New Articles

US Imposes Additional Sanctions on Key Sectors of Iranian Economy

iranian

US Imposes Additional Sanctions on Key Sectors of Iranian Economy

On Friday, January 10, 2020, President Trump issued a new Executive Order, “Imposing Sanctions With Respect to Additional Sectors of Iran” (“E.O.”), which authorizes the imposition of sanctions against persons operating in or transacting with Iran’s construction, mining, manufacturing or textile sectors. The E.O. also imposes secondary sanctions against foreign financial institutions (“FFIs”) that engage in “significant financial transactions” within these sectors. Concurrently, the US Department of the Treasury, Office of Foreign Assets Control (“OFAC”), designated several Iranian and third-country metal producers and mining companies, a number of senior Iranian officials, and third-country entities that have transacted in the Iranian metal and mining sectors. This Legal Update provides a brief summary of these new sanctions and designations and discusses their impact on US and non-US businesses and financial institutions.

Designations. Concurrently with the E.O., OFAC designated several Iranian and third-country entities, including 17 Iranian metal producers and mining companies (described as the largest metals manufacturers in Iran); an Oman-based steel supplier; a network of three China- and Seychelles-based entities; and a vessel involved in the purchase, sale and transfer of Iranian metals products, as well as in the provision of critical metals production components to Iranian metal producers. OFAC also designated, pursuant to pre-existing authorities, several senior Iranian officials who have “advanced the regime’s destabilizing objectives.”[i]

New Targeted Sanctions. The E.O. imposes sanctions on the construction, mining, manufacturing and textile sectors of the Iranian economy, expanding on those already imposed on the country’s energy, shipping and financial sectors under Executive Order 13846 (“E.O. 13846”) and the iron, steel, aluminum and copper sectors under Executive Order 13871 (“E.O. 13871”). The aim of the new E.O. is to “deny the Iranian government revenues, including revenues derived from the export of products from key sectors of Iran’s economy, that may be used to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence.” The new sanctions come amid rising tensions between the United States and Iran and only days after targeted, tit-for-tat military actions by both countries.

The E.O. authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to block all property and interests in property that are in the United States, or within the possession or control of any US person, belonging to any person (meaning an individual or an entity) determined to:

1. be operating in the construction, mining, manufacturing, or textile sectors of the Iranian economy;

2. have knowingly engaged, on or after January 10, 2020, in a significant transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with one of the aforementioned sectors of the Iranian economy;

3. have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any persons whose property and interests in property are blocked pursuant to the E.O.; or

4. be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the E.O.[i]

Importantly, the E.O. authorizes the Treasury Department to designate as a Specially Designated National (“SDN”), any “person,” including non-Iranian and non-US persons, who operates in or knowingly engages in a significant transaction in these sectors of the Iranian economy. The E.O. also permits the Treasury Secretary to designate other sectors of the Iranian economy to be subject to sanctions in the future.

Secondary Sanctions on Foreign Financial Institutions. In addition to the targeted sanctions discussed above, the E.O. permits the Secretary of the Treasury, in consultation with the Secretary of State, to impose correspondent account and payable-through-account (“CAPTA”) secondary sanctions on any FFI that, on or after January 10, 2020, knowingly conducts or facilitates any “significant financial transaction”:

i. for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with one of the aforementioned sectors of the Iranian economy; or

ii. for or on behalf of any person whose property and interests in property are blocked pursuant to this order.

CAPTA sanctions “may prohibit the opening, and prohibit or impose strict restrictions on the maintaining” of such accounts in the US by FFIs determined to have engaged in the conduct described in the E.O.

Impact of the New Iranian Sanctions and Related Designations

The E.O. expands on the sanctions already put into place against Iran following the reimposition of secondary sanctions against the country announced in May 2018 and as expanded under E.O. 13846 (sanctions against Iranian energy, shipping and financial sectors) and E.O. 13871 (sanctions against Iranian iron, steel, aluminum and copper sectors).

Under the current sanctions regime, it remains prohibited for US persons—including US-owned or -controlled entities—to engage in virtually any transaction, directly or indirectly, with Iran without OFAC authorization. US persons are further prohibited from transacting without authorization with those persons and entities designated by OFAC and added to the SDN List, including via this recent round of designations.

The new sanctions introduced by the E.O. increase OFAC’s ability to sanction non-US persons, as the E.O. enables the United States to designate and block the property and interests in property of those non-US persons operating in or engaging in significant transactions with the construction, mining, manufacturing or textile sectors of Iran.[i] This has the effect of cutting off such non-US persons from the US financial system (and the US market more generally). Businesses with a presence in the European Union may continue to face challenges as they take into account this enhanced sanctions authority in light of the EU blocking statute, which prohibits EU companies from direct or indirect compliance with certain US sanctions laws, including Iranian sanctions.

It remains a secondary sanctions risk for FFIs (and non-US businesses) to knowingly engage in significant transactions involving certain Iranian persons on the SDN List.[i] Additionally, as discussed above, CAPTA sanctions may be imposed against FFIs who conduct or facilitate any “significant financial transaction” in one of the sectors of the Iranian economy specified in the E.O., regardless of whether such transactions have a US nexus. FFIs and non-US businesses may now include an evaluation of significant transactions in the Iranian construction, mining, manufacturing or textile sectors as part of their Iran sanctions risk assessments.

While the E.O. does not define either the term “significant transaction” or “significant financial transaction,” we suspect that the Treasury Department will apply a standard similar to previously issued guidance published in relation to E.O. 13871. Accordingly, such a determination will likely be based on a multifactor, totality-of-the-circumstances assessment of a broad range of factors, including the size, number and frequency of the transactions or services; their type, complexity and commercial purpose; and the level of awareness of the institution’s management.[i]

Since reinstating secondary sanctions in 2018, the United States has only designated non-US entities under secondary sanctions in a few limited circumstances.[i] However, this E.O. joins a series of preexisting Iran-related secondary sanctions authorities[ii] and further extends the extraterritorial reach of the Iran sanctions program to advance US policy objectives.

_________________________________________________________________

Endnotes

[1] See Press Release, Treasury Targets Iran’s Billion Dollar Metals Industry and Senior Regime Officials (January 10, 2020), available at https://home.treasury.gov/news/press-releases/sm870

[1] The E.O., by its terms, does not apply with respect to any person for conducting or facilitating a transaction for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.

[1] The blocking provision of the E.O. requires that the property or interests in property comes within the United States or within the possession or control of a US person (e.g., through use of the US financial system in such transactions).

[1] See OFAC FAQ 636, available at https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_iran.aspx

[1] See OFAC FAQ 671, available at https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_iran.aspx

[1] See, e.g., OFAC, “Iran-related Designations; Issuance of Iran-related Frequently Asked Question,” (Sept. 25, 2019), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190925.aspx (adding Chinese tanker companies to the SDN list due to their alleged role in transporting Iranian oil).

[1] See, e.g., Mayer Brown Legal Update, “US to Reimpose Secondary Sanctions Against Iran Amid EU Opposition” (May 9, 2018), available at https://www.mayerbrown.com/en/perspectives-events/publications/2018/05/us-to-reimpose-secondary-sanctions-against-iran-am Executive Order 13846, “Reimposing Certain Sanctions With Respect to Iran,” (Aug. 6, 2018).

About the authors:

Tamer Soliman is a partner in Mayer Brown’s Washington DC and Dubai offices, global head of the firm’s Export Control & Sanctions practice and a member of the International Trade practice.

Ori Lev is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice and the Consumer Financial Services group.

Yoshi Ito is a partner in Mayer Brown’s Washington DC office and a member of the International Trade and Public Policy, Regulatory & Political Law practices.

Brad Resnikoff is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice.

Liz Owerbach is an associate in Mayer Brown’s Washington DC office and a member of the firm’s Export Control & Sanctions and International Trade practices.

Brad Cohen is an associate in Mayer Brown’s New York office and a member of the Litigation & Dispute Resolution practice.

usmca

Sizing up the USMCA Compromise Package – How Various Industries Will be Impacted

On December 10, Speaker Nancy Pelosi, the Trump administration, along with leaders in Mexico and Canada, announced a compromise to the new North American trade deal, known as the U.S. Mexico and Canada Agreement.  Eleventh-hour concessions by the Administration and Mexico are likely to result in a win for labor, President Trump, and ultimately market stability.

The final deal gives Democrats in Congress a few big wins in the pharmaceutical and labor industries, as well as environmental standards, and gives President Trump the victory of having his new trade deal on the path to ratification by all countries involved. Canada managed to receive much of what they requested, despite the slight opening of the Canadian dairy market to U.S. producers.

One of the biggest changes from the original draft USMCA in the compromise trade agreement is the negotiated labor monitoring and penalties for noncompliance. While the original draft required Mexico to change its laws to make it easier for workers to unionize, the compromise created an interagency committee that will monitor Mexico’s labor reform, established benchmarks and penalties for Mexico’s labor reform process, and established labor attachés in Mexico for on-the-ground reporting about Mexico’s labor practices.

Below is an outline of the changes to the USMCA – the House is expected to vote on the deal next week, though the Senate will likely not address the bill until the impeachment process has concluded:

For workers, language was removed that made it difficult to prove that trading partners are not protecting workers from violence in their respective countries. Now, Mexico has agreed to a “rapid-response labor mechanism” (see ANNEX 31-A) that allows independent, multinational three-person panels to investigate Mexican factories. Mexico, too, can have a panel investigate factories in the U.S. If a violation of union rights is found, a complaint can be filed, and the country making the accusation can determine the period of time that the accused county can have to address the concern. Provisions against Forced Labor also remain strong in the agreement. The deal is expected to also create 176,000 new jobs in the U.S. (See Article 23.3-23.4, ‘Labor Rights.)

For the environment, Democrats have promised that the deal has an added commitment that all the countries will have seven multilateral environment agreements (MEAs), alongside language that will allow the list to grow over time. Provisions include prioritization and monitoring of MEA commitments, and maintain and strengthen the protection of endangered species, the Montreal Protocol, prevention of pollution from ships, regulation of whaling, protection of the Ozone Layer and more (Article 1.3 Amendment and Article 24.9 Amendment)

For the pharmaceutical industry, the deal’s former provision that gave biologics a 10-year exclusivity period on the market is now entirely taken out. Democrats argued against the exclusivity period, concerned it could increase the cost of drugs, and succeeded in eliminating language that allows patent evergreening – when brand-name drug manufactures extend patents an additional to maintain power in the market when a new or related drug is created. (See the deletion of Article 20.49 ‘Biologics’)

For the internet, a Democratic concession led to maintained protections in the USMCA for technology companies, giving legal immunity for content posted by their users, as well as legal protections when these companies seek to moderate platforms. These provisions remain the same from Section 230 of the Communications Decency Act of the USMCA.

For the steel industry, while the deal already exempted the Canada and Mexico from steel and aluminum tariffs, the revised agreement has strict rules of origin in the automotive industry. The deal states that seven years after entry into the USMCA, all steel manufacturing must occur in one or more of the countries involved, except for the refinement of steel additives. Ten years after the agreement, the countries will consider appropriate requirements in the interest of all parties for aluminum to also be considered. (See Chapter 4, ‘Rules of Origin’)

For Canada and dairy, the U.S. will be able to export 3.6% of Canada’s dairy market, currently at 1%. Dairy companies in the U.S. can sell their products into Mexico duty-free, with access to common-named cheeses, while Canada is opening its market with more duty-free quotas for U.S. dairy products. The deal eliminates Canada’s 6/7 milk pricing system, and holds Canadian export of dairy to the standards of international trade rules.

And for the auto industry, in order to avoid tariffs, a car or truck must have 75% of its components made in the U.S., Mexico or Canada, up from 62.5% today.  Also, workers making the cars or trucks, at least 30% of the work, must be earning at least $16 an hour. By 2023, that number is 40% of the work done on cars.

With the United States positioning itself to negotiate several more trade deals, labor hopes that these last-minute changes set a benchmark for labor standards and enforcement moving forward and, likewise, the President hopes it demonstrates he can close a major trade deal.

___________________________________________________________

Note: Ryan Bernstein, formerly chief of staff to Senator John Hoeven (R-ND) is a senior vice president with McGuireWoods Consulting federal public affairs group.Mariam Eatedali is a research associate at McGuireWoods Consulting; she previously consulted with former representatives and senators to address foreign economic and diplomatic concerns while she was a fellow for the U.S. Association of Former Members of Congress

trade war

How Has the Trade War Affected China?

In the last two weeks the stakes in the ongoing trade conflict between the United States and China have increased significantly. After negotiations stalled in July, President Trump expanded his tariff targets to cover nearly all imports from China. But the weapons in this conflict have become increasingly more sophisticated. Beijing retaliated by suspending purchases of U.S. agricultural products and by lowering the value of its currency to make Chinese goods less expensive abroad. In response, the U.S. Treasury named China a currency manipulator and vowed to take actions to eliminate the alleged unfair competitive advantage. In addition, President Trump announced that the United States is not going to do any business with China’s tech giant Huawei. 

While these escalations have recently uneased investors and rattled the markets, they have yet to make an obvious impact on the U.S. economy, albeit U.S. farmers have begun to experience the negative effects of lost sales to China. But how have these actions resonated in China? There are some indicators that the trade war has had an impact on the Chinese economy, as well as public perception in that country. 

At the moment, the U.S. can claim a short term victory, although China appears to be playing the long game. Official reports indicate that Chinese economic growth has decelerated to its slowest pace since 1992, as businesses have held back on investment in light of the ongoing trade tensions with the United States. Also, Chinese exports to the U.S. declined by $5.6 billion in June, versus a $1.8 billion decrease in U.S. exports to China. 

The Trump administration has claimed that its trade policy seeks to remedy problems which have been neglected for too long, and to defend America’s economic interests against perceived abuses by its trade partners. The administration has introduced tariffs as a means to address alleged intellectual property violations by China and a growing trade deficit. Its trade policy takes into account that some pain will need to be absorbed by the United States. However, it is not evident that the U.S. consumer has suffered yet. U.S. importers have to pay the tariffs, and so far many have sough ways to absorb them in whole or in part to minimize any price increases for the consumer. They have also begun to shift sourcing to third countries, including bringing some production to the United States. 

Concurrently, Beijing has implemented a robust domestic stimulus by encouraging banks to relax controls on borrowing and by cutting 2 trillion yuan ($291 billion) in taxes. Furthermore, investment in infrastructure has increased in the first half of the year and Chinese factory output rose 6.3% in June from a year earlier, compared with 5.3% in May. Also, by letting the value of the yuan fall and making Chinese goods cheaper, China has in effect offset some of the impact of the U.S. tariffs – essentially giving the U.S. consumer a tax cut.

The efforts by the Chinese government to lower domestic taxes and support an easier fiscal policy appear to have been, at least temporarily, beneficial to economic growth. If these actions are to be expanded, they may continue to serve as a further stimulus in the second half of this year in areas such as consumption and investment. Although Chinese shipments to the United States have declined, they comprise only about a fifth of its overall exports. By allowing the yuan to fall, China can boost its sales to other countries to offset declines to the United States. 

The trade conflict also does not appear to have had a negative impact on the mindset of the Chinese population at large. Skilled workers and professionals have expressed an open mind to the ongoing trade negotiations, some even welcoming them with a sentiment that “Trump is good for Chinese people” because he has opened up the dialogue between the two countries on trade which in turn has fostered certain welcome reforms in China, as well as tax cuts. Indeed, if Beijing had already planned to institute such measures, then U.S. policy may have provided ample cover for them.

The trade war has also led China to reevaluate existing global alliances, such as those with Japan and Russia. Mending fences with Russia, for instance, is key to the continuation of China’s ambitious “Belt and Road Initiative” of investment and infrastructure projects to connect Asia with Africa and Europe via land and maritime networks. 

With further entrenchment by both sides, and a trade deal increasingly unlikely before next year’s U.S. presidential elections, China appears to be bracing itself for a protracted conflict and may have reason to believe it can “win” if President Trump faces increased political pressures entering the election. As the President recently announced, China may be counting on a Democrat to win the White House to strike a new trade deal. On the other hand, a continuing conflict between two of the world’s greatest economies which has evolved from measures to address intellectual property protection and trade imbalances to currency manipulation, may in the long run lead to recession and hurt growth globally. 

Mark Ludwikowski is the leader of the International Trade practice of Clark Hill, PLC and is resident in the firm’s Washington D.C. office. He can be reached at 202-640-6680 and mludwikowski@ClarkHill.com

AI

Report: U.S. Companies Led AI-Tech Acquisitions 2014-18

.Leading data and analytics company, GlobalData, released a report this week highlighting companies that dominated the artificial intelligence-tech space from 2014-2018. In the report, four out of five top acquirers were U.S. based: Facebook, Microsoft, Apple and Splunk. These companies represent a combined total of 30 acquisitions during the time period studied. Accenture made the list as the only non-U.S. based company, representing six acquisitions total.

“Technology companies have been the dominant deal makers in the AI space. However, with artificial intelligence making inroads into diverse sectors, the buyer universe in expanding and the space is also attracting investments from non-technology companies,” said Aurojyoti Bose, Financial Deals Analyst at GlobalData.

Top Deal Makers-Payment Tech_V2

“The high number of American firms attracting investments in the AI space is a testimony to the country’s dominance in AI technology. The recent launch of American AI Initiative program also augurs well for the development of the sector or start-ups operating in this space,” added Bose.

Additional insights in the report confirm the U.S. as a leading region for targeted acquisitions, representing 70 percent of those acquired by the top five in the list. Regions closely following include the UK, China, India, Canada and Israel due to the talent pool and innovative technology offerings.

Top Deal Makers-Payment Tech_V1 Table

“With increasing adoption of AI across sectors, this space is bound to witness growth in an already burgeoning M&A activity. Corporates are extensively evaluating options to integrate AI in their business operations and automation initiatives. Going forward, AI solutions will be an integral part of their strategies,” Bose concludes.

Source: GlobalData

Five reasons the USMCA won’t be passed easily by Congress

In his recent State of the Union address, U.S. President Donald Trump described the North American Free Trade Agreement (NAFTA) as a “historic trade blunder” and a “catastrophe”. He recounted recent meetings with unemployed Rust Belt workers who have been on the front lines of America’s deindustrialization, imploring Congress to rid America of the NAFTA burden by passing the recently signed United States-Mexico-Canada agreement into law.

Ratification of the agreement, however, is far from certain, and not just because the government is divided along party lines. While it’s true Democrats are leveraging their newfound House majority power to insist on enhancements to the USCMA, there are other factors at play that could stymie the President’s efforts to ratify the trade deal, not least of which is the ongoing row over funding of a border wall, which forced the longest government shutdown in history.

Labor provisions

Perhaps one of the most controversial aspects of the USMCA are the labor provisions outlined in Chapter 23 of the new agreement. The USMA demands that all imports, but particularly automobiles, be manufactured using laborers that have the right to collective bargaining and representation by independent unions. Those labor provisions are critical as much of the impetus behind renegotiating NAFTA was the establishment of a more balanced labor environment between the U.S. and Mexico to minimize the flight of U.S. manufacturers to Mexico where labor wages are only a fraction of those in the U.S. Democrats have noted the Chapter 23 provisions lack enforceability and are unlikely to result in tangible reforms.

The challenge is that putting in place more robust enforcement provisions would require reopening negotiations with Mexico. The governing party in Mexico today is not the same as the one that had negotiated and signed the USMCA. In fact, the conclusion of the negotiations was hastened specifically to ensure the agreement could be signed by then Mexican Prime Minister Enrique Peña Nieto as incoming President Andrés Manuel López Obrador was less inclined to expend his political capital on the new trade deal. Since then, López Obrador’s administration has signalled its support for the USMCA but also that it has no desire to reopen negotiations.

Automotive Content Requirements

Democrats’ demands for stronger labor provision aren’t the only objection to the changes imposed on automotive trade. Republicans have also taken issue with the changes, noting the content requirements are too onerous and against the spirit of open trade.

The content provisions, which require automobiles to have 75% North American content and which prescribe minimums for the use of U.S. steel and aluminum, were the most hotly contested changes in the agreement. While both Canada and Mexico were keen to keep automotive content requirements fairly low and may be receptive to seeing some the changes clawed back, there’s likely little political appetite to reopen negotiations over an issue that was so divisive and which complicated the negotiations from beginning to end.

Section 232 Tariffs on Steel & Aluminum

One of the issues the USMCA agreement failed to address was that of the ongoing steel and aluminum tariffs the Trump administration has imposed on Canada and Mexico, and the associated countermeasures with which each of those countries reciprocated.

Now, Republicans such as Senator Patrick Toomey and Ron Johnson, who chairs the Senate Homeland Security and Governmental Affairs Committee, are echoing the concerns of many U.S. businesses about the impact of the tariffs and stressing their support for the USMCA will be contingent on the tariffs’ repeal. The President, however, has dug in his heels and refused to do away with the tariffs, suggesting instead that he will simply withdraw the U.S. from NAFTA if Congress refuses to ratify the USMCA.

Pharma

Politco Pro recently reported that a group of House Democrats have suggested they cannot support the USMCA if it maintains its current provisions over pharmaceutical intellectual property.

The USMCA increased the period for which drug makers can maintain a patent on high-cost biologics from eight years to 10 years. Democrats fear this will prolong what they see as a period of monopoly for drug makers, enabling them to keep costs high for life-saving drugs.

Environment

The USMCA was an improvement over the 1993 NAFTA agreement in terms of environmental protections. There is specific language about the protection of marine environment and reduction of marine litter and ship pollution, as well as recognition of fishing issues, air quality and the ozone layer. Furthermore, the removal of NAFTA Chapter 11 eliminated the ability for private corporations to sue governments and seek damages for the implementation of environmental laws and regulations that impeded their profits.

But environmental groups and many House Democrats aren’t happy the USMCA excludes mention of climate change and say that – much like the automotive labor provisions – the environment rules lack enforceability and they want to see more definitive language to ensure profit won’t supersede protection.

ITC Report

The aforementioned concerns are only those that have emerged from the text of the agreement itself. Congress has not yet seen the International Trade Commission’s report (the due date for which has been extended to April 19 due to the government shutdown), which will outline the economic impact of the agreement and which could conceivably raise a number of other unforeseen apprehensions.

Only time will tell precisely what sorts of volleys the parties will exchange over the course of the USMCA’s ratification process. What’s certain, however, is that the passing of the USMCA legislation won’t be easy and bi-partisan support may require concessions on the part of an administration that has hitherto been able to govern unimpeded on the trade file.

 

David Rish is president of Global Trade Management at customs brokerage, freight forwarding and trade consulting firm Livingston International. He can be reached at gtmleader@livingstonintl.com.

 

NAFTA 2.0

After more than a year of negotiations and minutes before the midnight deadline, the United States, México, and Canada reached a new free trade, tri-national agreement. The US-México-Canada Agreement (USMCA) will ultimately replace the North American Free Trade Agreement (NAFTA). USMCA or NAFTA 2.0, contains 34 Chapters and 12 side letters covering agriculture, dispute resolution, e-commerce, and labor relations.

1. Background on NAFTA 1.0

Before we can understand the USMCA, it is important to understand the history behind NAFTA. NAFTA, or as it is known in Spanish: Tratado de Libre Comercio de América del Norte (TLCAN), was executed by the United States of America, México, and Canada on January 1, 1994.

The goal of NAFTA was to create a free trade zone between the U.S., Canada, and México. In addition to the core agreement, incorporated in NAFTA are the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC). The NAALC and NAAEC were added with the goal of protecting workers and the environment.

The NAALC is typically referred to as the “Labor Side of the Agreement,” and within the agreement each country agreed to enforce its own labor standards and to strive to improve labor standards within its respective countries. The NAAEC is the “Environmental Side of the Agreement,” within which each of the three countries agreed on principles and objectives for the conservation and the protection of the environment.

NAFTA created the largest free trade area in the world, helping drive down consumer good prices, and boosting economic growth, profits and employment in all three countries.

II. The Impact Of NAFTA to Employers in the Region

Many economic experts note that NAFTA was quite beneficial to the United States.  This benefit came in the form of lowered tariffs and import prices, as well as a narrowed risk of inflation.  Some argued that it also had a positive impact on interest rates in the United States.

From 1993 to 2017, the United States increased its exports of goods to México and Canada from $142 billion to $525 billion, which equates to a third of its total exports. It is estimated that NAFTA helped create at least 5 million direct and indirect jobs in the United States associated with the export of goods.

In México, NAFTA facilitated the growth of the maquiladora industry. A maquiladora is essentially a subcontractor manufacturing operation, where factories import material and equipment on a duty-free basis for assembly and manufacturing. The assembled product may then be returned to the raw materials’ country of origin.  NAFTA had a direct result in the growth and expansion of this industry.

The interdependence of the three economies is seen not only through the growth in the maquiladora industry, but also in the automobile manufacturing industry. For example, by 2020, México will manufacture 25% of all North American cars. Additionally, approximately 75% of Mexican exports are sold to United States consumers, a number which in large part is a direct result of NAFTA.

On September 30, 2018, the United States, México, and Canada completed negotiations of an updated trade agreement now known as United States-México-Canada Agreement—“USMCA,” or as we like to refer to it, NAFTA 2.0.  While the deal was agreed upon by the three countries, it must ultimately be ratified by each country’s legislature and, as such, will likely not go into effect before 2019.

III. USMCA-What it means to Employers

Chapter 23 of the NAFTA 2.0 is dedicated to the issue of labor.  This chapter establishes that all the parties should recognize, adopt, and follow the following rights:

-Freedom of association and the effective recognition of the right to collective bargaining;

-The elimination of all forms of forced or compulsory labor;

-The effective abolition of child labor and, for the purposes of this Agreement, a prohibition on the worst forms of child labor; and

-The elimination of discrimination with respect to employment and occupation.

The USMCA contains specific provisions impacting each of the countries that is a party to the agreement. For example, within the USMCA, there is a provision requiring México to create adequate legislation to ensure freedom of association as well as requirements relating to collective bargaining and labor relations. Additionally, the car manufacturing industry will be impacted by the updated agreement as it provides that a significant percentage of work performed on car manufacturing must be completed by workers earning at least $16 an hour, or about three times what the typical Mexican autoworker currently makes.

Canada’s dairy industry will also be impacted by the USMCA. Under NAFTA, United States farmers had limited access to the Canadian market as a result of tariffs and set quotas on dairy products exported to Canada. These restrictions are eased under the new agreement, thus opening up opportunities in the Canadian market for the United States dairy industry.

While the agreement was officially reached on September 30, 2018, the USMCA will not become effective until ratified by the legislatures of the United States, México, and Canada.  The anticipated date for each country’s respective legislature to pass the agreement is sometime in the middle of 2019.  One important difference between NAFTA and the USMCA is that the USMCA expires in 2034; NAFTA was a perpetual agreement.

IV. Forecast and Conclusion

While it is early to make concrete predictions on the true impact of the USMCA, there will no doubt be some impact to employers across the three countries. For example, those in the automotive industry will need to grapple with increased salary requirements for their employees in México, which may ultimately impact consumer cost. Some analysts predict that the automotive industry will shift manufacturing to Asia in order to reduce costs. This, along with other provisions regarding collective bargaining and labor relations, may be a generating force for labor-related issues for employers, particularly in México. Additionally, the United States dairy industry may see an uptick in labor demands as a result of the new market opportunities in Canada. While these changes may be gradual, growth and updated labor dynamics as a result of the USMCA should be addressed with the guidance and counsel of legal professionals.

 

 

About the authors:

Mishell Parreno Taylor is a shareholder in Littler’s San Diego office.

 

David Leal González is an associate in Littler’s Monterrey, Mexico office.

 

 

 

 

 

 

U.S. – China Trade, Investment Meeting Scheduled

Washington, D.C. – The US and China are scheduled to hold their annual round of discussions on commerce and trade next week in Chicago.

The 25th Session of the China-U.S. Joint Commission on Commerce and Trade (JCCT), slated for December 16-18, will include a roundtable discussion on bilateral investment; a cooperative travel and tourism program; and a discussion on “developing a shared vision of economic leadership.”

According to the Office of the U.S. Trade Representative, for the first time, the JCCT schedule includes a full day of events designed to facilitate private sector engagement with officials from the U.S. and Chinese governments with the goal of “expanding the scope of the JCCT with engagement between businesses from both countries.”

U.S. Secretary of Commerce Penny Pritzker, U.S. Trade Representative Michael Froman, and Chinese Vice Premier Wang Yang will co-chair the high-level plenary talks. U.S. Secretary of Agriculture Tom Vilsack will also participate.

Sixteen JCCT Working Groups meet throughout the year to address topics such as intellectual property rights, agriculture, pharmaceuticals and medical devices, information technology, and travel and tourism.

Established in 1983, the JCCT is the primary forum for addressing bilateral trade and investment issues and promoting commercial opportunities between the United States and China.

Private sector groups involved in the event include the U.S. Chamber of Commerce; The Paulson Institute; World Business Chicago; the U.S. Travel Association; and the Chicago Council on Global Affairs.

12/10/2014