global Tax USMCA: What Does the New Trade Deal Entail? April 06, 2020 After more than two years of negotiation, the United States-Mexico-Canada Agreement, or USMCA, has finally been ratified by Congress. Here’s what the new trade deal entails. On January 29, President Trump signed the United States-Mexico-Canada Agreement (USMCA) after more than two years of negotiations. Earlier the same month, Trump worked out an initial trade deal with China. These moves help alleviate uncertainty regarding future alliances with countries that represent more than half of U.S. trade. Key Provisions The USMCA updates the 27-year-old North American Free Trade Agreement (NAFTA), along with introducing several landmark changes. The new deal is a major win for U.S. workers and businesses in many sectors. It’s forecast to create nearly 600,000 jobs and generate up to $235 billion in economic activity over the next six years. Trump has called the USMCA, “The largest, most significant, modern, and balanced trade agreement in history.” But he can’t take all the credit: It was the result of bipartisan efforts. House Democrats negotiated several changes to the labor, environmental and patent protection provisions of the agreement, before ratifying the USMCA. Here are the highlights of the 2,000+ page agreement: More stringent auto content rules. To qualify for zero tariffs under the USMCA, vehicles must have 75% of their components manufactured in the United States, Mexico or Canada (up from 62.5% under NAFTA). Plus, 70% of a vehicle’s steel and aluminum must originate in North America to avoid tariffs. Incentives for automakers to pay higher wages or shift production to regions with higher pay. To qualify for zero tariffs under the USMCA, by 2023, 40% to 45% of a vehicle’s parts must be made by workers who earn at least $16 an hour by 2023. That’s roughly three times the average hourly wage paid by Mexican factories today. Mexico also agreed to pass new labor laws that will give greater protections to workers and make it easier for them to unionize. In addition, the agreement establishes an independent panel that can investigate factories accused of violating labor rights. As a result of these proactive labor measures, the USMCA has received a thumb’s up from the largest labor union in the United States, the AFL-CIO. Enhanced access to agricultural markets. Under the USMCA, U.S. farmers will have greater access to the Canadian markets to export products, such as milk, butter, cheese, baby formula, eggs, poultry, wheat and wine. As a result, U.S. agricultural exports are expected to increase by $2.2 billion. In return, the United States will expand access to its market for Canadian dairy and sugar. Enhanced intellectual property protections. The USMCA generally extends the terms of copyrights to 70 years beyond the life of the author (up from 50 years under NAFTA). The deal also imposes new criminal penalties for stealing trade secrets, including those who commit cybertheft, and it prohibits governments from asking tech companies to disclose their source codes or put duties on electronic transmissions. New digital trade rules. The USMCA includes provisions for today’s digital economy. Notably, it prohibits charging duties on digital products that are distributed electronically, such as music, software and ebooks. In addition, the agreement provides legal protections for Internet companies, such as Facebook and YouTube, so they’re not liable for content created by users. Expanded environmental protections. The USMCA provides the most comprehensive set of enforceable environmental obligations of any previous United States agreement. It includes provisions to improve air quality, prevent and reduce marine litter, and support sustainable forest management. The agreement also establishes a fisheries management system to prevent overfishing in North America. Restrictions on controversial arbitration system. The USMCA limits a special system of arbitration under NAFTA that companies and governments could turn to if they believed another party in another country had violated their trade rights. Additionally, the USMCA contains a 16-year sunset clause. This provision also allows participating countries to review the deal every six years to decide whether they want to extend it. Stay Tuned Mexico and the United States ratified the USMCA and were waiting on Canada’s approval. On March 13th, Canada ratified the trade agreement. US trade officials are pushing to have the agreement enter into force by June 1. Contact us for the latest developments in global taxes and trade and how they affect your business.