An agreement was reached late last evening between Canada and the U.S. that will now conclude the negotiations on a revised trilateral NAFTA. The new agreement is to be called the U.S., Mexico, and Canada Agreement (USMCA) and will support North American manufacturing and mutually beneficial trade.
The complete agreement text can be found here.
With respect to the cosmetics and personal care products sector, highlights include the following:
1.Tariffs
Under this agreement, and subject to one exception, the tariff free movement of our products will continue between Canada and the U.S. (Canada & Mexico are already signatories of the Trans-Pacific Partnership trade agreement that would continue tariff-free access between our two countries even without a new NAFTA).
The one current exception is the retaliatory tariffs on certain cosmetics and personal care products imposed by Canada on July 1st, 2018, in reaction to the Trump administration’s imposition of Section 232 (national security) tariffs on Canadian steel and aluminum. We understand that a resolution to this issue was not included in the NAFTA negotiations (likely because of time) but is still under discussion as a separate issue. (Please note item 8 below on Canada-U.S. Side Letters). CA will report back when we have further information.
2. Cosmetics Annex
The revised NAFTA includes a chapter on “Technical Barriers to Trade” which includes a specific Cosmetics Annex that essentially mirrors the Cosmetics annex included in the Trans Pacific Partnership trade agreement with two additions (or partial additions) requested by our industry.
The first addition recognizes the importance of the aligned use of INCI labelling and commits the parties to working towards further alignment with a requirement to report back one year after implementation of the agreement. Industry had sought agreement by the U.S. to accept the sole use of Latin-based INCI terms where they currently require the English equivalent (i.e. aqua/water). Industry estimates that this adds approximately $113 million to the cost of U.S. exports in re-labelling costs. The U.S. Food & Drug Administration (FDA) was not prepared to agree at this time but agreed to discuss it further. Industry will continue to pursue this benefit under the Annex.
The second addition is an agreement between Canada and the U.S. that recognizes for the first time products at the interface of “cosmetics” and “drugs” or “natural health products”, and the need for appropriate regulatory requirements for such products. One provision would eliminate the costly requirement to quarantine and conduct confirmatory re-testing for such products upon importation which industry has estimated at an approximate annual cost of some $100 K per product. Although eliminating this provision is included in Health Canada’s Self-Care Products Framework (and has been partially eliminated under the Sunscreen Pilot), the specific recognition of products at the “cosmetic/drug” interface in a trade agreement is a significant gain for our industry and a useful precedent for future trade negotiations and regulatory reform initiatives. Additionally, this new provision calls for further discussion on aligning labelling for these products which industry will pursue with regulators for further alignment and mutual recognition.
3. De Minimis Shipment Values
Mexico and Canada have agreed to raise their de minimis shipment value levels. Canada will raise its de minimis level from C$20 to C$40 for taxes (i.e. HST). Canada will also provide for duty free shipments up to C$150. Importantly, de minimis shipment values relate only to express shipments. Mexico will continue to provide USD $50 tax free de minimis and provide duty free shipments up to the equivalent level of USD $117.
4. Rules of Origin
Chapter 33 (Essential Oils and Resinoids; Perfumery, Cosmetic or Toilet Preparations) and Chapter 34 (Soap, Washing Preparations, Lubricating Preparations, etc.) outline changes (including heading changes). We are currently seeking clarification from Global Affairs Canada if these include any substantive changes from the current NAFTA rules and will report back. (These provisions are found in the full text noted above under “Rules of Origin”).
5. Dispute Settlement
The provisions of NAFTA’s Chapter 19 for dispute settlement remain intact. We are waiting for confirmation that they will apply to Mexico as they were not included in the text of the U.S. – Mexico agreement reached earlier.
6. Entry into Force
This new agreement will come into force the 1st day of the third month following notification that the internal requirements for approval have been met by all three parties. Consequently, the agreement will likely become operation sometime in 2019.
7. Term
The new agreement is for a 16 year term with a provision for a review after 6 years in which the parties can agree to renew for 16 years (therefore adding to the term). Parties can also withdraw by providing six months notice.
8. Side Letter on U.S. Section 232 Tariffs (National Security)
Canada and the U.S. have agreed to two side letters with respect to the U.S.’s use of “section 232 (national security) tariffs”.
The first addresses the application of such tariffs with respect to autos and auto parts by agreeing that should Section 232 be used, the U.S. would exclude the first 2.6 million vehicles, light trucks, and 32.4 billion worth of auto parts exported to the U.S. annually. As Canada currently exports less than these amounts (about 1.8 million vehicles annually), this has effectively removed the threat of future U.S. auto tariffs and any resulting retaliatory tariffs (which could be expected to include our products).
The second letter addresses Canada’s concerns with section 232 tariffs generally with the U.S. agreeing that should Section 232 be used, the U.S. would provide Canada with a 60 day period to negotiate an “appropriate outcome based on industry dynamics and historical trading patterns”. Canada would also retain the right to seek redress through various dispute mechanisms as well as to “take a measure of equivalent commercial effect in response” (i.e. retaliatory tariffs). It is expected that in light of this side letter, Canada and the U.S. will attempt to settle the issue with Section 232 steel and aluminum tariffs and the resulting retaliatory tariffs (that are now affecting our industry).
CA will continue to keep you updated on developments. Contact: Susan Nieuwhof, snieuwhof@cosmeticsalliance.ca
