US girds for updated North American trade pact amid Covid-19 pandemic

An interagency panel to monitor Mexico’s labor reforms. A rule to delay compliance for some auto companies. Requests for candidates to sit on dispute resolution panels. Interim customs guidance.

The novel coronavirus pandemic hasn’t stopped the US federal government from preparing for the US-Mexico-Canada Agreement’s entry into force. The Trump administration officially announced last week that it’s ready to implement the pact on July 1 despite pressure from the business community to postpone implementation due to the public health shutdowns.

The USMCA contains new rules-of-origin and labor requirements to which companies were already scrambling to adjust even before the viral outbreaks. But with businesses now struggling to stay afloat, the new regulations could exacerbate an already bad situation.

“Now is not the time to implement a trade agreement that contains so many important and meaningful changes that will impact certain industries in a significant financial manner,” an advisory group to US Customs and Border Protection said in a Covid-19 white paper prepared for its quarterly April 15 meeting. The group suggested delaying USMCA’s entry into force until no earlier than Jan. 1, 2021.

The rush to implement the USMCA, however, is necessary as part of the US economic recovery — especially as other governments have turned inward with new protectionist policies and export sanctions on medical supplies, food and other essential products to respond to Covid-19.

“USMCA really stands in contrast to that,” said Kelly Anne Shaw, a former top White House trade official in the Trump administration.

“It’s really going to be important to do everything we can to inject lifeblood back into our respective economies as well as reduce the barriers to those trade flows,” said Shaw, now with the law firm Hogan Lovells.

While the new rules are a heavy lift to implement, the USMCA “builds on a depth and wealth and history of a strong trading relationship already,” Shaw said.

Trade between the three countries reached nearly $1.3 trillion in 2017. Existing relations with Canada and Mexico can also serve as a framework for a new US medical supply chain not dependent on China.

“I don’t think it is ever realistic for us to produce everything at home that we need,” Clete Willems, another former Trump administration trade official, said during a webinar this week hosted by the Washington International Trade Association.

“We need to figure out a way to have these trusted supply chains and networks,” said Willems, now with the law firm Akin Gump.

The USMCA replaces the existing North American Free Trade Agreement, a promise that President Donald Trump had vowed to pursue as part of his 2016 campaign.

Congressional Democrats, too, loathed the 1994 pact. They blamed it for the massive hemorrhaging of US manufacturing jobs to low-cost Mexico, which prompted them to later get on board with Trump to revise Nafta.

They pursued tense negotiations for a year with US Trade Representative Robert Lighthizer to strengthen labor, enforcement, pharmaceutical and environmental provisions in the original White House plan.

In January, Congress ratified the USMCA, a few months after the Mexican Senate approved the agreement. The Canadian Parliament rushed to approve the pact in March, just before lawmakers adjourned due to the pandemic. Deadlines embedded in the agreement then estimated that implementation would begin in June with all three countries’ ratification. Lighthizer’s April 24 notification then pushed back the effective date to July.

Auto rules

But days before Lighthizer gave the green light, his office indicated there could be some regulatory relief for auto companies, which would be significantly impacted by the USMCA’s rules of origin and labor requirements. Manufacturers of vehicles or light trucks can opt for another way to transition to the new rules, which involves going through a vetting process with USTR by first providing a draft alternative staging plan by July 1.

Since Covid-19 was declared a pandemic in March, many car factories have been occupied in their role as ventilator producers. Ford, Fiat Chrysler and General Motors last month urged the administration to issue draft uniform rules to prepare for compliance, citing the lengthy process of obtaining information throughout their supply chains to certify that their cars and trucks qualify under the agreement.

Adding to supply chain challenges is Mexico’s ill-defined definition of “essential business” during the pandemic. A bipartisan group of US senators asked Secretary of State Mike Pompeo this week to ask Mexico City to clarify the meaning.

“We particularly urge you to press your Mexican counterparts to incorporate industries providing components to the food, medical, transportation, infrastructure, aerospace, automotive, and defense sectors into their guidance. Consistent direction from Mexico to its manufacturers would improve the U.S. economy because our domestic companies would find it easier to secure alternate sources for their products,” said Senators John Cornyn, a Texas Republican, and Dianne Feinstein, a California Democrat.

Interagency panels

The White House this week issued an executive order to establish an interagency labor committee to monitor and enforce Mexico’s labor reform as part of the agreement. Customs and Border Protection also released interim instructions last month on how to make preferential tariff claims. Those instructions included ways to calculate products' regional value content and get exemptions from merchandise processing fees. The instructions also detail the 10 percent de minimis provision for most goods, which says a product is considered North American if the value of any of its non-North American materials doesn't exceed 10 percent of the transaction value or total cost of the final product.

In March, the White House also ordered the creation of another interagency committee on auto goods, which will help USTR review the petitions for an alternative staging plan. USTR has opened an application process for service on the dispute settlement panel, as well as a specialized labor panel that would address worker issues in a Mexican facility.

And in February, the White House mandated the creation of an interagency committee to monitor the implementation of the USMCA's environmental provisions.