On July 1, 2020, the new trade deal between the U.S., Mexico, and Canada (USMCA) came into effect, replacing the North American Free Trade Agreement (NAFTA) that was signed in 1994. The USMCA enshrined a new set of protections, restrictions, and rules that companies in North America must navigate if they hope to take advantage of tariff-free trade between signatory countries.
The USMCA Trade Deal
At the time of its signing, NAFTA created the world’s largest free trade region, removing, fixing, or limiting tariffs on a multitude of products that moved across the U.S., Mexico, and Canada. Although the deal largely had economic benefits for each country, its removal became a key focus of the 2016 U.S. presidential election. The NAFTA renegotiation was a central pillar in then-presidential candidate Donald Trump’s campaign, which he ultimately fulfilled.
Negotiations began in 2017 and lasted until late 2018. The USMCA trade deal is very similar to NAFTA, but introduces few new provisions that companies must be mindful of. Of specific interest are a guaranteed average wage rate for manufacturing workers in the auto sector, certain environmental protections, and other changes that impact the percentage of content from each country that can come from finished products (like automobiles).
How the USMCA Is Different From NAFTA
The world has changed a great deal since 1994, and the USMCA does include elements that would not have been considered during NAFTA negotiations. For example, the new agreement has rules about where companies can house their digital property. The new chapter on digital trade includes protections for consumers, an assertion parties will facilitate electronic commerce, and protections for companies’ data assets.
NAFTA removed tariffs from most products moving across North America, but had a major focus on three industries: automotive, textiles, and agriculture. These industries are also the most impacted by the new measures in the USMCA.
USMCA Certificate of Origin
There has been a substantial change in the documentation required to take advantage of the preferential trade agreement, as NAFTA Form 434, which served to certify country of origin, has been sunsetted without a replacement. Nevertheless, companies are still required to certify the country of origin. This has created a need for both a new electronic database to capture digital USMCA forms/certifications and new industry adopted formats for communicating compliance.
In a guidance published by U.S. Customs and Border Protection (CBP), companies have been instructed to include nine minimum data points in their claims:
- Importer, exporter, or producer certification of origin.
- Description and HS Tariff Classification of the good.
- Origin criteria (as outlined in Article 4.2 of the agreement).
- Blanket period (for when multiple shipments are required).
- Authorized signature and date.
It’s important to note that, even for goods that see no change from NAFTA to the USMCA, Form 434 will not be accepted as certification of origin. Therefore, all companies seeking to claim USMCA preference must adopt a new system of record and data exchange standard to capture the required information from suppliers and communicate it out to customers and customs.
The De Minimis Rule
Under NAFTA, goods are eligible for preferential trade status when deemed an originated good, or manufactured in a member country. A product can be considered an originated good if it consists of no more than seven percent material from non-member countries. This maximum non-member origination of materials is called de minimis. Under the USMCA the de minimis threshold increased to 10 percent, granting a measure of flexibility for manufacturers to source from outside North America and reducing the net amount of North American sourced material.
The USMCA also includes provisions for environmental protections not found in NAFTA. New rules make environmental laws prohibiting marine littering, excess air pollution, and trafficking in wildlife legally enforceable by party countries. Each country has also committed to upholding standards related to these and other areas of environmental concern.
Human Rights Protections
Under NAFTA, labor rights were protected through side agreements between countries. Article 23.3 of the USMCA commits each signatory country to upholding labor rights through laws and practices, including:
- The freedom of association and the right to collective bargaining.
- The elimination of all forms of forced labor.
- The effective abolition of child labor.
- The elimination of discrimination with respect to employment and occupation.
This commitment affects imports as well as work being done domestically. The U.S. has existing legislation that prohibits companies from importing goods made wholly or in part through forced labor such as the Trade Facilitation and Trade Enforcement Act. Canada and Mexico have now committed to establishing administrative and regulatory measures that can meet the same end goal.
USMCA Impact on the Automotive Industry
The new trade deal has changed the NAFTA provision requiring automakers to use a minimum percentage of North American-made parts, increasing the requirement from 62.5 percent to 75 percent. The North American market for light and medium vehicles is an estimated $728 billion USD, and a 2017 study determined the average car part crosses a North American border eight times during the manufacturing process. That means multiple points for tariff charges and the potential for large costs to companies unable to meet USMCA requirements.
To determine the composition, importers must use the substantial transformation criterion, which is based upon the percentage cost of parts rather than overall part number. As such one engine would be considered a greater portion of a vehicle compared to 100 bolts.
Steel used in automotive manufacturing is subject to its own rules. A minimum of 70 percent of steel used in the final product must be sourced from a North American country.
The automotive job force in Mexico was paid less than those performing comparable work in Canada or the U.S. Wages accounted for one-eighth of manufacturing overhead for Mexican companies compared to one-quarter for American. NAFTA contained no provision to address the wage inequality across borders.
Under the USMCA, however, companies are now required to produce 40–45 percent of their parts from factories paying an average wage of $16 USD per hour.
Mexico was obligated to pass a series of laws reforming labor conditions, including the collective bargaining agreements between auto workers and employers within four years for ratification
USMCA Impact on the Agricultural Industry
The agricultural industry saw a large shift as the U.S. secured greater access to Canada’s protected dairy market, almost quadrupling to 3.6 percent of Canada’s total dairy market, up from one percent under NAFTA. These impacts will be reviewed five years after ratification and every two years after to consider new changes.
More broadly, USMCA provided updated measures to address scientific advancement in the agricultural industry. The agreement adds stipulations for cooperation around sanitary and phytosanitary processes as well as information sharing for biotechnology and gene editing related to agriculture.
The countries have also agreed to set aside the use of competitive grading of wheat, as Canada agreed to rate U.S. wheat no less favorably than its own. A similar agreement on other agriculture products between the U.S. and Mexico was also added.
Steel Under USMCA
Steel is subject to provisions outside of its use in the automotive industry. Under Section 232 of the Trade Expansion Act of 1962, the U.S. has the right to implement tariffs on the grounds of national security. In an agreement separate from USMCA, the U.S. agreed to provide Canada and Mexico with a 60-day consultation period prior to activating Section 232. This agreement guarantees an exemption of 2.6 million Canadain passenger vehicles and $32.4 billion USD worth of Canadian auto parts. Light trucks are also exempt and do not count towards the 2.6 million total.
What USMCA Means for Businesses
The total trilateral merchandise trade between the U.S., Mexico, and Canada is over $1 trillion USD. While the USMCA is in effect, billions of dollars in potential tariff costs will be averted by preferential trade claims. With the removal of the more structured Form 434, businesses have more flexibility in demonstrating eligibility under the agreement. However, as with any process lacking standardization, the potential for human error increases and places a requirement that companies implement a software and database system to maintain USMCA claims.
Additionally, how companies demonstrate compliance with new standards such as the wage guarantee remains to be seen. Companies may opt to request attestations affirming alignment with the wage measures and other incoming standards.
How Assent Helps
Assent is the global leader in supply chain data management and supplier engagement. The Assent Compliance Platform automates supplier outreach, enabling the efficient collection and validation of customs codes necessary for trade. Assent’s USMCA template also simplifies the certification of origin documentation, providing companies with a streamlined process to issue claims for the preferential trade agreement. To learn more, contact our experts.