 2017 and 2018. This was one of the Trump administration’s highest priorities. The result was the United States-Mexico-Canada Agreement. The three parties signed the protocol replacing NAFTA with USMCA on November 30, 2018. 

U.S. Trade Representative Robert Lighthizer negotiated extensively with working groups chosen by House Speaker Pelosi to modify the agreement to ensure that USMCA passed Congress with broad bipartisan support. The United States, Mexico, and Canada executed those changes through a Protocol of Amendment to USMCA that was signed on December 10, 2019. 

The House of Representatives passed the USMCA implementing bill, H.R.5430, by a vote of 385-41 on December 19. The Mexican Senate, which ratified the original USMCA agreement on June 20, approved the revised agreement on December 12. The Canadian Parliament has yet to ratify the agreement.

USMCA enjoys privileged status in Congress under Trade Promotion Authority, which was most recently reauthorized in 2015. Under TPA, the USMCA implementing bill is not amendable by either chamber of Congress and must be put forward for a majority vote on a strict timetable. For additional details, see RPC’s previous paper on the TPA process.

Floor Situation: The Senate received H.R.5430 on January 3, and it was referred to the committees on Finance; Health, Education, Labor, and Pensions; Environment and Public Works; Appropriations; Foreign Relations; Commerce, Science, and Transportation; and Budget. The Finance Committee favorably reported the bill by a 25-3 vote on January 7. The other committees have either already reported the bill or are expected to favorably report it shortly.

Executive Summary: USMCA will supersede the North American Free Trade Agreement. American businesses and farmers will enjoy the same or better market access than they had under NAFTA. The agreement adds significant new commitments relating to digital trade; intellectual property; automobile manufacturing and labor; access to the Canadian dairy market; and a sunset provision whereby the terms expire after 16 years and are subject to review every six years.

NOTABLE BILL PROVISIONS

Agriculture

  1. Canada will expand tariff rate quotas for U.S. exports of milk, cheese, cream, skim milk powder, condensed milk, yogurt, and other dairy products.

  2. Under Article 3.A.3.3, Canada will eliminate its milk pricing regime for Class 6 and Class 7 dairy products (various products relating to skim milk and milk protein concentrates.) six months after USMCA enters into force.

  3. Under Article 3.A.4, Canada will grade U.S. wheat in a manner no less favorable than it accords Canadian wheat.

Automobile Manufacturing/Labor

  1. The appendix to annex B of chapter 4 of the agreement – the “auto appendix” – increases the regional value content requirements for automobiles and auto parts. In order to receive duty free tariff treatment, 75% of auto content must originate in the U.S., Canada, or Mexico. Under NAFTA, the requirement was 62.5%. This provision is meant to incentivize manufacturing in North America and preclude non-parties like China from unfairly benefitting from the agreement. 

  2. Under article 6 of the auto appendix, at least 70% of an auto producer’s steel and aluminum purchases must originate in the U.S., Canada, or Mexico.

  3. Article 7 of the auto appendix requires 40-45% of auto content be made by workers earning at least $16 per hour.

  4. Sections 202 and 202A of H.R.5430 direct the president to create an interagency committee to advise on enforcement and modification of the automobile related portions of the USMCA.

  5. Section 204 creates penalties for people who falsely certify goods under the rules of origin.

  6. Title VII of H.R.5430 creates an Interagency Labor Committee for Monitoring and Enforcement to monitor implementation of the labor portions of the agreement. The implementing bill contains specific directions for the committee, including an annually updated list of priority subsectors, a biannual assessment of whether Mexico is complying with its obligations, recommendations for enforcement actions if necessary, and a web-based hotline to receive whistleblower tips on labor issues in Mexico and Canada from interested parties. The bill also establishes procedures for rapid response labor panels.

Digital Trade

  1. Article 19.3 prohibits customs duties on digital products transmitted electronically.

  2. Article 19.11 prohibits restrictions on cross-border data transfers if the activity is for conducting business.

  3. Article 19.16 prohibits the parties from requiring the transfer of source code or underlying algorithms as a condition of allowing the import, distribution, sale, or use of software in their territory.

  4. Article 19.17 prohibits all signatories from holding the provider of an internet service for copyright liability for the actions of their users.

Environmental Monitoring and Enforcement

  1. Unlike NAFTA, USMCA’s environmental provisions have been incorporated into the agreement, in chapter 24, and are fully enforceable.

  2. Article 24.11 commits the parties to cooperate on air quality.

  3. Articles 24.17 to 24.21 contain important commitments to protect marine life, including those to prevent overfishing and harm of marine habitats.  

  4. Article 24.22 commits the parties to take measures to combat the illegal trade of plant and animal life.

  5. Title VIII of H.R.5430 creates an Interagency Environment Committee for Monitoring and Enforcement of the relevant environmental provisions.

  6. Section 822 of H.R.5430 allows several agencies to detail employees to the U.S. embassy in Mexico to help the Interagency Environment Committee carry out monitoring and enforcement actions.

Dispute Settlement

  1. Chapter 31 establishes a binding dispute settlement system. It also closes loopholes in NAFTA that allowed parties to block the formation of dispute settlement panels.

  2. Under articles 23.3 and 24.4, violations of labor or environmental obligations now put the burden on an offending party to prove that the violation does not affect trade or investment.

  3. Article 34.7 stipulates that the agreement shall terminate 16 years after it enters into force unless the parties agree to extend it. The agreement is also subject to six-year reviews.

ADMINISTRATION POSITION

The administration strongly supports H.R.5430.

COST

CBO estimates that H.R.5430 would reduce the deficit by $3.044 billion over 10 years, largely due to an increase in revenues from tariffs on motor vehicles and parts. It also projects a reduction in spending of $84 million attributable to decreased federal payments to support dairy producers as a result of USMCA’s agriculture provisions, with a total decrease in outlays of $74 million.