The Canada-United States-Mexico Agreement (CUSMA) will come into force on July 1, 2020, replacing the 26-year-old North American Free Trade Agreement (NAFTA). Known as USMCA in the United States, and T-MEC in Mexico, CUSMA comprises 34 chapters of complex provisions governing the trade relationship between the three CUSMA parties. CUSMA carries forward many of the existing rules under NAFTA, but is by no means a continuation or renewal of NAFTA.
In this bulletin, we provide a general overview of the CUSMA provisions applicable to specific industries. For more details of the rules applicable to customs and trade in goods, see our June 2020 Blakes Bulletin: Trade Tool Kit for a Successful Transition from NAFTA to CUSMA.
CUSMA introduces new rules of origin applicable to producers of passenger vehicles, light trucks and heavy trucks in the automotive industry. For more information, see our June 2020 Blakes Bulletins: FAQs: Navigating CUSMA in the Automotive Sector and A Deep Dive into CUSMA: New Automotive Rules of Origin.
OIL AND GAS
While the energy chapter in NAFTA no longer appears in CUSMA, Canada has entered into a bilateral side letter with the U.S. to generally facilitate transparency and cooperation regarding energy regulatory measures.
Certain trade facilitating measures have also been implemented to facilitate increased trade in the oil and gas industry. For example, CUSMA includes new rules of origin which will allow crude petroleum oil and crude oil to retain originating status when up to 40 per cent by volume of non-originating diluent is added for transportation purposes. The new rules of origin will also allow liquefied natural gas to qualify as originating with up to 49 per cent by volume of non-originating feedstock. CUSMA also no longer requires Canada to preserve the proportion of the total supply of energy and basic petrochemicals exported to the U.S. if it implements export restriction measures. These changes address and resolve known trade issues that existed for oil and gas producers under NAFTA, and do away with measures addressing previous policy concerns that no longer pose a threat.
CUSMA preserves Canada's system of supply management-including production quotas, minimum predetermined prices and tariff-rate quotas for imports-while allowing increased market access by both the U.S. and Canada. Under CUSMA, increases in tariff rate quotas will be provided for various dairy, poultry and egg products imported into Canada, and for dairy products, peanuts, refined sugar and sugar-containing products imported into the U.S. Canada will also eliminate special pricing for certain milk classes and allow U.S.-grown wheat registered in Canada to receive an official Canadian grain grade.
CUSMA encourages the CUSMA parties to use science and risk-based sanitary and phytosanitary analyses, measures and certification, and requires improved audit procedures, import checks, equivalence assessments and transparency measures to be put in place to facilitate and increase the predictability of market access. This also includes forward-looking obligations for agricultural biotechnology and provides trade-facilitative approaches to getting safe products to market.
TEXTILES AND APPAREL GOODS
New rules of origin for apparel goods under CUSMA include origin requirements for "secondary" textile components, such as sewing thread, pocketing fabric, narrow woven fabric and narrow elastic fabric. These new measures are designed to encourage use of North American goods for these components, which were previously not included in determining the origin of apparel goods under NAFTA.
NAFTA "yarn-forward" rules of origin, which requires that the yarn production and, all operations "forward" (i.e., fabric production through apparel assembly) occurring in North America are maintained. Two exceptions to this are niche, vegetable-based yarns and fabrics that are often sourced from outside North America. It is important to note that the CUSMA preserves NAFTA's tariff preference levels (TPLs) for various categories of textiles and apparel. TPLs allow for specified volumes of non-originating products to be accorded duty-free treatment among CUSMA partners. TPLs have largely been under-utilized, even though they facilitate "originating status" treatment for goods that do not otherwise qualify under the strict rules of origin applicable to this category of goods. TPLs are exempt from the merchandise processing fee in the U.S. under CUSMA, which is expected to alleviate financial and administrative burden for Canadian exporters.
CUSMA also allows greater flexibility for producers that use small amounts of non-originating materials, provided that the total weight of the non-originating materials is not more than 10 per cent of the total weight of the good and the total weight of elastomeric content does not exceed seven per cent of total weight of the good.
CHEMICALS, RUBBER AND PLASTICS
Eight new process rules will govern the rules of origin for various chemicals, rubber and plastics, namely: chemical reaction rule, purification rule, mixtures and blends rule, change in particle size rule, standards material rule, isomer separation rule, separation prohibition rule and biotechnological rule. Manufacturers of these materials and other businesses dealing with these materials are advised to review the new rule of origin.
IRON AND STEEL
The new rules of origin for iron and steel contain multi-tiered options beginning in 2022 or 2023. The new rules generally require that the product (i) undergoes a tariff shift from outside certain steel tariff headings, (ii) undergoes a tariff shift from the designated steel tariff headings, if at least 70 per cent by weight of the inputs of those designated headings is originating or (iii) satisfies an RVC threshold ranging 55 to 65 per cent under net cost method depending on the product.
OTHER INDUSTRY-SPECIFIC REGULATORY INITIATIVES
CUSMA also incorporates "sector-specific outcomes" to enhance regulatory compatibility and trade between the parties, while ensuring imported products are treated in the same manner as domestic products. Industries impacted by these sector-specific outcomes include pharmaceuticals, medical devices, cosmetic products and alcoholic beverages.
INTELLECTUAL PROPERTY RIGHTS AND THE DIGITAL ECONOMY
CUSMA has generally strengthened intellectual property rights. While many changes are in line with current Canadian intellectual property rights regime, some require changes from Canada to comply. Some of the changes required from Canada include (i) extending copyrights for works to 70 years after the creator's death, and for performances and sound recordings to 75 years after the creator's death, (ii) adjusting patent term to compensate for unreasonable delays in processing and granting of a patent, (iii) completing the accession to the Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite, (iv) providing for criminal remedies in respect of altering or removing rights management information, (v) imposing new criminal offences for unauthorized and willful misappropriation of a trade secret, (vi) implementing stronger border measures to detain suspected counterfeit trademark and pirated copyright goods in transit and (vii) providing for a "system" of damages for trademark counterfeiting.
CUSMA also implements new rules related to information technology and digital trade. These rules include (i) prohibiting customs duties on digital products-such as music and e-books, (ii) civil liability protections for interactive computer services with respect to content published on their platforms, (iii) reduced data localization requirements for certain financial institutions, foreign service providers and foreign investors and (iv) establishment of new consumer and privacy protections. For more information, see our June 2020 Blakes Bulletin: IP Post-NAFTA: What CUSMA Coming into Force Means for Canadian IP Law.
The implementation of the CUSMA will be welcome by businesses in North America as there will finally be a measure of certainty regarding the rules applicable to trade among Canada, the U.S. and Mexico. However, because there is no transitional period from NAFTA to CUSMA, businesses need to prioritize planning and preparing for CUSMA's implementation. The CUSMA is a technically complex agreement but should be reviewed in detail in order for businesses to extract the maximum level of benefits available within its provisions.
Originally published June 24, 2020
For permission to reprint articles, please contact the Blakes Marketing Department.
© 2020 Blake, Cassels & Graydon LLP.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.