Written by Darrel Pearson, John Weekes, Jessica Horwitz, Margaret Kim and Ethan Gordon
On December 10, 2019, Canada, the United States and Mexico signed an Amending Protocol that revises the Canada-United States-Mexico Agreement (CUSMA) and steers its path toward ratification.
Also known as the "USMCA" and "T-MEC", the text agreed amongst leaders was signed in November 2018. Mexico ratified the CUSMA promptly and Canada prepared amending legislation that was not proceeded with pending ratification by the United States. The Democrat-led U.S. House of Representatives made clear they would only consider voting for ratification if certain changes were made to the agreement. This week's updates introduce changes to provisions dealing with dispute settlement, labour, environment, automotive rules of origin, and intellectual property. To Canada's benefit, the amendments largely reflect proposals that Canada had advanced during earlier CUSMA negotiations.
All parties have indicated their intentions to pass implementing legislation as quickly as possible. The CUSMA will come into force on the first day of the third month following the ratification of the last of the three Parties. Assuming no significant delays during legislative ratification proceedings, the CUSMA is now expected to enter into force in the Spring of 2020. The North American Free Trade Agreement (NAFTA) will remain in force until the CUSMA is implemented.
This agreement and the clear likelihood of early ratification will go a long way to removing much of the uncertainty regarding access to the U.S. market that has been hanging over the Canadian business community. Businesses that have put projected investments on hold should now reconsider whether the time has arrived to proceed.
The following is a summary of noteworthy changes.
The most noteworthy change in the Amending Protocol from a Canadian perspective is the significant strengthening of the CUSMA's Dispute Settlement mechanism. The Dispute Settlement provisions of the NAFTA (Chapter 20) and first agreed CUSMA (Chapter 31) allowed a party to block the formation of a panel in a state-to-state dispute settlement by either not engaging in the meeting of the Free Trade Commission of Ministers (required to approve a panel), or by vetoing updates to the roster of panellists. The updated dispute settlement system closes these gaps by causing panels to be automatically established upon request, bypassing the Commission of Ministers. If parties cannot reach consensus on the roster of approved panelists within one month, the roster will be formed automatically from the proposed members.
No dispute settlement panel has been successfully formed under NAFTA Chapter 20 since 2000, when the United States blocked the establishment of a panel in the U.S.-Mexico sugar dispute. The revised dispute settlement provisions are consistent with more modern FTAs, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which ensure that parties cannot unreasonably delay or avoid the formation of a panel. This improvement is all the more vital given the current shutdown of the WTO Appellate Body that has made WTO dispute resolution a less reliable process for dispute settlement by the WTO's 164 member countries, including Canada, the United States and Mexico.
Canada agreed to establish a first-of-its-kind bilateral mechanism (a "Facility-Specific, Rapid Response Labor Mechanism") with Mexico for expedited dispute settlement of specific labour obligations concerning freedom of association and collective bargaining. Under the new process, a party may request an investigation into allegations of labour violations at an exporter's facility by an independent panel of three labour experts. If the panel concludes that violations exist, the complaining party may impose penalties on exports from that facility. This bilateral mechanism also exists between the United States and Mexico.
The parties removed language in the Labour chapter's Violence Against Workers provision that conditioned a violation on a "sustained and recurring course of action or inaction". Also, the amendments reverse the burden of proof for challenging labour violations: as previously worded, a party had to demonstrate that the other party's act or omission constituted a violation of labour rights "in a manner affecting trade or investment between the Parties". In the amended version, the burden on the complaining party to prove this point is replaced by a presumption that a labour violation affects trade and investment "unless the responding Party demonstrates otherwise". These two changes should increase the Parties' flexibility to pursue dispute settlement in connection with labour chapter violations.
Mirroring the changes to the Labour chapter, the burden of proof for establishing a failure to comply with environmental obligations has been reversed. The changes should increase the enforceability of the Parties' obligations in this chapter.
The revised Environment chapter (Chapter 24) recognizes and reinforces the existing commitments of the Parties under various multilateral environmental agreements (MEAs). The amendments restore a provision under Article 104 of the original NAFTA that prioritizes MEA commitments when implementing MEA and trade agreement obligations. The list of covered MEAs for Canada are:
- The Convention on International Trade in Endangered Species of Wild Fauna and Flora;
- The Montreal Protocol on Substances that Deplete the Ozone Layer;
- The Protocol of 1978 Relating to the International Convention to the Prevention of Pollution from Ships;
- The Convention on Wetlands of International Importance Especially as Waterfowl Habitat; and
- The Convention for the Establishment of an Inter-American Tropical Tuna Commission.
In the event of a conflict between the CUSMA and an MEA, the obligations under the CUSMA will not preclude a Party from taking measures to comply with its obligations under the MEA, as long as the measure is not a disguised restriction on trade.
Automotive Rules of Origin
The previously agreed version of CUSMA contained automotive rules of origin that required 70 percent of the steel and aluminum purchased by vehicle producers qualify as originating for the vehicle to qualify as originating. The updated rule additionally requires that all of the steel manufacturing processes, from the initial melting and mixing to the coating stage, must occur in one or more of the Parties (except for metallurgical processes involving the refinement of steel additives). The requirement does not extend to raw materials used in the steel manufacturing process. These changes will not come into effect until seven years after the CUSMA comes into force.
No similar updates were made for aluminum but the Parties agreed to address the issue again 10 years after the CUSMA enters into force.
Intellectual Property Rights
The Amending Protocol removes the obligation on data protection for biologics, avoiding the granting of data protection to name-brand biologic pharmaceutical producers for 10 years. With the revised IP provision, Canada need not amend its domestic regime, currently prescribing a period of data protection of eight years.
Parties also agreed to remove provisions on the availability of patents for new uses, methods, or processes of using a new product, as well as data protection for "new indications of existing drugs", but included additional language related to regulatory reviews and how parties may deal with patent-term restoration, patent linkage, and data protection for small molecule drugs.
Timing of Ratification
As stated above, all CUSMA parties must undertake their respective domestic ratification process to implement both the CUSMA and the Amending Protocol. Mexico had pushed the original CUSMA through a quick ratification process and has already ratified the revised agreement. In the United States, the CUSMA now has bipartisan support in Congress, with the CUSMA implementing bill already sent to the House Ways and Means Committee, setting up a 90-day in-session deadline for its ultimate vote in the Senate. However, ratification in the Senate may be delayed by the ongoing impeachment proceedings.
Canada will endeavour to keep up with the other Parties in its ratification process, but a specific timeline remains to be worked out by the newly-elected minority government. The CUSMA will come into force on the first day of the third month following the ratification of the last party.
For any additional questions or concerns regarding the updates to the CUSMA and to learn what it will mean for your business, please contact Bennett Jones' International Trade and Investment group.