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U.S. or Them: United States-Mexico-Canada Agreement Takes a Page From the Secondary Sanctions Playbook to Freeze Out Non-Market Economy Nations (i.e., China)

The recently published text of the United States-Mexico-Canada trade agreement (USMCA) includes a peculiar provision that confers on each of the parties the right to terminate the USMCA if any of the other parties enters into a “free trade agreement” (FTA) with a country determined by any of the USMCA countries to be a “non-market” economy.

USMCA’s “Non-Market Country” Provision

Article 32.10 of the USMCA (Non-Market Country FTA) adheres the United States, Mexico, and Canada to the binary choice of continuing to be a party to the trilateral agreement or enter into an FTA with a country that, as of the date of signature of the USMCA, was (1) a “non-market” economy and (2) with which a USMCA party had no FTA. Entry by the United States, Mexico, or Canada into an FTA with a “non-market” economy country allows the other USMCA parties to terminate the agreement (with six months’ notice) and “replace” the USMCA with a bilateral agreement between the exiting/objecting country and the country that entered into the FTA with a non-market economy nation.

USMCA Parties May Unilaterally Determine “Non-Market” Economy Status

The USMCA does not define “non-market” economy. Rather the agreement vests the United States, Mexico, and Canada with apparently unlimited latitude to unilaterally determine that a country maintains a “non-market” economy “for purposes of its trade remedy laws.” Thus, it appears that a country like China– widely believed at this time to be the primary target of Article 32.10–can be determined by any USMCA party to be a “non-market” economy nation.

U.S. or Them: Secondary Sanctions Playbook

Insofar as the USMCA requires the parties to choose between maintaining the trilateral trade agreement or entering into an FTA with a non-market economy country, the USMCA imports the premise that underlies U.S. secondary sanctions (related to Iran and North Korea), which essentially require non-U.S. persons to choose between doing business with the United States or with sanctions targets under threat of secondary sanctions (i.e., non-U.S. persons who do business with sanctions targets are themselves subject to U.S. sanctions that prohibit U.S. companies and individuals from doing business with them).

The explicit incorporation of the “us or them” paradigm into the USMCA is noteworthy– indeed, it is unprecedented in the FTA context–and it is worth watching if it will be replicated in any future U.S. trade agreements with single countries (e.g., Japan) or blocs (e.g., the European Union). (Notably, the multilateral Trans Pacific Partnership, scrapped by the Trump Administration in early 2017, excluded China by not including the country, but did not provide the United States with the stronger leverage and flexibility that a bilateral or trilateral agreement like the USMCA does).

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For more information, contact Hdeel Abdelhady at habdelhady@masspointpllc.com. Article 32.10 of the USMCA can be viewed at the USTR’s site here (note that the text of the USMCA is “subject to legal review for accuracy, clarity, and consistency.”)

 

Post Author: MassPoint PLLC

MassPoint PLLC is a boutique law and strategy firm that works with diverse clients to meet legal, strategy, and risk management needs in a globalized, complex world.