The United States and Mexico announced yesterday that they have reached formal agreement on a number of issues in the NAFTA renegotiation. While it still remains very unclear how this development will impact negotiations with Canada or timelines for Congressional consideration of an agreement to replace NAFTA, we now know how some of the issues under negotiation have been resolved.
The Office of the U.S. Trade Representative has made statements to the press and released a series of Fact Sheets about the agreement that reveal much about the legal substance of a potential NAFTA 2.0.
Unsurprisingly, what’s revealed in the Fact Sheets makes the new agreement seem a lot like the TPP the Trump administration abandoned shortly after his inauguration. For example, much of the Fact Sheets’ discussion of the new agreement’s provisions related to intellectual property, digital trade, agriculture, labor, and environment could just as easily describe the rules the United States, Canada, and Mexico all agreed to during the TPP negotiations. Until we have a full text, we won’t know what difference, if any, there will be for a number of these issues.
Despite broad similarities on the whole, some of the more specific “achievements” listed in the Fact Sheets do differ from TPP rules in interesting ways worth discussing.
According to the Fact Sheet, the agreement includes a minimum copyright term of 75 years. This term applies to works for hire and other works where there is no identifiable author. These works are currently protected for at least 95 years under existing U.S. law. The Fact Sheet claims the agreement “Extends” copyright duration, probably because the TPP (and other U.S. trade agreements) only imposed a minimum of 70 years protection for such works.
This 75-year term should not be confused with the more common way of calculating copyright duration based on a number of years after the author’s death. In the United States, that term is life of the author plus 70 years. The original NAFTA only requires life of the author plus 50 years, which is the international standard and was U.S. law when NAFTA was signed in 1993. Although it’s not mentioned in the Fact Sheet, a new NAFTA will almost certainly require life plus 70, as all recent U.S. trade agreements have done. This will require a change in Canadian law, which currently matches the standard life plus 50, but not Mexican law, which provides the longest copyright in the world of life plus 100 years.
The agreement also “includes 10 years of data protection for biologic drugs.” This refers to the process by which regulators make it difficult for generic versions of non-patented, large-molecule drugs to enter the market by requiring them to undergo the same rigorous safety testing as the original drug maker. In the United States, the FDA pretends it doesn’t know the competing drug is safe for 12 years so that innovators get a similar level of monopoly protection they would’ve gotten if the drug had been patented.
The TPP was the first trade agreement in the world to include a special provision mandating a unique term of “data exclusivity” for biologics, but that provision only required at least 5 years of exclusivity. The issue is very important for Senate Finance Committee Chair Orrin Hatch (R-UT), who made a big stink about the TPP’s apparently inadequate provision. Ten is more than 5, but it’s also less than 12, so we’ll have to see how this plays out in Congress.
Most of the Fact Sheet’s discussion of labor and environment issues is very vague and gives no real indication of how the agreement’s labor and environment rules will differ from the TPP. Contained within the agreements’ Rules of Origin, however, is a particularly creative and novel requirement that, for automobiles, at least 40–45% of a product’s value must be added by workers making at least $16 per hour in order for the product to receive duty free treatment.
The practical consequence of this rule will be to negate Mexico’s comparative advantage in low-cost, labor-intensive manufacturing, thus reducing gains from trade and disincentivizing the use of Mexican labor throughout automobile supply chains.
In essence, the Trump administration plans to use an international treaty to impose a $16 minimum wage on the North American auto sector. This is also an issue where it will be interesting to see how Congress reacts.
Rules of Origin
In addition to the agreement’s novel wage-based rule of origin, there will also be higher regional content requirements for automobiles and some other products. NAFTA currently requires 62.5% of the content of automobiles to be made within North America in order to qualify for tariff preferences. This is very high compared to the rules for other products and other U.S. free trade agreements.
The new agreement would raise the regional value requirement to 75%. As a result, U.S. auto manufacturers could be forced to pay tariffs on cars assembled in Mexico from mostly American parts because the vehicle also includes Japanese computer chips and steel smelted in Europe. The consequence of strict rules of origin is to reduce the ability of American companies to develop efficient supply chains and require them to devote significant resources toward ensuring compliance with government mandates.
The Trump administration has threatened to increase existing non-NAFTA auto tariffs from 2.5% to 25% in order to prevent automakers from simply absorbing the cost of the tariff rather than alter their supply chains to meet uneconomical rules of origin.
The Fact Sheet’s discussion of Digital Trade mentions a number of issues—including e-signatures, privacy, spam, source code disclosure, and algorithm transparency—that were also addressed in the TPP. Curiously, the Fact Sheet only mentions data localization and cross-border data flows in a section about financial services, not among its digital trade provisions.
One possible reason for discussing data rules as a financial services issue is that the TPP contained a special exception allowing financial regulators to force companies to store certain data in the United States. This proved controversial due to concern that such an exception could be abused by other governments for protectionist purposes. The Trump administration probably wants to assure financial services providers that it has addressed their concerns, and so USTR is including the issue in that section of its Fact Sheet.
Another possible reason why free flow of data is hidden in the financial services discussion, despite being a major U.S. demand, may be that the President doesn’t like the companies that are supposed to benefit from those rules–companies like Amazon, Google, Facebook, and Apple. If I were Trump’s USTR, I would certainly downplay any actions that could be seen as an attempt to further the interests of these particular stakeholders.
This could also explain why the Fact Sheet touts an agreed increase in Mexico’s de minimis shipment value (allowing small shipments to enter without customs procedures) without ever mentioning how raising that level will benefit U.S. e-commerce companies.
The Fact Sheet also makes no mention of copyright exceptions and limitations. The TPP included a unique provision encouraging countries to allow fair use or similar copyright exceptions. The absence of any mention of that provision in the Fact Sheet may mean that USTR has dropped that entirely from its demands, or it may simply mean that USTR does not wish to highlight its efforts on behalf of internet companies.
Similarly, there is no mention in the Fact Sheet of whether or how the agreement requires countries to limit internet companies’ liability for user conduct.
Whatever the reason, USTR’s restrained approach to cross-border data flows is worrisome. Trade rules for the digital economy will only become more and more important over the next few decades, and the United States ought to play a leading role in shaping those rules.
With rising countries like China using digital industrial policy to protect and promote domestic internet services and lackluster resistance from Europeans obsessed with privacy protection, the future of digital free trade will depend on active and consistent involvement by the United States in shaping trade rules for data flows.
Based on the announcements from USTR about the agreement with Mexico, it appears NAFTA 2.0 will restrict North American trade in some politically sensitive areas like autos while mimicking the rules of the TPP with some unhelpful adjustments.