NAFTA Renegotiations – Are You Prepared for Changes in Supply Chain Operations and Market Growth Planning?

by Snell & Wilmer
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On August 16, 2017, the United States, Canada, and Mexico began renegotiating the North American Free Trade Agreement (“NAFTA”). According to reports, the negotiations are scheduled to be expedited in an effort to be complete before the next Mexico presidential elections. However, the topics at issue are wide-ranging and will impact all industries in North America. Companies should take this opportunity to evaluate distributor relations, market opportunities, and supply chain management to understand how potential changes would impact business operations and plan accordingly.

On July 17, 2017, the Office of the United States Trade Representative (“USTR”) released a summary of the Trump administration’s objectives for the NAFTA renegotiation. Though the USTR’s summary lists 22 specific areas for renegotiation across various sectors and key concepts in trade, one unifying theme emerges—a new NAFTA that seeks to level the playing field for the U.S.

Four key sectors where the USTR seeks particularly strong updates are (1) trade in goods, (2) trade in services, which includes telecommunications and financial services, (3) digital trade in goods and services, and (4) intellectual property (“IP”). For trade in goods, the overall goal is to reduce the trade deficit with NAFTA countries, with a more explicit desire to expand market opportunities for agricultural goods and eliminate non-tariff barriers to U.S. agricultural exports. For trade in services, the USTR wants NAFTA countries to provide fair and open conditions for services trade, reasonable network access for telecommunications suppliers with coinciding transparent regulations, and to expand competitive market opportunities for U.S. financial service suppliers. For digital products, NAFTA countries must not impose custom duties, but, should ensure that digital products transmitted electronically do not face government-sanctioned discrimination based on the area where the product is produced. Measures restricting cross-border data flows should be eliminated.

Additionally, the USTR wants to shore up protection for IP rights. The U.S. seeks commitment from NAFTA countries to provide protection and enforcement mechanisms for new and emerging technologies and for technological developments, and to eliminate discrimination on matters impacting the enforcement of, availability, and acquisition of IP rights (to name a few). On the whole, the U.S. wants a standard of protection for IP rights in NAFTA countries similar to what is found domestically as well as fair and equitable market access opportunities for U.S. persons that rely on IP protection. American businesses and companies may welcome these updates, as well as those to trade, as they reflect rights and protections commensurate with the rapid advancement of technology since NAFTA was adopted.

Among the most significant proposals are those intended to make labor and environmental considerations key parts of NAFTA. The U.S. intends to bring both provisions into the “core” of the agreement, signifying that adherence to these standards is just as important as the economic benefits derived from a free trade agreement. Central to the labor objectives is the idea that NAFTA countries must observe and incorporate governing international principles, particularly internationally recognized labor standards, into their respective domestic laws. NAFTA countries should ensure the existence of acceptable conditions of work, specifically with regard to minimum wages, hours of work, and occupational safety and health. Additionally, goods produced by forced labor should be prohibited, regardless of whether the source country is part of NAFTA. Similar rhetoric exists for the environmental objectives, in that NAFTA countries must adopt and maintain their obligations under multilateral environment agreements and ensure their own environmental laws are not ignored for the purpose of trade or investment. If these aforementioned measures are adopted, American businesses and companies may not be as incentivized to move operations outside of the U.S. since labor and environmental regulations in all NAFTA countries would technically be the same.

Generally, the USTR seeks to re-establish American presence, as compared to the other NAFTA countries, in the following ways: (1) updating the rules of origin to ensure that the benefits of NAFTA go to products genuinely made in the U.S., (2) establishing rules that reduce or eliminate barriers to U.S. investment in all sectors, (3) ensuring that U.S. investors in NAFTA countries have rights consistent with U.S. legal principles and practices and that NAFTA country investors in the U.S. are not afforded greater rights than their domestic counterparts, (4) eliminating the Chapter 19 dispute settlement mechanism for trade remedies (which has been viewed as producing less than favorable outcomes for the U.S.[1]), (5) increasing opportunities for U.S. companies and businesses to sell U.S. products and services in NAFTA countries, and (6) establishing rules to oversee government procurement in NAFTA countries that mirror existing U.S. practices.

One noteworthy objective for American businesses and companies to be aware of relates to small and medium-sized enterprises (“SMEs”). In an effort to help SMEs understand requirements when exporting to NAFTA countries, the U.S. asks that NAFTA countries provide relevant information. Furthermore, the U.S. proposes creating an SME committee while the new NAFTA is being implemented to ensure that the needs of SMEs are acknowledged and to keep them aware of new commercial opportunities. American small businesses may find such provisions helpful when seeking prospects outside the U.S.

While much of the USTR’s proposed NAFTA renegotiation objectives may seem ambitious or are otherwise necessary to update a decades old agreement, those changes viewed as untenable (as commentators note, for example, reducing the trade deficit with NAFTA countries[2]) may not come to fruition. As per the Federal Register, the public comment period for the NAFTA renegotiating objectives ended in June of this year, preceding the USTR’s summary release. For now, American businesses and companies impacted by the NAFTA renegotiation can stay apprised of the outcome of each round of talks between the U.S., Mexico, and Canada. The countries are expected to meet multiple times with the hopes of reaching a mutual agreement on a new NAFTA.

In addition to keeping apprised and despite that the public comment period has closed, companies can still take proactive steps to ensure that policy makers have an understanding as to how any NAFTA changes would impact industry and specific business operations. Further, the negotiations period allows companies time to evaluate existing North American supply chain controls and market opportunities and initiate proactive plans that address potential eventualities that may result from the on-going NAFTA negotiations.

 

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Notes:

[1] See Anthony Esposito, Mexico Welcomes U.S. NAFTA Objectives, Eyes Stronger North America, REUTERS, July 17, 2017, http://www.reuters.com/article/us-usa-trade-nafta-mexico-idUSKBN1A301D.

[2] See The Outlines of NAFTA 2 Emerge: Canada and Mexico Face a Tricky Renegotiation of Their Trade Deal With the United States, THE ECONOMIST, July 20, 2017, https://www.economist.com/news/americas/21725345-canada-and-mexico-face-tricky-renegotiation-their-trade-deal-united-states.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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