The CCN Legal Guide
to the USMCA

I. INTRODUCTION

The USMCA’s Chapter 4 on Rules of Origin is relevant for trade among the Parties, because it sets forth the criteria to determine the origin of a product, therefore determining whether a product is subject to preferential tariffs and to other non-tariff-based benefits. In this regard, the USMCA implements important changes to the existing Rules of Origin chapter of the North American Free Trade Agreement (NAFTA), particularly with respect to the automotive and auto parts industries, as detailed below.

II. EXECUTIVE SUMMARY

Chapter 4 of the USMCA contains the agreements and provisions regarding Rules of Origin, both general and specific, establishing the criteria and procedures to determine the applicability of tariff and non-tariff-based benefits offered by USMCA, including the following matters:

1. General Rules of Origin;
2. Specific Rules of Origin;
3. Treatment of recovered materials used in the production of remanufactured goods;
4. Determination of the Regional Value Content;
5. Value of materials used in production and adjustments to such value;
6. Accumulation and de minimis rules;
7. Treatment of fungible goods and materials;
8. Treatment of accessories, spare parts, tools, instructional materials, packaging materials and containers, sets of goods, kits or composite goods;
9. Transit and transshipment; and
10. Non-Qualifying transactions and operations.

III. LEGAL DISCUSSION

This summary is divided into two main sections. The first section focuses on significant general changes to the Rules of Origin Chapter, in comparison to NAFTA, and the second section addresses significant provisions specifically relating to the automotive and auto parts industries.

General Changes

Article 4.8: Intermediate Materials. The USCMA establishes that any self-produced material, other than engines and transmissions (which are components listed on Table G of the Appendix to Chapter 4), used in the production of a good, may be designated by the producer as intermediate material for purposes of calculating the regional value content, provided that, if the intermediate material is subject to a regional value content requirement, no other self-produced material subject to a regional value content requirement used in the production of that intermediate material may be designated by the producer as intermediate material.  Therefore, in order to designate any raw material used in the production of a good as self-produced material, such raw material may not contain any raw material also designated as intermediate material.

Article 4.12: De Minimis. To be considered an originating good for USMCA purposes, the allowed value of non-originating materials that do not undergo an applicable change in tariff classification is increased from 7 percent, as provided in NAFTA, to 10 percent, based either on the transaction value of the good, excluding any costs incurred in the international shipment of the good or the total cost of the good.

Article 4.13: Fungible Goods and Materials. Several provisions included in NAFTA’s Uniform Regulations (General Rules for the Application of the Provisions on Customs Matters of the North American Free Trade Agreement for Mexican purposes) were added directly to the USMCA, including the provisions governing fungible goods.

Article 4.14:  Accessories, Spare Parts, Tools or Instructional or Other Information Materials. Similarly, provisions included in NAFTA’s Uniform Regulations were added in Article 4.14 as relates to accessories, spare parts, tools and instructional or other information materials.

Changes Relating to the Automotive and Auto Parts Industries

Article 4.10: Automotive Goods

1. Regional Value Content. NAFTA states that for a passenger vehicle or light truck to be considered as originating, it must comply with a minimum regional value content of 62.5 percent. The USMCA, on the other hand, in the Appendix to Annex 4-B (Product Specific Rules of Origin), establishes that as of the date of entry into force of the USMCA, the minimum regional value content will be 66 percent under the net cost method, increasing three percent each year, until reaching 75 percent.

2. Essential, Main and Complementary Parts. In an important shift, the USMCA eliminates NAFTA’s automotive tracing requirements, known as the “tracing list,” which currently requires producers to maintain strict control of the value of non-originating parts and components used in the production of a vehicle in order to calculate the regional value content. Instead, the USMCA sets forth specific regional value content requirements for key parts and components. These parts and components are divided into three different categories, establishing a minimum regional value content for each as follows: i) Tables A.1 and A.2 of the Appendix to Annex 4.B of Chapter 4 establish that the core parts and components, which include engines, axles, batteries, chassis, transmissions, and suspensions, among others, must reach a minimum of 66 percent regional value content on the date of entry into force of the USMCA, increasing 3 percent each year, up to 75 percent; ii) Table C of said Appendix establishes that the principal parts and components, which include brake systems, air conditioners, fuel systems, and exhausts, among others, must reach a minimum of 62.5 percent regional value content on the date of entry into force of the USMCA, increasing 2.5 percent each year, up to 70 percent; and iii) Table C of said Appendix further establishes that the complementary systems, which include switches, valves, wire harnesses, lighting, and locks, among others, must reach a minimum of 62 percent regional value content on the date of entry into force of the USMCA, increasing by 1 percent each year until reaching 65 percent.

3. Steel and Aluminum. As an additional requirement, the USMCA establishes that to consider a vehicle as originating, at least 70 percent of the producer’s purchases of steel and aluminum in a determined period must qualify as originating. The producer may calculate the purchases over: (a) the previous fiscal year of the producer; (b) the previous calendar year; (c) the quarter or month applicable to the date the vehicle is exported; (d) the producer’s fiscal year applicable to the date the vehicle is exported; or (e) the calendar year applicable to the date the vehicle is exported.

4. Labor Value Content. The USMCA also introduces a new requirement for a vehicle to be considered as originating, setting forth that, as of the date of entry into force of the USMCA, a certain percentage of labor value content must be incorporated in areas where the minimum wage is at least US$16.00 per hour. In the case of passenger vehicles, the USMCA establishes a minimum labor value content of 30 percent as of the date of entry into force of the USMCA, increasing annually until reaching 40 percent.  In the case of trucks, the USMCA establishes a minimum labor value content requirement of 45 percent, as of the date of entry into force of the USMCA.

5. Side Letters 6 and 7 Pursuant to Section 232 of the 1962 Trade Expansion Act. As part of the negotiations carried out between Mexico and the United States, their governments signed bilateral agreements known as “Side Letters,” including Side Letters 6 and 7 pursuant to Section 232 of the Trade Expansion Act of 1962 of the United States, which empowers the President of the United States to adjust imports of goods and materials if he deems the quantity or circumstances surrounding those imports to threaten national security. In this regard, both Parties agreed that if such a situation arises, the United States will allow the importation of up to 2.6 million units of passenger vehicles per year, up to $108 billion dollars of auto parts per year and an unlimited number of light trucks originating from Mexico, without imposing any tariffs or restrictions.

IV. CONCLUSION

The most relevant provisions to the USMCA’s Rules of Origin Chapter are directly focused on the automotive and auto parts industries, since the specific rules of origin applicable to goods of those industries have been tightened as compared to the more flexible rules of origin currently found in NAFTA. Therefore, it is imperative for companies in these industries to take into consideration that their products must now comply not only with a higher regional value content, but also with new requirements established under the USMCA, such as the labor value content and the requirement to make minimum purchases of originating steel and aluminum. Accordingly, companies in the automotive industry are highly recommended to conduct an analysis and make the proper adjustments to their operational and production processes. Failing to do so could limit their ability to gain access to the preferential tariffs offered under the USMCA and to continue participating in the attractive market that the USMCA region represents. This is especially true given that the United States is currently the world’s second largest consumer of vehicles.

CONTACT INFORMATION

Rene Cacheaux | rcacheaux@ccn-law.com

Tel: +1 (512) 614-1562

Daniel Cavazos | dcavazos@ccn-law.com

Tel: +1 (956) 686-5883

Joseph B. Newton | jnewton@ccn-law.com

Tel: +1 (210) 222-1642

Miriam Name | mname@ccn-law.com

Tel: +1 (210) 244-0224

Enrique Hill | ehill@ccn-law.com.mx

Tel: +52 (55) 5093-9705

I. INTRODUCTION

Textiles and apparel are key industries for the economies of each Party and account for significant trade among the Parties. Chapter 6 of the USMCA is dedicated to textile and apparel goods and includes new provisions to incentivize greater North American production of textiles and apparel. Chapter 6 also strengthens customs enforcement and facilitates broader consultation and cooperation among the Parties to the USMCA.

II. EXECUTIVE SUMMARY

The USMCA strengthens existing North American supply chains for textiles and apparel and opens new opportunities for exports of U.S. yarns, fabrics, and apparel, through four main avenues:

1. Revised rules that incentivize the use of regional outputs, requiring the sourcing of sewing thread, narrow elastic fabrics, pocketing, and coated fabrics from within North America.
2. Restructured tariff preference levels, to ensure that this limited exception to the rules of origin is not overused pursuant to the USMCA, at the expense of regional supply chains.
3. Updated rules of origin that provide flexibility, allowing manufacturers to use textile inputs not generally available in North America.
4. New robust customs enforcement provisions to prevent circumvention and fraud.

Chapter 6 contains the agreements and provisions related to specific rules of origin established for textile and apparel goods, to determine the applicability of the tariff and non-tariff-based benefits that the USMCA offers, including the following topics:

1. Rules of Origin and related matters;
2. Handmade, traditional folkloric, or indigenous handicraft goods;
3. Special Provisions applicable to certain textile and apparel goods;
4. Review and revision of Rules of Origin;
5. Cooperation;
6. Origin verification;
7. Denial of preferential tariff treatment determinations; and
8. Committee on Textile and Apparel Trade Matters.

III. LEGAL DISCUSSION

Below is a summary of the most significant articles of Chapter 6:

Article 6.1: Rules of Origin and Related Matters. The USMCA states that the Rules of Origin and Origin Procedures established in Chapters 4 and 5 apply to all textile and apparel goods except as specifically provided in Chapter 6.  Particularly, to be considered as originating, textile goods with both originating and non-originating materials classified in Chapters 50-60, or heading 96.19, may not have more than 10 percent of the total weight of the good made up of non-originating materials (elastomeric content may not exceed 7 percent).  Likewise, to be considered as originating, textile goods classified in Chapters 61-63 with both originating and non-originating fibers/yarns in the component that determines their classification may not have more than 10 percent of the weight of such component made up of non-originating fibers/yarns (elastomeric content may not exceed 7 percent).  Also, the value of goods packaged in sets for retail sale must correspond to originating goods by at least 90 percent. (Rules to calculate the value of goods and sets are set out in Chapter 4).

Article 6.2:  Handmade, Traditional Folkloric, or Indigenous Handicraft Goods. Duty-free treatment by the importing Party shall be given to hand-loomed fabrics of the cottage industry, hand-made cottage industry goods made of such fabrics, traditional folklore, or indigenous handicraft goods.

Article 6.3: Special Provisions. Article 6.3 refers to the Annex 6-A Special Provisions, which contain special provisions applicable to certain textile and apparel goods, as summarized below:

1. The “yarn-forward” rules of origin are maintained, which means that fibers may be produced anywhere, but each component starting with the yarn used to make the apparel garments must be formed within the USMCA region. This rule requires that the spinning of the yarn or thread, weaving or knitting of the fabric, and assembly of the final apparel garments must all occur within the USMCA region. However, it is important to note that the USMCA also maintains most of the exceptions to the “yarn-forward” rule allowed by the North American Free Trade Agreement (NAFTA), which allows manufacturers to use some textile inputs not generally available in North America.
2. The USMCA will continue offering duty-free treatment for goods assembled in Mexico using fabrics that are wholly formed and cut in the United States (commonly known as the 807A provision), exported from and reimported into the United States under Chapters 61 to 63 of the Harmonized System.
3. The Parties shall apply the preferential treatment applicable to originating goods, to goods classified in Chapters 61-62 of the Harmonized System that are both cut and sewn, or otherwise assembled in the USMCA region from yarn/fabric obtained outside the USMCA region that meet other conditions for preferential treatment. It is important to mention that several tariff items are ineligible for preferential treatment between Mexico and the United States, and include i) blue denim; ii) fabric woven on plain weave where two or more warp ends are woven as one (oxford cloth) of average yarn number less than 135 metric number; iii) goods composed chiefly of circular knit fabric of yarn equal to or less than 100 metric number and iv) goods as parts of ensembles.
4. The Parties shall apply, with respect to fabric and made-up goods, the preferential treatment to cotton or man-made fiber fabric or goods woven/knit in a Party from yarn/fabric from outside the USMCA region that meet all other conditions.
5. For trade between the United States and Canada, numbers of Square Meter Equivalents (SME) counted against Tariff Preference Levels (TPL) are as follows: non-originating goods with 50% or less by weight of materials of that good – 50% of the SME for that good; Non-originating goods with more than 50% by weight of the materials of that good – 100% of the SME for that good.
6. Preferential Tariff Treatment is applied with respect to spun yarn up to annual quantities in Appendix 3 to certain headings of cotton/man-made fiber yarns, produced/obtained outside the USMCA region that meet other conditions.
7. For trade between the United States and Canada, the Parties shall also apply preferential tariff treatment to goods classified under heading 56.05 of the Harmonized System that are formed in the territory of a Party, with fibers from outside the USMCA region, that meet other applicable conditions.
8. The following special provisions apply to goods entering under the TPL provisions:

• For goods imported under a TPL set out in Annex 6-A, the United States may not apply the Merchandise Processing Fee for Canadian goods. Provisions regarding claims that apply to other textiles also apply to these goods, notwithstanding that goods subject to TPL are not originating.
• Trade goods referred to in Annex 6-A shall be monitored by the Parties, which shall consult to ensure that TPLs are administered effectively, including responding to time-sensitive requests.
• The TPLs shall be managed on a first-come, first-served basis, calculating quantities on the basis of imports.
• The Parties shall publish online: i) procedures for allocation of TPLs with summary documents explaining the procedures, and changes to procedures; ii) annual amounts/utilization of TPLs and monthly updates; and iii) information on the allocation/utilization of TPLs starting from the date the USMCA enters into force.
• Importing Parties may require a document issued by a competent authority to track allocation and use of a TPL to grant duty-free treatment. (The Parties shall notify the other Parties if it requires a certificate of eligibility or other documentation and provide the minimum data elements required).
• Importers may claim duty-free treatment for a good under TPL for at least one year after importation.
• The Parties shall consult on adjusting annual TPLs for supplies of fibers/yarns/fabrics at the request of a Party. Adjustments shall require mutual consent and are subject to domestic approval procedures.

Article 6.4: Review and Revision of Rules of Origin. The USMCA allows Parties to initiate a consultation to consider if certain goods should be subject to different rules of origin, regarding the supply of fibers, yarns, or fabrics, provided that the requesting Party demonstrates substantial production in its territory for that particular good, which means proving its domestic producers can timely supply commercial quantities of the good in question. An initial assessment shall be made within 90 days, to the extent possible.  If the Parties agree that the fiber/yarn/fabric is not commercially available, they shall work on a proposal for a rule change and proceed with domestic implementation of such within 60 days of initial assessment. An agreement by the Parties will supersede any prior rule.

Article 6.6: Verification. The Article 6.6 provisions allow the Parties to conduct, through their customs administrations, a verification regarding textile goods to verify qualification for preferential treatment, or through a request for a site visit.  Site visits may be requested to verify the qualification of a good for preferential treatment or customs offenses regarding textile/apparel goods, allowing Parties to request access to records and facilities relevant to the claim or to the offenses, as applicable.  For a site visit, the importing Party shall provide the host Party with the following information at least 20 days before the planned site visit: i) proposed dates; ii) the number and location of exporters and producers to be visited; iii) whether assistance is requested; iv) the suspected offenses to be verified; and v) whether the importer claimed preferential treatment. The host Party shall acknowledge receipt of a site visit notification and may request information to facilitate the site visit.

Some rules that the importing Parties must follow when conducting site visits are set out in Article 6.6.7:

1. Officials of the customs administration of the host Party may accompany and assist the importing Party officials.
2. Each Party must limit communication to government officials and not inform any person outside the government who could undermine the effectiveness of the visit.
3. Access to records/facilities must be requested from the exporter or producer (or the person with capacity to consent for them) before or at the time of the visit. If access is denied, the site visit will not occur.
4. If the exporter or producer is not able to receive the importing Party for the site visit, it will be conducted on the next working day, unless the importing Party agrees otherwise or a valid reason acceptable to the importing Party is substantiated; otherwise, permission for the visit is considered denied. The importing Party must consider any reasonable alternatives.

Upon completion of the site visit, the importing Party must, if requested by the host Party, inform the host Party of its preliminary findings, and within 90 days of a request, provide a written report of the results (reports to exporters/producers shall be provided upon request as it pertains to each one).  If a Party intends to deny preferential tariff treatment as a result of a site visit, it shall provide notice of such intent to the importer/exporter/producer with information of the preliminary results of verification at least 30 days in advance, allowing them to submit additional information to support the claim. It is important to note that an importing Party may not reject claims for preferential treatment on the sole grounds of lack of assistance or information.

Additionally, Article 6.6.11 states that if verifications indicate a pattern of conduct by exporters/producers of false/unsupported representations that a certain good qualifies for preferential treatment the importing Party may withhold preferential treatment for identical goods of that person until it is demonstrated that goods do qualify for such treatment.

Article 6.7:  Determinations. Article 6.7 states that preferential treatment may be denied: a) for reasons established in Article 5.10 (Determinations of Origin); b) if it has not received sufficient information to confirm that the good qualifies for preferential treatment; or c) if the importing Party is unable to conduct site visits because access to facilities or relevant records is denied, or if the importing Party is otherwise prevented from completing the site visit.

Article 6.8:  Committee on Textile and Apparel Trade Matters. Article 6.8 provides for the creation of a Textiles Committee to review the implementation of Chapter 6, which will function as a consultative committee on technical or interpretive difficulties that may arise under Chapter 6, and to discuss ways to improve the effectiveness of cooperation under Chapter 6.

Additionally, the Textiles Committee shall assess the benefits and risks of restrictions on trade, including business and employment matters, and the market for textile goods of each Party, and shall consult before amendments are made to the Harmonized System in order to prepare proposed updates to Chapter 6.

IV. CONCLUSION

In comparison to the NAFTA, the USMCA incentivizes the production of textiles and goods within the USMCA region by strengthening customs enforcement and facilitating broader consultation and cooperation among the Parties. Nevertheless, it also maintains and relaxes some provisions related to non-originating materials used in the production of textile and apparel goods, such as increasing the de minimis content of non-originating fibers and yarns from 7 percent to 10 percent of the weight of the good. Chapter 6 is expected to favorably impact the textile and apparel industries in the USMCA region, and to result in an increase of textile and apparel exports by the Parties.

CONTACT INFORMATION

Rene Cacheaux | rcacheaux@ccn-law.com

Tel: +1 (512) 614-1562

Daniel Cavazos | dcavazos@ccn-law.com

Tel: +1 (956) 686-5883

Felipe Chapula | fchapula@ccn-law.com.mx

Tel: +52 (55) 5093-9713

Miriam Name | mname@ccn-law.com

Tel: +1 (210) 222-1642

Antonio Franck | afranck@ccn-law.com

Tel: +1 (210) 222-1642

Enrique Hill | ehill@ccn-law.com.mx

Tel: +52 (55) 5093-9705

I. INTRODUCTION

Chapter 7 of the USMCA is dedicated specifically to customs and trade facilitation. In contrast, NAFTA did not include a chapter on customs and trade facilitation. The procedures included in Chapter 7 are intended to streamline international trade by means of increased transparency and the use of procedures for the expedited release of express shipments.

Chapter 7 of the USMCA is based on the Agreement on Trade Facilitation established in the Protocol Amending the Marrakesh Agreement Establishing the World Trade Organization of November 27, 2014.

II. EXECUTIVE SUMMARY

Customs and foreign trade operations, procedures and inspections are regulated under Chapter 7, particularly with respect to the standards and guidelines relating to trade facilitation, customs clearance, use of technology, customs procedures, customs audits and determinations, transit of goods, penalties and matters generally relating to customs and foreign trade.  Accordingly, Chapter 7 is an important pillar for the facilitation and development of trade between the USMCA Parties.

III. LEGAL DISCUSSION

A summary of the key provisions of Chapter 7, which is comprised of Section A: Trade Facilitation, and Section B: Cooperation and Enforcement, is provided below.

Article 7.1: Trade Facilitation. The Parties affirm their rights and obligations under the Agreement on Trade Facilitation set forth in Annex 1A of the WTO Agreement.  In order to minimize costs to traders, each Party must administer its customs procedures in a manner that facilitates the importation, exportation and transit of goods in compliance with its law. Moreover, the Customs and Trade Facilitation Committee established by the Parties under Article 7.24 must discuss additional measures to facilitate trade.

Article 7.2: Online Publication. Each Party must make available, on a free, publicly accessible website, updated information related to customs matters, such as: practical steps required to carry out customs clearance procedures, lists of the documentation and data required for such procedures, links to all applicable laws, regulations, duties, taxes, fees and charges related to such procedures, and, in general, information to duly carry out and/or correct any customs procedure.

Article 7.3: Communication with Traders. To the extent possible, in accordance with its law, each Party must publish, in advance, proposed regulations on trade and customs matters of general application and provide traders an opportunity to comment on such before their adoption. Each Party must also adopt a mechanism to regularly communicate with traders within its territory, regarding customs and trade procedures and regulations.

Article 7.5: Advance Rulings. Each Party must issue an advance ruling, prior to the importation of an article into its territory, that sets forth the treatment that it will provide to such article at the time of its importation. Anyone with a justifiable cause may request such advance ruling, even if the applicant does not have an existing relationship with a person located within the territory of such Party. Advance rulings will be issued regarding tariff classification, application of customs valuation criteria, the origin of an article, including whether such qualifies as originating in a USMCA Party, and whether an article is subject to a quota or a tariff rate quota, among other customs matters. Each Party must adopt a uniform procedure throughout its territory to issue such rulings. The rulings must be issued as expeditiously as possible and must take effect on the date of their issuance but may be modified or revoked if there is a change in circumstances or applicable legislation. However, no Party may retroactively apply such revocation or modification to the detriment of the party that requested such ruling.

Article 7.6: Advice or Information Regarding Duty Drawback or Duty Deferral Programs.  Each Party must also provide, upon request from an importer in its territory, or an exporter or producer in the territory of another Party, advice or information relevant to duty drawbacks or duty deferral programs.

Article 7.7: Release of Goods. Each Party must adopt simplified procedures for the efficient release of goods, in order to facilitate trade and customs clearance. Such procedures must allow electronic submission of documents and must provide for the immediate release of goods upon compliance with the applicable requirements and procedures, or otherwise promptly notify the importer, to the extent permitted by its law, the reasons why the goods are not being released, and which border agency, if not the customs administration, has withheld the release of the goods. A Party may release goods conditioned on the granting of security, provided that the security amount is not burdensome and that the security is discharged as soon as possible after its customs administration is satisfied that the obligations arising from the importation of the goods have been fulfilled or, in the case of instruments covering multiple entries, is no longer required by the customs administration. Finally, the Parties must allow goods to be moved within their territories from one point of entry to another point at which the goods are intended to be released.

Article 7.8: Express Shipments. Each Party must provide expedited customs procedures for express shipments, and shipments valued at or below a fixed amount established under the Party’s law, while maintaining appropriate customs controls. Such procedure must allow, to the extent possible, for the release of such shipments immediately after arrival based on minimum documentation or a single submission of information. Under normal circumstances, no customs duties or taxes will be assessed at the time or point of importation of the shipment.

Article 7.9: Use of Information Technology. A significant new requirement of Chapter 7 is that the Parties must make use of information technology that: facilitates customs procedures, makes all required forms available, allows electronic payments and filings, uses electronic risk management systems, allows importers to correct declarations through its electronic systems and, in general, uses available technology in all customs matters.

Article 7.10: Single Window. The USMCA requires the Parties to establish and maintain a  single entry point system for the electronic filing of documentation and information for purposes of importation of goods into their territory, resulting in faster and more efficient customs clearance. Mexico has used this system since 2012.

Article 7.11: Transparency, Predictability, and Consistency in Customs Procedures. The customs procedures implemented by each Party must be generally transparent, predictable and consistent throughout each Party’s territory. Also, each Party must consider international standards and international trade instruments in order to develop its own customs procedures.

Article 7.12: Risk Management. Each Party is required to maintain a risk management system to focus on high-risk importations and simplify low-risk importations. Such systems may not be arbitrary or discriminatory and must be reviewed periodically.

Article 7.13: Post Clearance Audit. In order to ensure compliance with its customs and related laws and regulations, each Party must adopt post-clearance audits in a risk-based and transparent manner. Any party subject to a customs audit must be notified of the results, including the basis of the results and the audited party’s rights and obligations with respect to such audit.

Article 7.14: Authorized Economic Operator. The USMCA requires the Parties to maintain the internationally recognized Authorized Economic Operator or “AEO” program, intended to strengthen supply chain security in foreign trade through the implementation of minimum security standards in coordination with private companies.

The C-TPAT program was established as a result of the September 11, 2001 terrorist attacks in the United States. Similarly, in 2005, the World Customs Organization created the SAFE Framework of Standards to Secure and Facilitate Global Trade (SAFE Framework), to ensure security of supply chains, whereby international traders were recognized by the customs administrations of each country as trustworthy, after having complied with certain minimum standards  in certain areas of their operations.

Article 7.15: Review and Appeal of Customs Determinations. Each Party must guarantee that each party that receives a customs determination has access to uniform administrative, judicial or quasi-judicial appeals and reviews throughout the Party’s territory. The recipient of the customs determination must be notified of decisions relating to such procedures and provided with an explanation with respect to the same.

Article 7.17: Transit. Goods shall be deemed to be in transit across the territory of a Party when the passage across its territory is only a portion of the complete journey beginning and ending beyond the border of such Party. This does not apply to aircraft transit but does apply to the air transport of goods. The Parties may request only enough documentation and customs controls to identify the goods in transit and to ensure compliance with transit requirements imposed by the Party. Therefore, a Party may not apply customs charges, procedures, or inspections, other than those necessary for specific law enforcement purposes. If a guaranty, or other bond or security for traffic in transit is required, a Party shall cancel such guaranty or bond promptly once it determines that its transit requirements have been satisfied.

Article 7.18: Penalties. Each Party must implement measures that will allow for the imposition of penalties for breaches of its customs laws, regulations or procedures. Such penalties must be applied in a uniform manner and be proportional to the severity of the breach incurred by the sanctioned party. Clerical or minor errors in a customs transaction shall not be treated as a breach, and most errors may be corrected prior to their discovery by the authorities. An explanation must also be given whenever penalties are imposed for failure to comply with customs requirements.

Article 7.19: Standards of Conduct. Each Party must implement systems to deter their customs officials from engaging in any activities that would result in private gain or monetary benefits. Further, the Parties are required to implement systems to allow interested parties to submit complaints regarding perceived improper or corrupt policies or behavior.

Article 7.20: Custom Brokers. Under this provision of Article 7, companies or individuals are allowed, as they deem appropriate, to self-file customs declarations, without customs brokers. If special requirements are imposed to register as a customs broker, such requirements must be transparent and uniform. Also, a Party may not impose arbitrary limits on the number of ports or locations at which a customs broker may operate.

Article 7.21: Border Inspections. The Parties must cooperate with each other in order to facilitate trade, specifically by facilitating customs clearance procedures. As appropriate, they must coordinate to develop procedures or facilities adjacent to ports of entry for the efficient movement of goods.

Article 7.22: Protection of Trader Information. Each Party must apply measures to regulate the collection, protection, use, disclosure, retention, correction, and disposal of information collected from parties engaged in international trade. Also, each Party is required to protect confidential information.

Article 7.24: Trade Facilitation Committee.  The USMCA establishes a Trade Facilitation Committee to facilitate the exchange of information, to allow a forum for expressing views and resolving customs conflicts, and, in general, for the purpose of engaging in any other customs activities the Parties may wish to conduct. The Trade Facilitation Committee will meet once per year.

Section B: Cooperation and Enforcement. Section B of Chapter 7 sets forth the obligations of the Parties to expand their trade enforcement efforts, their cooperation in international trade matters, and to exchange customs information. For such purposes, a Sub-Committee on Customs Enforcement is established under Chapter 7.

IV. CONCLUSION

Chapter 7 of the USMCA is intended to facilitate and expedite customs matters through the implementation of clearer and simpler customs rules, the improvement of cooperation among the Parties, and the optimization of customs procedures. Chapter 7 is also very focused on providing guidance and assistance to members of the general public who seek to carry out international trade transactions and stipulates the Parties’ use of new means of technology to allow for the facilitation of most customs procedures.

CONTACT INFORMATION

Rene Cacheaux | rcacheaux@ccn-law.com

Tel: +1 (512) 614-1562

Daniel Cavazos | dcavazos@ccn-law.com

Tel: +1 (956) 686-5883

Joseph B. Newton | jnewton@ccn-law.com

Tel: +1 (210) 222-1642

Felipe Chapula | fchapula@ccn-law.com.mx

Tel: +52 (55) 5093-9713

Miriam Name Almanza | mname@ccn-law.com

Tel: +1 (210) 244-0224

Iker Dieguez | idieguez@ccn-law.com

Tel: +1 (512) 520-8294

Enrique Hill | ehill@ccn-law.com.mx

Tel: +52 (55) 5093-9705

Pablo Sáenz Baltazar | psaenzb@ccn-law.com

Tel: +1 (210) 244-0230

Héctor Hernández Sanz | hhernandez@ccn-law.com.mx

Tel: +52 (55) 5093-9700

I. INTRODUCTION

Chapter 8 of the USMCA consists of two paragraphs that expressly recognize Mexico’s ownership rights to its hydrocarbons, in accordance with Mexico’s Constitution.  This chapter, which focuses on Mexico for historic and political reasons, is a stark contrast from the other 33 chapters of the USMCA, which in fact regulate trilateral trade matters among the three signatory countries.

The USMCA does not dedicate any other chapter specifically to the regulation of energy.   The absence of a substantive energy chapter is significant, particularly given that the North American Free Trade Agreement (NAFTA) included a chapter dedicated to energy, as well as to basic petrochemicals.  However, as discussed below, although Chapter 8 itself does not reflect an agreement over energy sector trade topics, other sections of the USMCA do apply to the energy industry.

II. EXECUTIVE SUMMARY

Chapter 8 of the USMCA was inserted during the negotiations by Mexico’s current administration and, at first glance, such chapter seems to contradict provisions of Mexico’s 2013 constitutional reforms that opened the petroleum sector to private and foreign companies.  In any case, other provisions in the USMCA beyond Chapter 8 protect and regulate foreign investment in Mexico’s energy sector.

In lieu of a summary, the full text of Chapter 8 is reprinted below:

Article 8.1: Recognition of the United Mexican States’ Direct, Inalienable, and Imprescriptible Ownership of Hydrocarbons

1. As provided for in this Agreement, the Parties confirm their full respect for sovereignty and their sovereign right to regulate with respect to matters addressed in this Chapter in accordance with their respective Constitutions and domestic laws, in the full exercise of their democratic processes.
2. In the case of Mexico, and without prejudice to their rights and remedies available under this Agreement, the United States and Canada recognize that:

(a) Mexico reserves its sovereign right to reform its Constitution and its domestic legislation; and

(b) Mexico has the direct, inalienable, and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory, including the continental shelf and the exclusive economic zone located outside the territorial sea and adjacent thereto, in strata or deposits, regardless of their physical conditions pursuant to Mexico’s Constitution (Constitución Política de los Estados Unidos Mexicanos).

III. LEGAL DISCUSSION

As mentioned, Chapter 8 does not impose any obligations on the Parties, other than to respect the sovereignty of the other Parties, which is to be expected in any international treaty. Furthermore, paragraph 2, with respect to Mexico, is consistent with Mexico’s existing constitutional framework, and, therefore, does not add anything to such legal framework.

Additionally, Chapter 8 does not interfere with the protections provided in other chapters of the USMCA, thus making the legal impact of Chapter 8 almost nonexistent.

However, to understand the energy-related obligations undertaken by the Parties under the USMCA, one must consider other chapters beyond Chapter 8, such as: Chapter 14: Investment; Chapter 15: Cross-Border Trade in Services; and Chapter 22: State-Owned Enterprises and Designated Monopolies.

In Chapter 14, for example, the relevant provisions pertaining to energy relate to the investor-state dispute settlement (ISDS) procedure, which applies to investments in oil and gas, power generation, telecommunications, transportation, infrastructure and other listed sectors in which companies have a contract with Mexico’s federal government (Annex 14-E-6 (b) “covered sectors”).

On the other hand, Chapter 15 provides three basic protections to foreign investments generally, namely, Most-Favored-Nation Treatment, National Treatment and other minimum standard of treatment provisions, which are all discussed in our firm’s legal summary of Chapter 15.

Finally, Chapter 22 is a new chapter that places restrictions on state-owned enterprises (SOEs) and designated private monopolies stipulating that USMCA Parties are prohibited from discriminating against foreign enterprises.

It is important to mention Chapters 14, 15, and 22 here, in order to be able to read Chapter 8 in context, understand its scope and not misinterpret the energy regulations contained in the USMCA.

IV. CONCLUSION

It is somewhat misleading to call Chapter 8 “the energy chapter” of the USMCA because energy is regulated thoroughly in other chapters of the USMCA.  Nevertheless, the lack of specificity and obligations contained in Chapter 8 does not translate into a lack of certainty. International investments made in all three countries comprising North America continue to be protected by the USMCA in other chapters.

CONTACT INFORMATION

José María Lujambio | jmlujambio@ccn-law.com

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Sergio Mario Ostos | sostos@ccn-law.com

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Antonio Franck | afranck@ccn-law.com

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Antonio Riojas | ariojas@ccn-law.com.mx

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Patricio Belden | pbelden@ccn-law.com

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María Elena Hernández | ehernandez@ccn-law.com.mx

Tel: (55) 5093-9700

I. INTRODUCTION

In the international trade arena, countries establish controls and regulations governing the access of foreign products to their domestic markets. These controls and regulations can be divided into two categories:  i) tariff barriers, such as fees or customs duties applied upon importation; and ii) non-tariff restrictions, including all other requirements that do not involve fees or customs duties.

Technical barriers to trade are types of non-tariff restrictions. They may take the form of mandatory compliance provisions establishing the technical or standard requirements that must be complied with to import products for sale in a country’s domestic market, as well as related procedures to assess and certify legal conformity and compliance. In general, countries may establish such mandatory compliance provisions when the objective is the proper regulation of domestic markets, consumer protection, or preservation of natural resources. However, when such provisions are not justified, or when the underlying intent is to protect domestic industries or to discriminate against foreign products, such requirements could result in unnecessary barriers to trade.

Therefore, the effective regulation of technical barriers to trade is a fundamental component of multilateral trade agreements, including international organizations such as the World Trade Organization (WTO), along with bilateral or regional agreements signed by their member countries.  Such member countries regulate not only tariff treatment for imports and exports, but also provide rules to avoid establishing unnecessary barriers to trade.

II. EXECUTIVE SUMMARY

Considering the risk that technical barriers to trade pose to the member countries’ relationships and to the liberalization of trade intended and agreed upon by the Parties, Chapter 11 on Technical Barriers to Trade regulates the creation, adoption, and application of standards, technical regulations, and conformity assessment procedures.  Chapter 11 includes amendments that could affect the trade in goods between USMCA Parties and mandates the adoption of principles of collaboration and treatment of foreign goods in accordance with the USMCA’s National Treatment requirements.

Article 11.2 sets forth certain exceptions to the application of Chapter 11.  For example, such exceptions include the technical specifications established by a government body to satisfy its production or consumption requirements in government contracts, and the provision and application of sanitary and phytosanitary measures, which are permitted as long as such measures address food safety and the protection of national security. In these cases, Parties may not argue that the specifications or requirements are impermissible because they constitute unnecessary barriers to trade based on the provisions of Chapter 11.

Chapter 11 encompasses agreements and provisions pertaining to the regulation of technical barriers to trade, including the following:

• Recognition and adoption of multilateral agreements.

• Recognition, validity, and use of technical regulations and international standards.

• Procedures and collaboration with respect to the creation, use, and implementation of technical regulations by a Party.

• Openness, transparency, consulting, and publicity in the creation, implementation, maintenance, and amendment of technical regulations by a Party and conformity assessment procedures.

• Measures to facilitate implementation, cooperation commitments, and trade, including procedures for mutual recognition and regulatory alignment.

• Cooperation mechanisms for the exchange of information and joint technical discussions for mutual solutions to common trade issues.

• The establishment of a Technical Barriers to Trade Committee with representatives from each of the Parties, to perform required monitoring duties and joint work.

• Designation and establishment of the official points of contact of each of the Parties to address issues that arise under USMCA Chapter 11.

Chapter 11 of the USMCA provides as guiding principles the national treatment principle of the World Trade Organization (WTC) and avoidance of the creation of unnecessary barriers to trade among the Parties. Consequently, Chapter 11 incorporates the substantive provisions of the Agreement on Technical Barriers to Trade (TBT Agreement) of the WTO, as well as the decisions of the Technical Barriers to Trade Committee (TBT Committee) established under Article 13 of the TBT Agreement to create regulations, guides, and international recommendations, as set forth in USMCA Article 11.4.  Such guiding principles call for greater regulatory alignment and good regulatory practices, in a spirit of transparency, openness, impartiality, consensus, efficacy, relevance, and coherence, while reducing unnecessary barriers to trade.

III. LEGAL DISCUSSION

Under Article 2.5 of the TBT Agreement (incorporated into Chapter 11 in Article 11.3 along with several other articles from the TBT Agreement), a Party preparing, adopting and applying a technical regulation that could have a significant effect on trade of the other Parties must, upon the request of another Party, provide the justification for the technical regulation according to the terms of the provisions set forth in Paragraphs 2 through 4 of Article 2 of the TBT Agreement.  Additionally, under USMCA Article 11.7.22, when a Party has adopted a technical regulation or conformity assessment procedure that may have a significant impact on trade, a Party must promptly publish online an explanation of how the technical regulation or conformity assessment procedure achieves the Party’s objectives, along with a description of alternative approaches, if any, considered by the Party, and other required information.  If a technical regulation is prepared, adopted or applied for one of the legitimate objectives specified in TBT Article 2.2, and it is in accordance with international standards, it will be rebuttably presumed not to create an unnecessary obstacle to international trade.  Under Article 11.5.6, if a Party does not use an international standard as a basis for a technical regulation, such Party must, on request from another Party, explain why it has not used a relevant international standard or why it has substantially deviated from an international standard.  Under Article 2.9 of the TBT Agreement, whenever a relevant international standard does not exist or the technical content of a proposed technical regulation is not in accordance with the technical content of relevant international standards, if a technical regulation may have a significant effect on trade of the other Parties, a Party must publish, and otherwise give notice and provide information to the other Parties, in accordance with the provisions of such Article 2.9.

Under Article 11.3, the Parties are not allowed to resort to Dispute Settlement provisions in Chapter 31 of the USMCA with respect to disputes that arise in relation to Chapter 11, in order to avoid contradictions with the provisions of or resolutions issued within the framework of the WTO, particularly regarding disputes arising from provisions incorporated in the TBT Agreement or regarding actions related to a Dispute Settlement Panel of the WTO or the WTO Dispute Settlement Agency.

Under Article 11.4.7, each Party must ensure that any obligation or understanding that it has with a non-Party does not facilitate or require the withdrawal or limitation on the use or acceptance of any relevant standard, guide or recommendation developed in accordance with the TBT Committee Decision on International Standards, or the relevant provisions of USMCA Chapter 11.

Under Article 11.5.2, each Party must periodically review the technical regulations and conformity assessment procedures to adjust such to international standards and implement less restrictive approaches to trade and better practices.

With specific reference to conformity assessment procedures, under Article 11.6, each Party must accord to conformity assessment bodies located in the territory of another Party national treatment (i.e. treatment no less favorable than that it accords to conformity assessment bodies located in its own territory or in the territory of the other Party).  Such treatment includes procedures, criteria, fees, and other conditions relating to accrediting, approving, licensing, or otherwise recognizing conformity assessment bodies, as well as recognizing the results issued by the conformity assessment bodies.   Article 11.6.2 provides that no Party may condition the recognition of conformity assessment results to the conformity assessment body: (i) being located within its territory; or (ii) operating an office within its territory.

Notwithstanding the provisions of 11.6.1 and 11.6.2 that relate to the foregoing national treatment obligations, another Party is not precluded from reviewing the results of a conformity assessment procedure, as long as such review does not imply subjecting a product to duplicate conformity assessment procedures.

As to accreditation of a conformity assessment body, under Article 11.6.6, a Party may not reject the conformity assessment results issued by a conformity assessment body located within the territory of another Party because the accreditation body: (i) operates in the territory of a Party where there is more than one accreditation body; (ii) is a non-governmental body; (iii) is domiciled in the territory of a Party that does not maintain a procedure for recognizing accreditation bodies, provided that the accreditation body is recognized internationally; (iv) does not operate an office in the Party’s territory; or (v) is a for-profit agency.

Under Article 11.6.9, the fees charged by governmental conformity assessment bodies must be limited to the cost of the services rendered.

The provisions of Article 11.7 ensure that individuals of another Party have the same opportunity to participate in the creation of technical regulations, standards, and conformity assessment procedures, in conditions that are no less favorable than the ones granted to the individuals of a Party.

Pursuant to Article 11.7.10, each Party must publish online and make freely accessible, preferably on a single website, all proposed and final technical regulations and mandatory conformity assessment procedures, except with respect to any standards that are developed by non-governmental organizations and have been incorporated by reference into a technical regulation or conformity assessment procedure.

Under Article 11.8, if feasible and appropriate, each Party must endeavor to provide a time period of at least six months between the publication of a final technical regulation or conformity assessment procedure and its entry into force, without risking compliance with the legitimate objectives of the Party.

Under Article 11.9, in order to promote cooperation among the Parties and trade facilitation, the Parties acknowledge several mechanisms for the acceptance of conformity assessment results, from the mutual recognition of technical regulations and conformity assessment procedures compatible among the Parties, to the unilateral recognition of results of conformity assessments carried out within the territory of another Party.

The TBT Committee established under Article 11.11, which will be comprised of representatives of each of the Parties, will carry out, among other items, monitoring and identification of ways to strengthen implementation and operation of Chapter 11, promote cooperation among the Parties in matters related to Chapter 11, and carry out initiatives to support a better regulatory alignment in the USMCA region.

IV. CONCLUSION

In addition to agreements reached and to be administered by the Parties, the business community plays a fundamental role in safeguarding the unrestricted application of benefits arising from the USMCA and the promotion of liberalization of trade in the region.

In order to promote domestic industries, the business community must work with their governments to create and maintain the level of competitiveness required by such domestic industries to handle competition presented by foreign industries under the scope of the USMCA, while seeking to prevent the creation or implementation of technical barriers to trade as mere protectionist measures.

Businesses should, within the scope of their industries, be active and participate in the processes for the creation of new technical regulations and the updating of current ones, in order to promote the development of their respective domestic markets, the protection of consumers, and the preservation of local resources, all pursuant to terms that ensure equality for foreign businesses.

In the same manner, businesses must identify and denounce, through their governments, any technical barriers to trade that constitute unnecessary barriers that prevent market access by any of the other two Parties, or the granting of the same treatment received by domestic businesses.

CONTACT INFORMATION

Iker Dieguez | idieguez@ccn-law.com

Tel: (512) 520-8294

Enrique Hill | ehill@ccn-law.com.mx

Tel: +52 (55) 5093-9705

Esteban Gómez | egomez@ccn-law.com.mx

Tel: +52 (55) 5093-9700

José Fuentes | jfuentes@ccn-law.com.mx

Tel: +52 (55) 5093-9717

Fernanda Revilla | frevilla@ccn-law.com.mx

Tel: +52 (55) 5093-9700

I. INTRODUCTION

Chapter 15 is one of the key chapters of the USMCA, as it establishes rules and obligations to facilitate cross-border trade in services among the Parties. While a few aspects of Chapter 15 remain as compared with the NAFTA, important differences exist in between the two, which were designed to positively impact cross-border services and ensure the growth of international business in the USMCA region.

II. EXECUTIVE SUMMARY

The USMCA’s Chapter 15 on Cross-Border Trade in Services replaces Chapter 12, Part 5 of the NAFTA.  While a few areas such as the scope, National Treatment, and Most Favored Nation (MFN) treatment remain the same, significant differences can be found with respect to modernization, expanding market access for labor in the services industry, and certain cultural protections. It is important to note that Chapter 15 does not cover the treatment of financial services, government procurement, subsidies, grants, domestic land and air transportation services or services provided in the exercise of government authority.

III. LEGAL DISCUSSION

As noted, USMCA Chapter 15 regulates cross-border trade in services, also known as cross-border supply of services, which can be summarized as the supply of a service: a) from the territory of one Party into the territory of another Party; b) in the territory of a Party by a person of that Party to a person of another Party; and c) by a national of a Party in the territory of another Party.

Chapter 15 retains the principles of National Treatment and MFN found in the NAFTA, meaning that each Party must give services and service providers from the other Parties treatment no less favorable than that which it affords to its own services and services providers.  Furthermore, the local presence rule in Chapter 15 prohibits a Party from requesting a service supplier of another Party to establish or maintain a representative office or be a resident in its territory, so that such supplier is able to render cross-border trade in services in that Party’s territory.

Notwithstanding the above principles, the Parties may impose certain measures on services and services providers of another Party. However, keep in mind that such measures are subject to the specific rules set forth in Article 15.8, as explained below:

1. The Party imposing any general measure must ensure that the same is administered reasonably, objectively and impartially.

2. Any measure relating to licensing requirements and procedures affecting trade in services must be objective and transparent. Also, the Party applying the measure must ensure that the competent authority reaches its decision independently, that the procedure does not prevent the fulfillment of a requirement, and that an applicant is not required to approach more than one authority.

3. If a Party requires an authorization for the supply of a service, said Party must ensure that its competent authority complies with the following: a) an application may be submitted at any time within a reasonable time period; b) allowing a reasonable amount of time for applicants to answer any request for additional information and/or documentation; c) providing the status, indicative timeframes, and avoiding delays in reviewing the applications; d) in case of denial, provide details of the reason for such decision and the procedures to appeal or resubmit the application; and e) in general terms, grant the authorizations without delay or limitations.

4. Any fees charged for the granting of an authorization and/or permit must be reasonable, transparent, and not burdensome to the applicant.

5. Moreover, each Party must ensure that services suppliers are provided with the necessary information in order to comply with the procedures related to obtaining, maintaining, amending and renewing their respective authorizations and/or permits.

Another important provision to consider in Chapter 15 is Article 15.9, which provides that when a Party is deciding whether to grant an authorization to a foreign services supplier, such Party may take into consideration the experience and education of said foreign supplier in the territory of another Party.  This provision is generally believed to be helpful with respect to movement of labor and trade facilitation; however, its actual use in practice remains in question.

With respect to small and medium-sized enterprises (SMEs), Article 15.10, with a view towards enhancing commercial opportunities for SMEs, provides that the Parties must endeavor to develop cross-border trade in services of SMEs by facilitating measures, enabling business models (such as direct selling services) and protecting such entities from fraudulent practices.

Notwithstanding the above provisions aimed at promoting trade, a Party may deny all the benefits provided in Chapter 15 to certain services providers. In general, the Parties may deny these benefits to companies owned and/or controlled by a person from any country that is not a party to the USMCA.

In connection with payments and transfers derived from cross-border trade in services, under Article 15.12, each Party must permit all transfers and payments related to the cross-border supply of services to be made freely and without delay into and out of their territory.  Nevertheless, such payments may be prevented or delayed in cases where local laws or rules apply, such as in cases of bankruptcy, insolvency, financial reporting or criminal matters. Moreover, such payments may be prevented or delayed in order to comply with any juridical or administrative order or resolution.

In addition to the general rules described above, certain specific rules will apply to some service sectors. For example, Annex 15-A, on delivery services, provides that with respect to postal services, each Party may maintain a postal monopoly if the scope of the monopoly is defined based on objective criteria.

Another important sector covered by Annex 15-B is transportation, pursuant to which, the Parties agree to establish a Committee on Transportation Services (composed of government representatives  of the relevant trade and transport-related national authority of each Party) for purposes of discussing issues that may arise in the implementation of the applicable rules of Chapter 15 governing transportation services. The Committee on Transportation Services is required to meet within one year of the date the USMCA enters into force, and, thereafter, as necessary, at the place, manner, and time as the Parties decide.  The Committee on Transportation Services must report to the Commission all activities undertaken by the Parties pursuant to Annex 15-B.

Finally, the other important sector specifically regulated pursuant to Annex 15-C is the professional services sector. In relation to such sector, the Parties have established rules and guidelines to facilitate negotiations so that the Parties may enter into mutual recognition agreements for this specific sector.

IV. CONCLUSION

The importance of Chapter 15 is noteworthy, given that its main purpose is to facilitate cross-border trade in services by establishing protections and providing opportunities to services suppliers to operate and render services in the territories of the other Parties and/or in favor of clients from the other Parties. In generally, Chapter 15 differs from its NAFTA predecessor in that it seeks to, among other goals, modernize and expand market access for labor in the services industry. Furthermore, Chapter 15 contains significant advancements for SMEs by creating protective measures to foster their growth, and for the transportation industry, by creating a Committee on Transportation Services to lead discussions on how to facilitate and boost the international land transportation and motor carrier industries. Nevertheless, it will be necessary to see how these provisions will be used in practice as the USMCA Parties move forward with implementing the new agreement.

CONTACT INFORMATION

Robert M. Barnett | rbarnett@ccn-law.com

Tel: +1 (210) 222- 1642

Daniel Cavazos | dcavazos@ccn-law.com

Tel: +1 (956) 686-5883

Ramón Concha Hein | rconcha@ccn-law.com

Tel: +1 (210) 244-0205

Marissa S. Rodriguez | msandoval@ccn-law.com

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Natalie Cerón Cuellar | nceron@ccn-law.com

Tel: +1 (210) 244-0230

Pablo Sáenz Baltazar | psaenzb@ccn-law.com

Tel: +1 (210) 244-0215

I. INTRODUCTION

Despite Mexico and Canada’s persistence, Chapter 16 of the USMCA contains very few changes to NAFTA Chapter 16. This is notable since technology has substantially changed the way companies and individuals do business since NAFTA was first negotiated and implemented, and there was an expectation that the new text of the USMCA would modernize treaty immigration rules for new and emerging professional occupations.

II. EXECUTIVE SUMMARY

Chapter 16 of the USMCA, which addresses the temporary entry for business persons, provides for the TN (Trade NAFTA) visa category, which has been kept intact with only a few minor changes. Under the USMCA, temporary entry means entry into the territory of a Party by a business individual from another Party without the intent to establish a permanent residence. The minor changes to Chapter 16 are mostly rewordings, updates to previously negotiated revisions and a rearrangement of sections, which should not affect the process for applying for and obtaining a TN visa. For reference, such changes consist of: i) probable changes to the visa requirements for Traders and Investors (USMCA Annex 16-A §B(3)); ii) a technology mandate for Working Groups (USMCA Art. 16.6 2(e)); iii) numerical limits on Professionals (USMCA Annex 16-A §D); iv) new categories for Business Visitors (USMCA App. 1); and v) an updated scope.

Chapter 16 covers four categories of business individuals: i) traders and investors; ii) business visitors; iii) intra-company transferees; and iv) professionals. The list of NAFTA Professional Occupations, which features 63 occupations and their minimum educational requirements, was not modernized even given the emergence of new tech-related occupations.  Professionals in these new fields will have to obtain work authorization through other applicable exceptions, even when their professions are commonly found in today’s business world.

III. LEGAL DISCUSSION

The most important modifications to Chapter 16 are the following:

Treaty Traders Temporary Entry. NAFTA Annex 1603, Section B states that a Party may require a business person to obtain a visa or its equivalent prior to entry, even when such person is seeking temporary entry. Now, the USMCA includes additional language: “Before imposing a visa requirement, the Party shall consult with a Party whose business persons would be affected with a view to avoiding the imposition of the requirement. With respect to an existing visa requirement, a Party shall consult, on request, with a Party whose business persons are subject to the requirement with a view to its removal.” Such text is identical to that provided in the other three categories covered under Chapter 16 (i.e. business visitors, intra-company transferees and professionals). In essence, this new language requires the Parties to consult with each other before imposing visa requirements for this category of business persons.

Numerical Limits on Professionals. USMCA Annex 16-A, Section D(2)(b) removes the numerical limits of annual visas for Mexican business persons seeking entry into the United States. NAFTA Annex 1603, Section D (4) – D (7) allowed the NAFTA parties to impose numerical limits on professionals who may qualify for unrestricted access. NAFTA previously allowed an annual numerical cap of 5,500 visas for Mexican business persons seeking entry into the United States.

New Categories for Business Visitors. The USMCA has now independently categorized several professions previously categorized under the “General Service” category. Such professions include public relations and advertisement, commercial transactions, tourism, tour operations and translation.

Working Group Considerations. Chapter 16 requires the Parties to establish a Working Group to meet annually to consider the implementation of Chapter 16, among other items.  Specifically, it states that the Working Group shall consider “issues of common interest related to temporary entry of business persons, such as the use of technologies related to processing of applications, that can be further explored among the Parties in other fora.”

IV. CONCLUSION

Chapter 16 of the USMCA does not make any major changes to the prior immigration provisions of Chapter 16 of the NAFTA and the NAFTA’s TN visa category.  However, without an agreement to update the Professional Occupations list for TN visa requirements, practitioners of the emerging professions in USMCA countries will likely face the challenge of how to fit their professions within the USMCA’s occupational definitions.

CONTACT INFORMATION

Robert Barnett | rbarnett@ccn-law.com

Tel: +1 (210) 222-1642

Floriberto Morales | fmorales@ccn-law.com.mx

Tel: +52 (442) 262-0316

Patricio Belden | pbelden@ccn-law.com

Tel: +1 (956) 686-5883

Carrie Osman | cosman@ccn-law.com.mx

Tel: +52 (81) 8368-9099

I. INTRODUCTION

The inclusion of Chapter 19 in the USMCA is one of the most significant indications of the modernization of the NAFTA and a major reason the Office of the United States Trade Representative has described the USMCA as a 21st Century Trade Agreement. The NAFTA took effect in 1994, at a time when the internet was new and “digital trade” did not yet exist, so the NAFTA did not include any digital trade provisions. The USMCA addresses digital trade by including Chapter 19 Digital Trade, in addition to other chapters that include provisions relating to digital trade, such as Chapter 7 Customs Administration and Trade Facilitation, Chapter 17 Financial Services, and Chapter 20 Intellectual Property.

II. EXECUTIVE SUMMARY

The digital trade and e-commerce provisions of the USMCA focus on certain key objectives, among which are the following: cooperation among the Parties, ensuring the free flow of data, avoidance of the implementation of unnecessary regulatory barriers by a Party, avoidance of duties on electronic transmissions, ensuring consumer protection, building confidence in digital trade, protection of intellectual property, protection of privacy, and liability protection for internet providers and social media platforms. An overarching objective of Chapter 19 is the establishment of a framework for each Party to cooperate with each other on digital regulations, policies, enforcement and compliance, relying to an extent on existing international principles. Given that some countries have mandated that servers be located in their territory, have imposed restrictions on digital trade and on the free flow of data, have imposed duties on electronic transmissions, or have implemented regulations for unfounded reasons, specific provisions of Chapter 19 address these concerns. Other provisions of Chapter 19 ensure that suppliers are not restricted in their use of electronic authentication or electronic signatures in digital transactions. Chapter 19 further addresses the adoption and maintenance of consumer protection laws applicable to digital trade, as well as the protection of privacy, while respecting the legal frameworks of each USMCA Party’s privacy laws. Additionally, the provisions of Chapter 19 limit a Party’s ability to require the disclosure of proprietary computer source codes and algorithms. The USMCA also prevents a Party from maintaining measures intended to impose liability on third party digital-content providers, such as internet providers and social media platforms, for harm arising from, for example, hosting content created by its users, while at the same time protecting the ability of a Party to prevent illegal activity from operating through an interactive computer service.  Finally, the USMCA digital trade provisions protect small businesses from taxes on e-commerce.

III. LEGAL DISCUSSION

The most significant articles of Chapter 19 are summarized below.

Article 19.2: Scope and General Provisions. The Parties recognize the economic growth opportunities provided by digital trade and seek to promote consumer confidence in such, as well as eliminate unnecessary barriers.

Article 19.3: Customs Duties. Parties are prohibited from imposing duties and fees in connection with the importation or exportation of digital products transmitted electronically from one Party to another. However, the USMCA does not preclude the imposition of internal taxes and fees on digital products transmitted electronically within a Party’s territory.

Article 19.4: Non-Discriminatory Treatment of Digital Products. A Party may not discriminate against digital products originating in another Party, either because they were created in another Party or were created by a person from another Party. However, differential treatment among different types of digital products is permitted, and subsidies and grants are not subject to the non-discriminatory provision.

Article 19.5: Domestic Electronic Transactions Framework. Each Party must maintain a legal framework governing electronic transactions consistent with the principles of the UNCITRAL Model Law on Electronic Commerce 1996, to avoid unnecessary regulatory burdens on electronic transactions, and to accept input from interested persons on the development of its legal framework for electronic transactions.

Article 19.6: Electronic Authentication and Electronic Signatures. Parties may not deny the validity of a signature merely because it is in electronic form. The parties agree to encourage the recognition of electronic signatures and the use of electronic authentication.  However, with respect to certain categories of transactions, the Parties may require additional safeguards in connection with the use of electronic signatures and electronic authentication.

Article 19.7: Online Consumer Protections. Each Party agrees to adopt and maintain consumer protection laws to protect consumers from fraudulent or deceptive commercial activities when engaging in digital trade. The Parties recognize the importance of cooperation among their respective national consumer protection agencies and agree to cooperate with respect to consumer protection for online commercial activities.

Article 19.8: Personal Information Protection. Each Party agrees to adopt and maintain a legal framework that provides for the protection of the personal information of digital trade users, considering the guidelines of internationally recognized organizations. Each Party agrees to strive to adopt non-discriminatory practices for protecting digital trade users from personal information protection violations occurring within its jurisdiction and agrees to publish information on the personal information protections it provides to digital trade users, including how to pursue remedies and how to comply with legal requirements.

Article 19.9: Paperless Trading. Each Party will endeavor to accept a trade administration document submitted electronically as the legal equivalent of the paper version of such document.

Article 19.10: Principles on Access to and Use of the Internet for Digital Trade. Mutually recognized principles are set forth in connection with the benefits for consumers to be able to access and use services and applications of a consumer’s choice available on the Internet, and to connect the end-user devices of a consumer’s choice to the Internet.

Article 19.11: Cross-Border Transfer of Information by Electronic Means. The Parties agree not to prohibit or restrict the cross-border transfers of information, including personal information, by electronic means, in connection with the conduct of the business of a covered person. However, the Parties may adopt restrictions as necessary to achieve a legitimate public policy objective, provided such restrictions are not applied in an unjustified discriminatory manner and are no more restrictive on trade than necessary.

Article 19.12: Location of Computer Facilities. No Party will require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in such territory.

Article 19.13: Unsolicited Commercial Electronic Communications. Each Party must adopt or maintain measures for the limitation of unsolicited commercial electronic communications and to provide recourse in its law for unsolicited commercial electronic communications that do not comply with such measures.

Article 19.14: Cooperation. The Parties must cooperate with each other and exchange information and experiences relating to regulations, policies, enforcement and compliance relating to digital trade, as well as to actively promote digital trade. The Parties will consider establishing a forum to address digital trade issues.

Article 19.15: Cybersecurity. The Parties will endeavor to build capabilities and strengthen existing collaboration mechanisms relating to cybersecurity, to identify and protect against cybersecurity risks and to detect, respond to and recover from cybersecurity events.

Article 19.16: Source Code. The Parties agree not to require the transfer of, or access to, a source code of software owned by a person of another Party, or to an algorithm expressed in that source code, as a condition for importation or trade. However, regulatory bodies and judicial authorities may require the disclosure of such source code of software or algorithm in certain cases, such as specific investigations and judicial proceedings, subject to safeguards against unauthorized disclosure.

Article 19.17: Interactive Computer Services. The Parties will not treat a supplier or user of an interactive computer service as an information content provider in determining liability for damages relating to information stored or made available by the service, except to the extent the supplier or user has created or developed such information. Article 19.17 does not apply to intellectual property rights, which are addressed in USMCA Chapter 20 Intellectual Property. Notably, Article 19.17 will not apply to Mexico for the first three years after the USMCA takes effect.

Article 19.18: Open Government Data. The Parties acknowledge that facilitating public access to and use of government information fosters economic and social development, and, to the extent the Parties choose to make government information available to the public, they are encouraged to do so in a format that can be searched, retrieved, used, reused and redistributed.

Other supplementary provisions of the USMCA relating to digital trade include the following:

Chapter 7 Customs Administration and Trade Facilitation, provides in Article 7.8 for express shipments with respect to importations of goods, including those arising from digital trade, which are valued at or below a fixed amount set out under the Party’s law. In such cases, no customs, duties or taxes will be assessed on the importation of express shipments. More information may be found in the summary of Chapter 7 Customs Administration and Trade Facilitation.

Chapter 17 Financial Services provides in Article 17.17 that the transfer of information, including personal information, may be transferred into and out of a Party’s territory by electronic or other means for the conduct of business, subject to the right of a Party to protect personal data, personal privacy and confidentiality. Article 17.18 provides that no Party may require computing facilities to be in the Party’s territory as a condition for conducting business in such territory, so long as the Party’s regulatory authorities have sufficient access to required information. Notably, Article 17.18 will not apply to Canada in the first year after the USMCA takes effect.

Chapter 20 Intellectual Property provides in part in Article 20.79 that each Party confirms that the enforcement procedures set forth in Article 20.82 (Civil and Administrative Procedures and Remedies), Article 20.83 (Provisional Measures), and Article 20.85 (Criminal Procedures and Penalties) shall be available to the same extent with respect to acts of trademark infringement, as well as copyright or related rights infringement, in the digital environment. Article 20.89: Legal Remedies and Safe Harbors provides in part in paragraph 1 that each Party will ensure that legal remedies are available for rights holders to address copyright infringement and shall establish or maintain appropriate safe harbors for Internet Service Providers, which shall include: (a) legal incentives for Internet Service Providers to cooperate with copyright owners to deter the unauthorized storage and transmission of copyrighted materials or, in the alternative, to take other action to deter the unauthorized storage and transmission of copyrighted materials; and (b) limitations in its law that have the effect of precluding monetary relief against Internet Service Providers for copyright infringements that they do not control, initiate or direct, and that take place through systems or networks controlled or operated by them or on their behalf.

IV. CONCLUSION

Chapter 19 of the USMCA recognizes the importance of digital trade in today’s economy. Importantly and, unlike its predecessor the NAFTA, this new chapter specifically addresses the vital subject of digital trade at the international level. The provisions of Chapter 19 require the Parties to cooperate with each other to ensure the free flow of data across borders, while providing the necessary consumer and privacy protections required to instill confidence in the digital trade sector.  At the same time, the USMCA limits the Parties’ ability to adopt overly restrictive measures that would impede digital trade. The USMCA digital trade provisions provide a flexible framework upon which the Parties can continue to rely on and refine as technology evolves.

The movement of data is a significant factor in many sectors. In assessing the potential impact of the USMCA, the United States International Trade Commission concluded that the new agreement would benefit, for example, U.S. computer service and digital platform service firms, the U.S. telecommunications (telecom) industry, exporters of low-value shipments (including e-commerce exports), and U.S. payment services. One can expect that the USMCA will have the same type of salutary impact on such sectors in Mexico and Canada.

CONTACT INFORMATION

Daniel Cavazos | dcavazos@ccn-law.com

Tel: +1 (956) 686-5883

Marissa S. Rodriguez | msandoval@ccn-law.com

Tel: +1 (956) 686-5883

Julieta Guzmán | jguzman@ccn-law.com.mx

Tel: +52 (442) 262-0316

Fernando Govea | fgovea@ccn-law.com.mx

Tel: +52 (656) 648-7127

I. INTRODUCTION

Chapter 23 of the USMCA is dedicated to labor, which was a key topic in USMCA negotiations given that labor issues were a major concern of the United States Congress throughout the negotiation process. In contrast to the USMCA’s dedication of a specific chapter to labor matters, the NAFTA labor provisions were incorporated in a side agreement containing eleven guiding principles on worker rights. The NAFTA requires Parties to cooperate on labor matters and submit only persistent patterns of a Party’s failure to enforce labor laws to full dispute resolution procedures. Chapter 23 of the USMCA strengthens these labor provisions, allows for recourse on labor matters through the same dispute settlement procedures as apply to other matters, and requires each Party not only to enforce its labor laws but to adopt and maintain laws on core worker rights as stated in the International Labor Organization (ILO) 1998 Declaration of Fundamental Principles and Rights at Work (ILO Declaration on Rights at Work), all while promoting fair trade.

II. EXECUTIVE SUMMARY

Given the international importance of labor laws and working conditions, Chapter 23 is dedicated exclusively to addressing labor matters. Importantly, the Parties recognize their ILO obligations and agree to enforce their labor laws and maintain and adopt laws as necessary to protect the labor rights set forth in the ILO Declaration on Rights at Work. Such rights include the freedom of association and the effective recognition of the right to collective bargaining, the elimination of all forms of forced or compulsory labor, the effective abolition of child labor, and, for purposes of the USMCA, a prohibition on the worst forms of child labor, and the elimination of discrimination with respect to employment and occupation. Accordingly, the Parties may not eliminate or diminish their labor rights regulations in a manner that impacts trade or investment among the Parties. As to collective bargaining, Mexico must establish and maintain regulations that recognize and protect workers’ rights to collective bargaining. Additionally, the Parties are prohibited from importing goods that have been produced in whole or in part by forced or compulsory labor, including forced or compulsory child labor. The Parties are also required to address violence or threats of violence against workers that impact trade or investment among the Parties. Chapter 23 also requires each Party to establish and maintain fair and impartial labor tribunals to hear labor cases in an open and transparent manner and make decisions based on the evidence presented.

III. LEGAL DISCUSSION

The most significant articles of Chapter 23 are summarized below:

Article 23.1: Definitions. A key definition is the definition of “labor laws,” which is defined as statutes and regulations of a Party that directly relate to fundamental internationally recognized labor rights and include freedom of association, the right to collective bargaining, elimination of forced labor, and acceptable work conditions with respect to minimum wages, hours of work, and occupational safety and health.

Article 23.2: Statement of Shared Commitments. The Parties affirm their obligations as members of the ILO, including those stated in the ILO Declaration on Rights at Work and the ILO Declaration on Social Justice for a Fair Globalization (2008), recognize the important role of workers and employers’ organizations in protecting internationally recognized labor rights, and recognize the goal of trading only in goods produced in compliance with Chapter 23.

Article 23.3: Labor Rights. Each Party is obligated to adopt and maintain, in its domestic labor laws and regulations, and practices thereunder, the following rights as stated in the ILO Declaration on Rights at Work:

1. Freedom of association and the effective recognition of the right to collective bargaining;

2. The elimination of all forms of forced or compulsory labor;

3. The effective abolition of child labor and, for purposes of the USMCA, a prohibition on the worst forms of child labor; and

4. The elimination of discrimination with respect to employment and occupation.

Additionally, under Article 23.3.2, each Party is obligated to adopt and maintain laws and regulations, and practices thereunder, governing acceptable work conditions with respect to minimum wages, hours of work and occupational health and safety.

Article 23.4: Non-Derogation. The Parties recognize that it is inappropriate to encourage trade or investment by weakening or reducing the protections afforded in each Party’s labor laws. Accordingly, the Parties are prohibited from waiving or otherwise derogating from, or offering to waive or otherwise derogating from, its labor laws and regulations, which: (a) implement the labor rights described in Article 23.3.1, if such waiver or derogation would be inconsistent with any of such labor rights; or (b) implement the labor rights, including the work conditions described in Article 23.3.1 and Article 23.3.2, in a special trade or customs area in the Party’s territory, in a manner affecting trade or investment between the Parties.

Article 23.5: Enforcement of Labor Laws. No Party shall fail to effectively enforce its labor laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties. Additionally, each Party must promote compliance with its labor laws through appropriate government action, such as appointing inspectors, monitoring compliance and investigating suspected violations, seeking assurances of voluntary compliance, and requiring record keeping and reporting.  Article 23.5.3 affirms that the Parties retain the right to exercise reasonable enforcement discretion and to make good faith determinations as to the allocation of enforcement resources for the fundamental labor rights and work conditions described in Articles 23.3.1 and 23.3.2 respectively.  A Party’s authorities may not undertake labor law enforcement activities in the territory of another Party.

Article 23.6: Forced or Compulsory Labor. The importation of goods produced by forced or compulsory labor is prohibited, and each Party must cooperate in the identification and movement of such goods, in order to prohibit the importation of such goods into its territory.

Article 23.7: Violence Against Workers. Each Party recognizes that workers and labor organizations must be able to exercise their labor rights in a climate free from violence, threats, and intimidations, as well as the imperative of governments to effectively address violence or threats of violence against workers that is directly related to exercising or attempting to exercise labor rights.  Each Party must address violence or threats of violence.

Article 23.8: Migrant Workers. Each Party must ensure that migrant workers are protected by labor laws, whether they are nationals or non-nationals.

Article 23.9: Discrimination in the Workplace. Each Party is obligated to implement policies against employment discrimination based on sex, pregnancy, sexual orientation, gender identity, and caregiving responsibilities, provide job-protected leaves and protect against wage discrimination.

Article 23.10: Public Awareness and Procedural Guarantees. Each Party shall promote public awareness of its labor laws and make information relating to such labor laws, their enforcement and compliance publicly available. Each Party must ensure access to tribunals for enforcement of its labor laws, which tribunals may be administrative, quasi-judicial, judicial or labor tribunals and must ensure that the proceedings before such tribunals are fair and transparent, comply with due process, do not entail unreasonable fees or time limits, and that the hearings are open to the public. Each Party must ensure that the parties to such proceedings have an opportunity to present evidence to support their positions and that the final decisions on the merits of the case are based on evidence presented, state the reasons on which they are based, and are available in writing without undue delay. Each Party must provide, as appropriate, for an appeal procedure for the review and, if warranted, correction of the decision, and must ensure that the tribunal reviewing such appeal be impartial and independent. Additionally, each Party shall ensure that the parties to the proceedings have access to remedies under its laws for the effective enforcement of its labor laws and that the remedies are executed in a timely manner. Finally, each Party shall ensure that other types of proceedings within its labor bodies are fair, are conducted by impartial officials, do not entail unreasonable fees or time limits, and document and communicate decisions to persons directly affected by the proceedings.

Article 23.11: Public Submissions.  Each Party, through its contact point designated under Article 23.15, must provide for the receipt and consideration of written submissions from persons of a Party on matters related to Chapter 23, in accordance with its domestic procedures, making readily accessible and publicly available its procedures, including timelines for the receipt and consideration of written submissions.

Article 23.12: Cooperation. The Parties recognize the importance of cooperation in order to improve labor standards, and to further advance common commitments regarding labor matters, according to the principles and rights stated in the ILO Declaration on Rights at Work, including cooperation through exchanging of information and sharing of best practices on issues of common interest, study trips and research studies to document and study policies and practices, collaborative research and development of best practices, specific exchanges of technical expertise and assistance, and  other forms of cooperation.   Article 23.12.5 provides a comprehensive list of areas in which the Parties may develop cooperative activities, including, for example, the promotion and effective implementation of principles and rights as stated in the ILO Declaration of Rights at Work, and labor laws and practices in compliance with ILO Convention No. 182 Concerning the Prohibition and Immediate Action for the Elimination of the Worst Forms of Child Labor.

Article 23.13: Cooperative Labor Dialogue. A Party may initiate dialogue with another Party on any matter arising under Chapter 23 by delivering a written request to the contact point designated under Article 23.15, which includes specific and sufficient information on the matter at issue, to enable the receiving Party to respond.  Unless the Parties engaged in dialogue decide otherwise, the dialogue shall begin within 30 days of the receipt of a request and may be held in person or by any technological means. Parties must dialogue in good faith, address all the issues raised in the request, considering all available options, and jointly deciding on a course of action. If the dialoguing Parties resolve the matter, they must document the outcome, including, if appropriate, specific steps and timelines.  Said outcome must be made generally available to the public, unless the Parties decide otherwise.

Article 23.14: Labor Council. A Labor Council established by the Parties, which is composed of senior governmental representatives from trade and labor ministries, must meet within one year from the effective date of the USMCA and every two years thereafter, unless the Parties decide otherwise.  Upon reaching the fifth year after the effective date of the USMCA, the Labor Council will review the operation and effectiveness of Chapter 23 and undertake subsequent reviews. Each meeting must result in the issuance of a decision, report or statement made by consensus, which generally will be available to the Public, unless otherwise agreed by the Parties.

Article 23.15: Contact Points. Each Party must designate, within 60 days from the effective date of the USMCA, an office or official within its labor ministry or equivalent entity, as a contact point to address matters related to Chapter 23.

Article 23.16: Public Engagement. Each Party must establish or maintain, and consult with, a national labor consultative or advisory body, including representatives of its labor and business organizations, to provide views on matters regarding Chapter 23.

Article 23.17: Labor Consultations. The Parties must make every effort through cooperation and dialogue to arrive at a mutually satisfactory resolution of any matter arising under Chapter 23.  Pursuant to Article 23.17.2, a Party may request labor consultations with another Party (based on a procedure similar to the procedure for a party to request dialogue pursuant to Article 23.13), which consultations must commence within 30 days after the date of delivery of the request, unless the consulting Parties decide otherwise. Pursuant to Article 23.17.3, a third Party that considers it has a substantial interest in the matter may participate in the labor consultations upon written notice to the consulting Parties, which notice must include an explanation of its substantial interest in the matter.

Pursuant to Article 23.17.5, the consulting Parties must make every effort to arrive at a mutually satisfactory resolution of the matter, which may include appropriate cooperative activities.  The consulting Parties may also request advice from independent experts chosen to assist them.  If the consulting Parties fail to resolve the matter, a consulting Party may request that the relevant Ministers or their designees of the consulting Parties convene to consider the matter and seek to resolve it, including, if appropriate, by consulting independent experts and having recourse to procedures such as good offices, conciliation, or mediation, as described in Article 31.5 of Chapter 31 Dispute Resolution.

Pursuant to Article 23.17.8, if the consulting Parties fail to resolve the matter within 30 days of receipt of a request for Labor consultations, or another agreed period, the requesting Party may request the establishment of a panel under Article 31.6 of the USMCA.

ANNEX 23-A

Worker Representation in Collective Bargaining in Mexico

Pursuant to paragraph 1 of Annex 23-A, Mexico is required to adopt and maintain the measures set forth in paragraph 2 of Annex 23-A, which are necessary for the effective recognition of the right to all aspects of collective bargaining, by enacting labor laws in accordance with such provisions and Mexico’s Constitution, to protect the enumerated rights of workers and prohibit activities aimed at interfering with any of such rights.  This includes requiring legislation establishing an independent entity for conciliation and registration of unions and collective bargaining agreements, as well as independent Labor Courts for the adjudication of labor disputes.

Importantly, Annex 31-A Facility-Specific Rapid Response Labor Mechanism, applicable to the United States and Mexico, and Annex 31-B Canada-Mexico Facility-Specific Rapid Response Labor Mechanism, applicable to Canada and Mexico, contain procedures for the Rapid Response Labor Mechanism for alleged violations of workers’ rights to free association and collective bargaining. Under this new procedure, a person may file a complaint with the United States or Canadian governments alleging that a Covered Facility in Mexico is violating Mexico’s labor laws addressing its obligations under the USMCA regarding workers’ rights to collective bargaining. The United States and Canada each intend to establish their own respective domestic processes, under which their governments will strive to complete initial reviews of complaints about a Covered Facility in Mexico within 30 days of receipt by their governments.

IV. CONCLUSION

The USMCA’s labor provisions were heavily negotiated and critical for the ultimate approval of the Agreement by the United States. Each Party is required to implement legislation to comply with Chapter 23. In May of 2019, Mexico amended its Federal Labor Law in order to comply with the requirements of the USMCA and the ILO Declaration on Rights at Work. In order to comply with such, employers must implement a protocol to prevent workplace discrimination and adopt policies to prevent psychosocial risk in accordance with the Official Regulation “NOM-035-STPS-2018,” which became effective on October 23, 2019. In the coming months, Mexico will need to implement a new labor judicial system, as well as further protections for workers’ rights to collective bargaining.

CONTACT INFORMATION

Pablo Sáenz | psaenz@ccn-law.com.mx

Tel: +52 (55) 5093-9700

Francisco J. Peña Valdés | fpena@ccn-law.com

Tel: +1 (956) 686-5883

Javier Zapata | jzapata@ccn-law.com.mx

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Justo Bautista | jbaustista@ccn-law.com.mx

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Claudio Vázquez | cvazquez@ccn-law.com.mx

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Fernanda Magallanes | fmagallanes@ccn-law.com.mx

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José Ángel Sesma Hernández | jsesma@ccn-law.com.mx

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Mayra de Luna | mdeluana@ccn-law.com.mx

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Nefris Sanchez | nsanchez@ccn-law.com.mx

Tel: +52 (656) 648-7127

Daniel Ramírez Herrera Lasso | dramirez@ccn-law.com.mx

Tel: +52 (33) 2003-0737

I. INTRODUCTION

The USMCA directly addresses environmental matters in Chapter 24 Environmental, unlike its predecessor the NAFTA, which handled environmental issues in a separate side agreement called the North American Agreement on Environmental Cooperation.  Chapter 24 modernizes such side agreement, borrowing extensively from the environmental provisions of Chapter 20 of the Trans-Pacific Partnership Agreement. The objectives of Chapter 24 are to promote mutually supportive trade and environmental policies and practices, provide high levels of environmental protection and effective enforcement of environmental laws, as well as to enhance the Parties’ capacity to address trade-related environmental issues in a cooperative fashion to further sustainable development.

II. EXECUTIVE SUMMARY

The USMCA’s Chapter 24 provisions are intended to complement the efforts of each Party to enforce their own respective environmental laws and regulations, with a special focus on controlling the production, consumption and trade of substances harmful to the ozone layer, controlling pollution of the marine environment by ships, and preventing the trafficking of specific protected species of flora and fauna, including endangered species. The Parties agree to maintain procedures for evaluating the environmental impact of certain projects, with the intention of avoiding adverse effects on the environment.  The Parties also establish mechanisms for the application of environmental legislation and incorporate the possibility of establishing new consultative mechanisms, such as national advisory committees, to monitor the implementation of the provisions contained in Chapter 24, which mechanisms include encouraging transparency and the participation of the general public. Recognizing that a healthy environment is an integral element of sustainable development, and the contribution that trade makes to such,  the Parties commit to protect the marine environment, prevent and reduce marine litter, improve air quality, promote corporate social responsibility and responsible business conduct, promote sustainable forest management, avoid whaling for commercial purposes, and criminalize the intentional transnational trafficking of protected wildlife.

III. LEGAL DISCUSSION

The key provisions of Chapter 24 are summarized below:

Article 24.1: Definitions.  The term environmental law means a law or regulation of a Party, including any multilateral environmental agreement, the main purpose of which is the protection of the environment, or the prevention of a danger to human life or health.

Article 24.2: Scope and Objectives. The key objectives of Chapter 24 are to promote mutually supportive trade and environmental policies and practices, and to promote high levels of environmental protection and effective enforcement of environmental laws. The Parties further acknowledge that it is inappropriate to establish or use their environmental laws or other measures in a manner that constitutes a disguised restriction on trade or investment among the Parties.

Article 24.3: Levels of Protection. The Parties recognize the sovereign right of each Party to establish its own levels of environmental protection and to establish, adopt or modify environmental laws and policies to promote and encourage high levels of environmental protection.

Article 24.4: Enforcement of Environmental Laws. The Parties are prohibited from intentionally neglecting to effectively enforce their environmental laws in a manner that affects trade or investment between the Parties after the USMCA has entered into force. Likewise, the Parties acknowledge that it is inappropriate to encourage trade or investment by weakening or reducing the protection afforded in their respective environmental laws.   Finally, no Party may undertake environmental law enforcement activities in the territory of another Party.

Article 24.5: Public Information and Participation. Each Party must promote public awareness of its environmental laws and policies, including enforcement and compliance procedures and ensuring that necessary information is available to the public.

Article 24.6: Procedural Matters. Each Party is required to ensure that a procedure is available whereby an interested person may request from its competent authorities the investigation of alleged violations of its environmental laws, and further ensure that its competent authorities properly consider such requests, in accordance with the Party’s own legal framework. Each Party must further ensure that administrative, quasi-judicial or judicial procedures for the enforcement of its environmental laws are available, and that such proceedings are fair, equitable, transparent, and comply with due process of law. This includes ensuring that the parties to such proceedings have the opportunity to support or defend their positions without undue complications, unreasonable fees or timelines. Hearings in such proceedings must be conducted by impartial and independent persons, in accordance with the Party’s applicable law, and will be open to the public, except as otherwise required for the proper administration of justice. Final decisions on the merits of the case must be formulated in writing and substantiated.  Each Party must also ensure that pursuant to its law the parties to these proceedings will have the right to request the review, and if appropriate, the correction or re-determination of final decisions. Each Party must provide appropriate sanctions or remedies for violations of its environmental laws, considering factors such as the gravity of the violation, damage to the environment, and any economic benefit derived by the violation.

Article 24.7: Environmental Impact Assessment. Each Party commits to maintaining appropriate procedures for assessing the environmental impacts of projects that are subject to an action of that Party’s federal government that may cause significant effects on the environment in order to avoid, minimize or mitigate any adverse effects.

Article 24.8: Multilateral Environmental Agreements. The Parties recognize the important role that multilateral environmental agreements play in protecting the environment and as an effective response of the international community to global or regional environmental problems. Each Party affirms its commitment to implement the multilateral environmental agreements to which it is a party, and to undertake to consult, cooperate and exchange information with each other on environmental issues of mutual interest, particularly in trade-related matters, pertaining to multilateral environmental agreements.

Article 24.9: Protection of the Ozone Layer. The Parties recognize that atmospheric emissions of certain substances can significantly deplete and change the ozone layer and may have effects on human health and the environment. Each Party is required to take measures to control the production, consumption and trade of substances controlled by the Montreal Protocol.  Consistent with their obligations to cooperate pursuant to the provisions of Article 24.25, the Parties must cooperate in matters that may include exchanging information and experiences in areas related to: (i) environmentally friendly alternatives to such substances; (ii) practices, policies and programs for refrigerant management; (iii) methodologies for the measurement of stratospheric ozone; and (iv) combating the illegal trade of such substances.

Article 24.10: Protection of the Marine Environment from Ship Pollution. The Parties recognize the importance of protecting and preserving the marine environment.  To that end, each Party must take measures to prevent pollution of the marine environment by ships.

Article 24.11: Air Quality. The Parties recognize that air pollution is a serious threat to public health, ecosystem integrity, sustainable development and that it contributes to other environmental problems. Noting that the reduction of certain air pollutants can provide multiple benefits, the Parties agree to cooperate to address matters of mutual interest with respect to air quality.

Article 24.12: Marine Litter. The Parties recognize the importance of taking measures to prevent and reduce marine litter, including plastic and micro-plastic wastes, in order to preserve human health and marine and coastal ecosystems, prevent loss of biodiversity, and mitigate costs and impacts of marine litter.

Article 24.13: Corporate Social Responsibility and Responsible Business Conduct. The Parties recognize the importance of promoting corporate social responsibility and responsible business conduct.  Accordingly, each Party is obligated to encourage enterprises organized under its laws, or operating in its territory, to adopt and implement voluntary best practices of corporate social responsibility related to the environment, such as those in internationally recognized standards and guidelines that have been endorsed or supported by a Party.

Article 24.14: Voluntary Mechanisms to Enhance Environmental Performance. The Parties recognize that flexible and voluntary mechanisms, such as voluntary auditing and reporting, market-based mechanisms, voluntary sharing of information and expertise, and public-private partnerships, can contribute to the achievement and maintenance of high levels of environmental protection and complement domestic regulatory measures.

Article 24.15: Trade and Biodiversity. Each Party, recognizing the importance of conservation and sustainable use of biological diversity, as well as the ecosystem services it provides, and their key role in achieving sustainable development, commits itself to promote and encourage the conservation and sustainable use of biological diversity, in accordance with its law or policy. Each Party also recognizes the importance of respecting, preserving and maintaining the knowledge and practices of indigenous peoples and local communities that involve traditional lifestyles that contribute to the conservation and sustainable management of biological diversity.

Article 24.16: Invasive Alien Species. The Parties recognize that the transboundary movement of exotic land and aquatic invasive species through trade-related pathways can adversely affect the environment, economic activities and development, and human health.  Accordingly, the Environment Committee established under Article 24.26.2 must coordinate with the Committee on Sanitary and Phytosanitary Measures, established under Article 9.17 of Chapter 9, to identify cooperative opportunities to share information and management experiences on the movement, prevention, detection, control, and eradication of invasive alien species.

Article 24.17: Marine Wild Capture Fisheries. The Parties acknowledge their roles as major consumers, producers, and marketers of fishery products and the importance of marine fisheries sectors for their development and for the livelihood of fishing communities, including those dedicated to artisanal, small-scale and native fisheries. The Parties also recognize the importance of promoting and facilitating trade in fish and fishery products obtained and managed in a sustainable and legal manner, while ensuring that the trade of these products is not subject to unnecessary or unjustified barriers to trade, given the negative effect that such barriers can have on the well-being of their communities that depend on the fishing industry for their livelihood.

Article 24.18: Sustainable Fisheries Management. With a view to achieving the objectives of conservation and sustainable management, each Party is required to operate a fishery management system that regulates wild marine capture fishing.

Article 24.19: Conservation of Marine Species. Each Party agrees to promote the long-term conservation of marine species through the implementation of appropriate measures, including studies, evaluations and data collection in relation to the adverse impact of operations on non-target species.

Article 24.20: Fisheries Subsidies. The Parties recognize that for the prevention of overfishing and overcapacity, as well as to promote the recovery of overfishing populations, subsidies that contribute to such activities must be controlled, reduced and eventually eliminated. Each Party is prohibited from granting or maintaining prohibited subsidies under the SCM Agreement. With respect to subsidies that are not prohibited, each Party must make its best efforts not to introduce new subsidies, or to extend or improve existing subsidies. The Parties must review subsidies at regular meetings of the Environment Committee and work with the WTO to strengthen international rules on the granting of subsidies to the fisheries sector and to improve the transparency of fisheries subsidies generally.

Article 24.21: Illegal, Unreported, and Unregulated (IUU) Fishing. The Parties agree to endeavor to improve international action and cooperation against IUU fishing, with and through competent international organizations, through the implementation of port state control measures, schemes for monitoring, controlling, surveilling, and enforcing trans-shipment in the sea of fish caught by IUU fishing or fishery products derived from IUU fishing.  Each Party must maintain a vessel documentation scheme and promote the use of International Maritime Organization or other comparable unique ship identification numbers for vessels that operate outside its national jurisdiction.

Article 24.22: Conservation and Trade. The Parties agreed to promote conservation and to combat the illegal taking of and illegal trade in wild fauna and flora. Each Party must take measures to protect and conserve the natural resources identified at risk within its territory, maintain or strengthen governmental capacity and institutional frameworks, and must seek to improve public participation. The Parties must take measures to enhance the effectiveness of inspections of shipments containing wild flora and fauna, including parts and products thereof, must treat international trafficking of wildlife protected under its laws as a serious crime as defined in the United Nations Convention on Transnational Organized Crime, and must endeavor to identify opportunities to enhance law enforcement cooperation and information sharing.

Article 24.23: Sustainable Forest Management and Trade. The Parties acknowledge their role as major consumers, producers and traders of forest products, and acknowledge the importance of a healthy forest sector, as well as the importance of the conservation and sustainable management of forests in providing environmental economic and social benefits for present and future generations. Additionally, the Parties recognize that forest products, when sourced from sustainably managed forests, contribute to fulfilling global environmental objectives, including sustainable development, conservation and sustainable use of resources, and green growth. Accordingly, each Party agrees to maintain or strengthen government capacity and institutional frameworks to promote sustainable forest management, trade in legally harvested forest products, and to exchange information and cooperate for such purposes, and for purposes of combatting illegal logging and associated trade.

Article 24.24: Environmental Goods and Services. The Parties recognize the importance of trade and investment in environmental goods and services, including clean technologies, as a means to improve environmental and economic performance, contributing to green growth and jobs, and encouraging sustainable development, while addressing global environmental challenges. The Parties will strive to facilitate and promote trade and investment in environmental goods and services. For compliance with the foregoing, the Environmental Committee will deal with issues related to trade in environmental goods and services. The Parties agree to work to address any potential barriers to trade in environmental goods and services, including through work in the Environmental Committee and in conjunction with other committees.

Article 24.25: Environmental Cooperation. The Parties agree to expand their cooperative relationship on environmental matters, recognizing that such will help them achieve their shared environmental goals and objectives, including the development and improvement of environmental protection practices, and technologies. The Parties agree to undertake cooperative environmental activities pursuant to the Environmental Cooperation Agreement between the governments of Canada, the United Mexican States and the United States of America (ECA), which will be coordinated and reviewed by the Commission for Environmental Cooperation as provided for in the ECA.

Article 24.26: Environmental Committee and Contact Points. Each Party is obligated to designate a point of contact within its government and must establish an Environmental Committee comprised of senior government representatives or their designees. The Environmental Committee will meet within one year after the entry into force of the USMCA and, thereafter, every two years. During the fifth year following the entry into force of the USMCA, the Environment Committee will review the implementation and functioning of Chapter 24 and will report its conclusions and recommendations to the Council for the Commission for Environmental Cooperation and the Commission.

Article 24.27: Submissions on Enforcement Matters. Any person of a Party may file before the Secretariat of the Commission for Environmental Cooperation (“CEC Secretariat”) a submission asserting that a Party is failing to effectively enforce its environmental laws. The CEC Secretariat will examine it and determine if such requires a response from the Party, in which case it will notify the Party. Such Party will notify the CEC Secretariat if that specific matter is subject to a judicial or administrative proceeding that is pending resolution, in which case the CEC Secretariat will not proceed with the matter.

Article 24.28: Factual Records and Related Cooperation. If the CEC Secretariat considers that the submission merits the preparation of a factual record, it will inform the Council and the Environmental Committee. The CEC Secretariat will prepare a factual record if at least two members of the Council instruct it to do so. Any Party may provide comments to the draft factual record, which comments will be incorporated to the final factual record that the CEC Secretariat will submit to the Council. The Environmental Committee must consider the factual record and may provide recommendations to the Council.

Article 24.29: Environmental Consultations. A Party may request consultations with any other Party with respect to any matter arising from Chapter 24. A third party that considers itself to have a substantial interest in the matter may also participate in the consultations. The Parties will enter into the consultations, with the understanding that such Parties will use their best efforts to reach a mutually acceptable resolution of the matter.

Article 24.30: Senior Representative Consultations. If the Parties fail to resolve the dispute, a Party may request that the Parties’ Environmental Committee representatives meet in order to discuss the matter. Such representatives will meet promptly following notice and will seek to resolve the matter. The Environmental Committee representatives of any other Party that considers it has a substantial interest in the matter may also participate in the consultations.

Article 24.31: Ministerial Consultations. If the Parties fail to resolve the dispute, one Party may refer the matter to the relevant Ministers of the consulting Parties, who will then seek to resolve the matter.

Article 24.32: Dispute Resolution. If the Parties fail to resolve the dispute through consultations within the allotted time period, the requesting Party may ask for the establishment of a panel. Such panel may seek advice or technical assistance to address the specific matter, will allow the Parties the opportunity to provide their respective comments and will consider any interpretative guidance in making its findings and recommendations.

IV. CONCLUSION

Chapter 24 provides for protection of the environment, while allowing trade among the Parties to prosper and environmental policies to be implemented, all taking into account the proper enforcement of their respective environmental laws.

Additionally, Chapter 24 provides opportunities for the implementation and enforcement by the Parties of obligations and commitments made in prior multilateral agreements.

While avoiding unnecessary trade barriers, Chapter 24 provides for cooperation among the Parties in order to achieve their main objectives, which include, among others: (i) encouraging better regulation and international cooperation, (ii) promoting sustainable development by incorporating tools such as public consultations, (iii) establishing dispute resolution mechanisms, which may incorporate the results of public consultations on issues of interest to the Parties, and (iv) establishing a framework for active public participation through the inclusion of written submissions to the Parties regarding any matter that is subject to environmental regulation.

CONTACT INFORMATION

Francisco Peña-Valdés | fpena@ccn-law.com

Tel: +1 (956) 686-5883

Omar López | olopez@ccn-law.com.mx

Tel: +52 (818) 088-7382

Patricio Belden | pbelden@ccn-law.com

Tel: +1 (956) 668-6084

Wakako Ikeda | ikeda@ccn-law.com.mx

Tel: +52 (55) 5093-9718

I. INTRODUCTION

The inclusion of Chapter 25 in the USMCA is significant given that its predecessor, the North American Free Trade Agreement (NAFTA), did not include a chapter specifically dedicated to small and medium-sized enterprises (SMEs). Based on this, and considering the impact SMEs can have on the economy, Chapter 25 and its proper implementation by the three Parties is a significant step toward recognizing the integral role SMEs have in increasing trade and investment in the North American economy.

II. EXECUTIVE SUMMARY

Owing to the fundamental role of SMEs in the Parties’ economies, Mexico, the United States and Canada have agreed to cooperate to increase trade and investment by SMEs by promoting, among other items: i) cooperation among the Parties’ small business support infrastructure; ii) collaboration on activities to promote SMEs owned by underrepresented groups; iii) exchanges of information and best practices in areas related to access to capital and credit; and iv) participation in platforms, such as web-based platforms, to share information and best practices to link SMEs with international suppliers, buyers and potential business partners. Furthermore, Chapter 25 provides for the creation of a Committee on SME Issues comprised of government representatives from each Party and sets forth the programs and activities to be carried out by such SME Committee. Lastly, Chapter 25 includes a reference to provisions in other chapters of the USMCA that seek to enhance cooperation among the countries on SME related topics that may be of benefit to SMEs generally.

III. LEGAL DISCUSSION

Chapter 25 is divided into several articles, the most significant of which are summarized as follows:

Article 25.2:  Cooperation to Increase Trade and Investment Opportunities for SMEs. This article sets forth the principles that will guide the Parties’ cooperation in the creation of an international network to share, among other items, best practices and information to strengthen collaboration among the Parties on activities to promote SMEs owned by underrepresented groups, such as women, minorities and start-ups, and to enhance cooperation for the exchange of information related to access to capital and credit, to support SME participation in government procurement opportunities and to help SMEs adapt to changing market conditions.

Article 25.3:  Information Sharing. This article provides that each Party agrees to establish or maintain its own free, publicly accessible website with information regarding the USMCA, including the text of the USMCA, information designed for SMEs, including the provisions in the USMCA that each Party deems relevant to SMEs. Accordingly, a Party’s website should include links to the other Parties’ websites and to its own government agencies providing useful information as to trading, investment and doing business in the respective Party, such as customs, intellectual property, foreign investment and other areas relevant to international trade.

Article 25.4: Committee on SME Issues. The USMCA establishes an SME Committee consisting of a governmental representative from each Party. This article sets forth the activities to be performed by the SME Committee, which include, among others:

1. the exchange and discussion of each Party’s experiences and best practices in supporting and assisting SME exporters with respect to training programs, trade education, trade finance and trade facilitation, and establishing good business credentials;
2. collaboration with other committees, working groups and subsidiary bodies established under the USMCA, and other relevant international bodies to avoid duplication of work programs to identify appropriate opportunities for cooperation to improve the ability of SMEs to engage in trade and investment opportunities.
3. facilitating the development of programs to assist SMEs to participate and integrate effectively into the Parties’ regional and global supply chains; and
4. submission of an annual report on the Committee’s activities, with recommendations, to the Commission.

The USMCA provides that the Committee will meet at least annually. The Committee is required to collaborate with experts and international donor organizations while performing its programs and activities.

Article 25.5:  SME Dialogue. A framework is provided for the establishment of SME Dialogue, involving the private sector, employees, non-government organizations, academic experts, SMEs owned by diverse and under-represented groups and other stakeholders from each Party. The objective of the SME Dialogue is to provide formal input and relevant technical, scientific or other information to government officials on the implementation and further modernization of the USMCA, thus ensuring that SMEs continue to benefit from the Agreement’s terms.

Chapter 25 also sets forth numerous references to articles and other provisions of the USMCA that may be of interest and benefit to SMEs, including those related to origin procedures, government procurement, intellectual property, labor, competitiveness and anticorruption. 

IV. CONCLUSION

Chapter 25 of the USMCA recognizes the fundamental role of SMEs in the North American economy.  Notably, this is the first time an SME chapter or significant provisions supporting small and medium-sized businesses have been included in a free trade agreement signed by the United States. It is very important for SMEs to carefully review all the USMCA, not just the mechanisms set forth in Chapter 25, in order to understand how the USMCA can increase trade and investment for SMEs across the North American region.  This is especially true given the significant impact SMEs can have on the broader economy.  Also, it is important for SMEs to understand their position as stakeholders in the SME Dialogue and to become active participants in the implementation and further modernization of the USMCA.

CONTACT INFORMATION

Daniel Cavazos | dcavazos@ccn-law.com

Tel: (956) 686-5883

Robert M. Barnett | rbarnett@ccn-law.com

Tel: (210) 222-1642

Adrian Salgado | asalgado@ccn-law.com

Tel: (210) 244-0221

Marissa S. Rodriguez | msandoval@ccn-law.com

Tel: (956) 686-5883

Natalie Ceron | nceron@ccn-law.com

Tel: (210) 244-0230

Michelle Romero | mromero@ccn-law.com.mx

Tel: (210) 244-0206

I. INTRODUCTION

Chapter 30 of the USMCA provides for the establishment of the Agreement’s permanent institutional bodies, along with the official communications channels among the Parties. While NAFTA grouped Institutions, Dispute Settlement and Domestic Proceedings, and Private Commercial Dispute Settlement under Chapter Twenty, the USMCA separates Institutional Arrangements into its own Chapter. Additionally, the USMCA provides more specificity as to the role and functions of the Free Trade Commission (Commission), while expanding its functions.

II. EXECUTIVE SUMMARY

The USMCA’s Chapter 30 addresses the creation and establishes the functions of the Commission, along with the Decision-Making process, the Rules of Procedure of the Commission and Subsidiary Bodies.  The functions of the Commission include: (i) considering proposals to amend or modify the USMCA; (ii) adopting and updating the Rules of Procedure and the Code of Conduct applicable to dispute settlement proceedings; and (iii) reviewing the Roster and Qualifications of Panelists (Article 31.8), and, when appropriate, constituting a new roster.

The Commission may consider and adopt a modification to the USMCA of: (i) the Schedules to Annex 2-B (Tariff Commitments); (ii) the adjustments to the Tariff Preferential Levels established in Chapter 6 (Textile and Apparel Goods); (iii) the rules of origin established in Annex 4-B (Product-Specific Rules of Origin); (iv) the minimum data requirements for the certification of origin; (v) any provision as may be required to conform with any change to the Harmonized System; and (vi) the lists of entities, covered goods and services, and thresholds contained in the Schedules to Chapter 13 (Government Procurement). The Commission may also issue interpretations of the provisions of the USMCA, which are binding for USMCA tribunals and panels. Additionally, the Commission may modify any Uniform Regulations agreed jointly by the Parties, subject to completion of applicable legal procedures by each Party.

Chapter 30 also creates the obligation for each Party to designate Agreement Coordinators to facilitate communications between the Parties, as well as formal Contact Points, as discussed further below.

Finally, this chapter states that the Commission shall establish a Secretariat, which shall assist the Commission and provide administrative assistance to the USMCA’s panels and the committees.

III. LEGAL DISCUSSION

The most significant articles of Chapter 30 are summarized below:

Article 30.1: Establishment of the Free Trade Commission. The Commission shall be composed of government representatives of each Party at the level of Ministers or their designees.

Article 30.2: Functions of the Commission. The Commission shall consider matters relating to the implementation or operations of the USMCA, consider proposals to amend or modify the USMCA, supervise the work of the subsidiary bodies, adopt and update the Rules of Procedure and Code of Conduct, and review the Roster and Qualifications of Panelists.

The Commission may:

1. consider and adopt certain types of modifications to the USMCA, including: (i) Tariff Commitments under Annex 2-B; (ii) adjustments to Tariff Preferential Levels under Chapter 6 (Textile and Apparel Goods); (iii) the rules of origin in Annex 4-B; (iv) the minimum data requirements for the certification of origin; (v) any provision as may be required to conform with any change to the Harmonized System, or the lists of entities, covered goods and services, and thresholds contained in the Schedules to Chapter 13 (Government Procurement),
2. develop arrangements for implementing the USMCA,
3. seek to resolve differences or disputes that may arise regarding the interpretation or application of the USMCA,
4. issue interpretations of the provisions of the USMCA (which shall be binding for tribunals and panels established under Chapter 14 [Investment] and Chapter 31 [Dispute Settlement]), and
5. modify any Uniform Regulations agreed jointly by the Parties under Article 5.16 (Uniform Regulations).

Article 30.3: Decision-Making. Unless otherwise provided in the USMCA, the Commission or a subsidiary body shall be deemed to have taken a decision by consensus if all Parties are present at a meeting when a decision is taken and no Party present at the meeting when a decision is taken objects to the proposed decision.

Article 30.4: Rules of Procedure of the Commission and Subsidiary Bodies. The Commission shall meet within one year of the date of entry into force of the USMCA and thereafter as the Parties may decide, including as necessary to fulfil its functions. The Commission has the prerogative to establish rules of procedures for the conduct of its work.

Article 30.5: Agreement Coordinator and Contact Points. For the facilitation of communications between the Parties on any matter covered by the USMCA, Chapter 30 sets rules for the appointment of Agreement Coordinators and Contact Points.

Article 30.6: The Secretariat. Finally, the Commission shall establish and oversee a Secretariat, which shall aid the Commission, provide administrative assistance to panels and committees under the USMCA, and be responsible for the payment of remuneration to and expenses of panels and committees under the USMCA. The Secretariat shall, as the Commission may direct, support the work of other committees and groups under the USMCA and facilitate the operation of the USMCA. Each Party shall establish and maintain a permanent office of its Section and be responsible for its operations and costs, designate an individual to serve as Secretary of its Section, who shall be responsible for its administration and management, and notify the other Parties of the contact information for its Section’s office.

IV. CONCLUSION

Chapter 30 establishes the rules for the ongoing, day to day communications among the Parties and the shared institutions under the USMCA. Although the Agreement contains no major differences with NAFTA, the USMCA provides a more specific and solid legal framework for the Parties.

CONTACT INFORMATION

Rene Cacheaux | rcacheaux@ccn-law.com

Tel: +1 (512) 614-1562

Daniel Cavazos | dcavazos@ccn-law.com

Tel: +1 (956) 686-5883

Joseph B. Newton | jnewton@ccn-law.com

Tel: +1 (210) 222-1642

Robert M. Barnett | rbarnett@ccn-law.com

Tel: +1 (210) 222-1642

Michael Aguilar | maguilar@ccn-law.com

Tel: +1 (210) 222-0204

I. INTRODUCTION

The North American Free Trade Agreement (NAFTA) included three distinct dispute settlement processes – one for state-to-state disputes (Chapter 20), a second one for investor-state disputes (Chapter 11), and a third one for review of anti-dumping and countervailing duty determinations (Chapter 19). The biggest differences between dispute resolution under the NAFTA and under the USMCA are in the investor-state dispute processes. The USMCA’s processes for resolving state-to-state disputes and antidumping and countervailing duty disputes remain largely unchanged.

II. EXECUTIVE SUMMARY

Chapter 14 of the USMCA deals with investor protection mechanisms, which are significantly reduced from those contained in the NAFTA. As between the United States and Canada, it does not provide investors the right to arbitrate investor-state disputes; however, procedures for resolving existing investor-state disputes under the NAFTA are phased out over a three-year period. As between the United States and Mexico, Chapter 14 narrows investors’ protections against non-discriminatory treatment and limits the ability of investors to have investor-state disputes decided by international arbitrators, as opposed to domestic tribunals.

Thanks to Canadian resistance to any material change to the NAFTA’s Chapter 19 dispute resolution mechanism, along with the United States’ need to secure Canada’s participation in the USMCA, minimal meaningful differences exist between the NAFTA’s Chapter 19 process and the new mechanisms contained in the USCMA. Final antidumping and countervailing duty determinations of a Party will remain subject to binding review in binational arbitration proceedings initiated by affected exporters or producers.

Chapter 20 of the NAFTA was critical to ensuring that the three governments fulfilled their obligations under such trade agreement. In practice, the United States obstructed the formation of arbitral panels that were supposed to adjudicate state-to-state disputes. In the USMCA negotiations, the United States pushed for the right to veto panel determinations, which Canada and Mexico vigorously opposed. In the end, the Parties elected to largely preserve the NAFTA’s state-to-state dispute resolution mechanism in what is now the state-to-state dispute settlement provisions of the USMCA.

III. LEGAL DISCUSSION

Investor-State Disputes. Mexico has a well-known history of expropriating foreign investments. In 1938, the Mexican government expropriated the assets of nearly all foreign oil companies operating in the country. In 1982, the Mexican government nationalized fifty-eight of the country’s sixty banks, including those owned by foreign investors. Thus, before the NAFTA was adopted in 1993, foreign investors were reluctant to make major investments in Mexico based on fears of expropriation and discriminatory treatment of foreign investment by the Mexican government.

Chapter 11 of the NAFTA sought to allay the fears of investors by granting North American investors protections against discriminatory treatment based on their status as foreigners. For example, it provided for national treatment (an assurance that each NAFTA party’s government would accord investors of the other NAFTA parties treatment no less favorable than that accorded to its own investors) and barred the imposition of export requirements, sales limits and other performance requirements not imposed equally on all investors, regardless of nationality.

Chapter 11 then established a mechanism for the settlement of investor-state disputes, which gave further assurance of equal treatment and due process before an impartial tribunal. Prior to the NAFTA, U.S. investors whose investments were expropriated or impaired by the Mexican government were left to sue the Mexican government in its own courts, which many viewed as not being impartial or fair. Under the NAFTA’s Chapter 11, an investor could avoid Mexican courts by submitting a claim that its rights had been violated to binding arbitration under the Convention of the International Centre for the Settlement of Investment Disputes (“ICSID”) or the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”). Importantly, Chapter 11 stated that “a disputing party shall abide by and comply with an award without delay” and provided that the governments were to make final arbitration awards enforceable against them in their domestic courts.

The USMCA’s Chapter 14 regulating investment replaces Chapter 11 of the NAFTA. The biggest change from Chapter 11 is that the treatment of United States and Mexican investors was separated from that of United States and Canadian investors. Canada, which had been ordered to pay damages of more than $300 million to foreign investors under Chapter 11, sought to terminate such Chapter’s protections and dispute resolution mechanism. Although the United States has never been ordered to pay damages by a Chapter 11 arbitral tribunal, in the USCMA negotiations, the Trump administration was not committed to retaining Chapter 11, in part due to a view that its dispute resolution process diminished United States sovereignty.

Thus, Annex 14-C to Chapter 14 of the USMCA provides that the Parties’ consent to resolve disputes under NAFTA Chapter 11 “shall expire three years after the termination of NAFTA 1994” and applies only to arbitrations initiated “while NAFTA 1994 is in force.” See USMCA, Chapter 14, Annex 14-(C)(3) & (5). This means that investment disputes against Canada may not be initiated after the NAFTA terminates, and any “legacy” disputes, which remain in the arbitration pipeline, should be concluded no later than three years thereafter. Because both Canada and Mexico are parties to the Trans-Pacific Partnership (TPP), which contains a dispute resolution mechanism for investor-state disputes, Canada’s withdrawal from the NAFTA’s Chapter 11 mechanisms does not impair the ability of Canadian investors to protect their investments in Mexico or of Mexican investors to protect their investments in Canada. Canada’s gain is that it will no longer be the target of Chapter 11 arbitration claims by United States investors.

The rights and protection of United States and Mexican investors are governed by Annex 14-D of Chapter 14 of the USMCA. That Annex permits U.S investors who have invested in Mexico and Mexican investors who have invested in the United States to submit limited types of claims to international arbitration. Only claims that a Party has violated its national treatment, most-favored-nation treatment and “direct expropriation” obligations may be arbitrated. And those claims may be arbitrated only after the investor has first: (a) tried to resolve the dispute through consultation and negotiation; and (b) initiated a proceeding before a competent court or administrative tribunal of the respondent Party and obtained a final decision from a court of last resort, or thirty months have elapsed from the date the proceeding was initiated. Additionally, pursuant to Appendix 3 to Annex 14-D, a United States investor waives the right to arbitrate a claim under Annex 14-D if the investor alleges in proceedings before a Mexican court or administrative tribunal that Mexico breached an obligation under Chapter 14. In other words, the investor’s allegations in the underlying Mexican proceeding must be limited to claims that Mexico violated its obligations under Mexican law, independent of any obligations under Chapter 14. Like NAFTA Chapter 11, Annex 14-D provides that final arbitration awards may include monetary damages and restitution of property, and such may be enforced in the territory of the respondent country.

Notably, Annex 14-E to Chapter 14, which addresses Mexico-United States disputes related to covered government contracts, in Paragraph (6)(B),carves out investment related to government contracts in defined covered sectors – i.e., oil and natural gas, public power generation, public telecommunications services, public transportation services and the ownership and management of certain roads, railways, bridges or canals. United States investors in these sectors will be able to continue to arbitrate their disputes with Mexico in much the same way originally provided for under the NAFTA.

In addition to reducing the types of claims that are subject to international arbitration, pursuant to Articles 14.4(4) and 14.5(4) of Chapter 14 of the USMCA, a legitimate public welfare objectives exception to the government’s national treatment and most-favorite-nation treatment obligations was created, thereby diluting the investor rights emanating from such principles. Moreover, although the USMCA prohibits both direct expropriation and measures that constitute indirect expropriation of investment, only claims of direct expropriation are subject to international arbitration. See Article 14.8(1) and Annex 14-D, Paragraph 14.D.3(1)(a)(i)(B).

Unfair Trade Disputes. To offset unfair trade practices such as dumping and government subsidies, and sometimes for purely political motives, governments impose antidumping and/or countervailing duties on imports. Chapter 19 of the NAFTA established a process through which final determinations by an agency in antidumping and countervailing duty cases would be subject to binding review by independent binational arbitrators, instead of by domestic courts.

Going into the negotiation of the USMCA, the United States and Canada held diametrically opposing views of NAFTA Chapter 19. The United States sought the wholesale removal of the Chapter based on sovereignty concerns stemming from the ability of international tribunals to alter or undo the decisions of United States trade authorities. Canada, which had used Chapter 19 to successfully reverse the United States government’s imposition of duties on certain Canadian exports, demanded that Chapter 19’s dispute resolution mechanism remain in place. Ultimately, Canada prevailed, and the NAFTA Chapter 19 dispute resolution process remains largely the same under USMCA Chapter 10 Trade Remedies, Section D, and a handful of Annexes thereto.

State-to-State Disputes. Chapter 20 of the NAFTA established a process for the resolution of disputes between the Parties regarding the interpretation or application of the NAFTA and whenever an actual or proposed measure of a party was inconsistent with or would impair rights under such trade agreement. That process began with consultation between the disputing parties. If consultations did not resolve a dispute, a party could request the NAFTA’s Free Trade Commission (composed of cabinet-level officials) to intervene to resolve the dispute. If the Commission proved unable to resolve a dispute, a Party could request the establishment of an arbitral panel. A five-member panel was then to be drawn from a standing thirty-person roster of qualified arbitrators. Following an initial report and an opportunity for the Parties to comment thereon, the panel was to issue a final report. The disputing Parties then were to agree on a resolution of the dispute that should conform to the panel’s determinations. Absent a mutually satisfactory agreement, the complaining party could suspend NAFTA benefits “of equivalent effect” to the party complained against.

In practice, the United States disrupted the functioning of the Chapter 20 dispute resolution process by refusing to make appointments to the roster of qualified arbitrators. When the United States pushed in USMCA negotiations for the ability to veto panel decisions, Mexico and Canada determined that preservation of the Chapter 20 mechanism (despite its shortcomings) was a better alternative. Thus, the state-to-state dispute resolution mechanism of the NAFTA has remained largely intact.

Chapter 31 of the USMCA on Dispute Settlement replaces NAFTA Chapter 20. Many of Chapter 20’s provisions were transplanted into the USMCA with no change at all. Other provisions were slightly reworded, and the organization or order of many provisions changed. One of the biggest changes, in view of advances in technology since the NAFTA entered into force in 1994, is a new requirement, pursuant to Article 31.12, of electronic filing of all documents relating to a dispute.

IV. CONCLUSION‍

On balance, the USMCA’s dispute resolution process for investor-state disputes reflects a retreat from advances made in the NAFTA. The clearest examples of this are Canada’s withdrawal from the investor-state dispute resolution process altogether, the dilution of foreign investor rights which existed under NAFTA Chapter 11, and the reduction in the ability of foreign investors to prosecute disputes before binational arbitral panels instead of domestic courts. Largely owing to Canada’s insistence, the NAFTA’s mechanism for resolving antidumping and countervailing duty disputes remains substantially unaltered in the USMCA. Finally, rather than revising Chapter 20 of the NAFTA to eliminate the ability of a respondent party (mostly the United States) to obstruct the state-to-state dispute resolution process, Canada and Mexico were pleased to preserve such process under the USMCA and subdue the United States’ effort to further weaken or debilitate the process.

CONTACT INFORMATION

Robert M. Barnett | rbarnett@ccn-law.com

Tel: +1 (210) 222-1642

Jorge Sánchez-Cubillo | jcubillo@ccn-law.com.mx

Tel: +52 (55) 5093-9700

David Lopez | dlopez@ccn-law.com

Tel: +1 (210) 222-1642