What USMCA is and how it works

What it replaced, and what it is called

The North American Free Trade Agreement entered into force on 1 January 1994. The protocol replacing it was signed on 30 November 2018, a protocol of amendment followed on 10 December 2019, and what the two produced entered into force on 1 July 2020.

One text, three names. Article 34.8 makes the English, French and Spanish versions equally authentic, so no version is the translation of another, and each capital reads its own: the United States-Mexico-Canada Agreement in Washington, the Canada-United States-Mexico Agreement or Accord Canada-États-Unis-Mexique in Ottawa, the Tratado entre México, Estados Unidos y Canadá in Mexico City.

A free trade area, and the wall it leaves standing

Nothing here is a customs union. Each party keeps its own tariff on goods from outside, so a good moving between them has to establish that it came from inside, and most of the agreement's length goes on saying what inside means. Chapter 4 sets the rules of origin, chapter 5 sets how a claim to them is certified, chapter 7 covers what customs does with the claim. The certification is made by the exporter, the producer or the importer, on no prescribed government form, and it travels with the shipment.

The car

Cars carry the heaviest of those rules. Regional value content for passenger vehicles and light trucks is 75%, against the 62.5% NAFTA asked for, phased in equal annual stages and fully in effect from 1 July 2023. Heavy trucks kept 60% at entry into force, went to 64% on 1 July 2024, and reach 70% on 1 July 2027. Seven core parts, the engine, transmission, body and chassis, axle, suspension, steering system and, where fitted, the advanced battery, have to originate themselves or the vehicle does not qualify at all. A producer has to buy at least 70% of its steel and aluminium by value in North America, and from July 2027 steel counts only where every manufacturing process from the initial melting and mixing through the coating stage happens in one of the parties. Aluminium is to be considered for the same treatment in 2030.

Then the labour value content. At least 40% of a passenger vehicle's value, and 45% of a light or heavy truck's, has to come from plants paying an average base wage of at least 16 United States dollars an hour. The appendix writes that wage as a fixed amount, and a producer may claim credits against the requirement for research and development wages and for an engine, transmission or battery plant of its own.

The reading a panel settled and the practice it did not

Mexico requested consultations on 20 August 2021 over how those calculations run, Canada notified its intention to join six days later, and a panel was established on 6 January 2022. The United States read the core parts requirement as separate from the vehicle calculation, so that non-originating material inside a qualifying core part still counts against the vehicle. Canada and Mexico read a core part that qualifies on its own as originating in full when the vehicle is worked out. The panel report was made public on 11 January 2023 and found the United States reading inconsistent with Article 4 of the agreement and with Article 3 of the autos appendix. The 2024 report to Congress on the operation of these rules records that the parties consulted afterwards and had not reached a resolution.

The clock

Article 34.7 gives the agreement a term of sixteen years and puts a joint review of its operation on the sixth anniversary of entry into force, which fell on 1 July 2026. Each head of government confirms in writing whether to extend for a further sixteen years. Canada and Mexico confirmed; the United States did not, and what the same article provides for that outcome is a joint review every year for the remainder of the term. Nothing lapsed on the day. The agreement runs on its existing terms until 1 July 2036, and the extension stays available at any of those reviews if all three confirm it in writing.

Leaving is a separate mechanism with a shorter fuse. Article 34.6 lets a party withdraw on six months' written notice, and provides that the agreement stays in force for the two that remain.

What the text does with everyone else

Article 32.10 governs what a party may do with a country outside the group. Where that country had been designated a non-market economy for trade remedy purposes by one of the parties on the date of signature, and had a free trade agreement with none of them, the party intending to negotiate has to tell the other two at least three months before talks open, and hand them the full text no later than 30 days before signature. If it signs anyway, either of the others may terminate the agreement on six months' notice and replace it with a bilateral one between themselves. The clause names no country.

The investment chapter is not the same for all three. Canada took investor-state arbitration out entirely, and Annex 14-D, which keeps a narrowed version of it, runs between Mexico and the United States alone. Claims begun under NAFTA rules were kept alive by Annex 14-C, whose consent expired three years after NAFTA terminated, on 1 July 2023. Chapter 8 is a single article in which the other two recognise Mexico's direct, inalienable and imprescriptible ownership of its hydrocarbons.