Sure, for those that aren’t familiar with NAFTA, let me give you a quick summary.
NAFTA stands for the North American Free Trade Agreement. It came into force in 1994 and gradually eliminated most of the trade barriers between Mexico, Canada and the US.
When Donald Trump was elected, he called for NAFTA to be re-negotiated, calling it the “worst trade deal” in US history.
The signing of NAFTA today ends months of uncertainty for trade in North America as no one was sure if the three countries would agree a deal. Many were concerned that Trump would pull the US out of NAFTA, just as he did for the Trans-Pacific Partnership in January last year. At the time this affected the Mexico currency and drove the value of some US trade-related stocks down.
There were also fears as to whether Canada would be a party to the NAFTA deal. Talks between the US and Canada had stalled and the US said it was happy to proceed with only Mexico. Mexico was quick to give away concessions, not only because NAFTA is good for trade (Mexico ships 4/5 of its exports to the US), but also because the outgoing President wanted to sign a deal before he left office and because the US had threatened to impose tariffs on car imports, which would damage the Mexican economy.
By giving concessions away and agreeing to negotiate directly with the US, Mexico may have harmed relations with Canada, as the two had promised to maintain a common front during negotiations.
In the end, Canada signed, largely because they are especially reliant on the US economy. In 2017, the US traded more with Canada than any other country except China. Canada had already been suffering a slowdown in investment due to the US lowering corporate tax. One assessment predicting the Canadian economy would contract by 2.2% without NAFTA
So what has been renegotiated?
Some of the key terms of the deal -- now called the United States-Mexico-Canada Agreement or USMCA -- include:
- The share of a car’s components made in North America had to rise from 62.5% to 75% for US and Mexican-assembled vehicles (Trump increasingly wants to bring back supply chains to the US even though it is more
- 40-45% of the content going into a vehicle must be made my workers earning an average of $16 an hour (this will encourage companies to keep manufacturing in the US).
- US farms will gain access to 3.5% of Canada’s dairy market.
- USMCA Is to be reviewed every six years.
- Canada retains access to Chapter 19, which provides a dispute resolution mechanism for anti-dumping and counterveiling duties
After the signing was announced, the Canadian dollar and the Mexican peso rose, which indicates greater confidence in the markets. The S&P 500 (a US stock index for the 500 public companies listed on the New York Stock Exchange) is also set to hit a record today
What is the impact on law firms?
When thinking about the impact on law firms, you might want to first consider the consequences on clients had a deal not been signed. There would be disruptions to supply chains and technologies in North America and a fall in international trade due to higher tariffs. Lawyers would need to help companies restructure their businesses. Deal value and volume would fall, affecting corporate teams -- although that might be mitigated somewhat in short term due to a rise in demand for lawyers who will be needed to interpret the WTO rules between the US and Mexico.
Moving to the present, lawyers will be needed to help clients prepare for the impact of the new deal terms. Even if law firms don’t specialise in international trade law, lawyers should be aware of the changes and be prepared to answer relevant questions from clients or in-house counsel. The scope of USMCA applies across IP, litigation, commercial and employment, among other departments.
Businesses that trade internationally will need lawyers to determine whether their goods are exempt from tariffs under USMCA and to ensure that they trade in compliance with NAFTA. In these cases, it might be useful for law firms to have offices in the US, Canada and Mexico, so they can advise on any additional local regulations for businesses, including licensing, certification or regulatory requirements.
The new review period taking place every six years will mean clients need to undertake regular risk assessments in case the terms of USMCA are changed. Lawyers can help businesses to identify which parts of their business are most at risk and identify opportunities to mitigate that risk. This could mean restructuring their business, moving supply chains or acquiring companies to manufacture their goods. It could also mean renegotiating contract terms with suppliers.
Lawyers will also be needed when it comes to cross-border investment disputes, to help companies take action under the dispute resolution provisions in compliance with USMCA.
