Advanced Guide to the USMCA
Wins and Losses for the US, Mexico, and Canada in this New Free Trade Agreement
New Trade in North America
Under the political pressure from President Donald Trump following up on his campaign promise, the North American Free Trade Act (NAFTA) was renegotiated by the US, Canada, and Mexico. The United States-Mexico-Canada Agreement (USMCA) is the new free trade agreement between the three countries. This free trade agreement is important because importers do not have to pay import duties on goods originating from either the US, Mexico, or Canada.
Import duties can be very expensive; e.g., a 3% import duty on a $1 million worth of products equates to $30,000 that the importer must pay. Thus, by avoiding the $30,000 import duty, goods qualifying under a Free Trade Agreement will save importers and companies a significant amount of money. Understanding this is a crucial step to increase profits and maximize value for shareholders. While much of the agreement between the three countries remains the same, there are important changes.
I. Important Changes from NAFTA to USMCA
USMCA’s adjustment to the Certificate of Origin requirement is a major catalyst to increase trade amongst the US, Mexico, and Canada.
The most fundamental aspect of USMCA is ensuring the product both comes from and goes to either the US, Mexico, or Canada (e.g., a product made in Mexico is then exported to the US or Canada will not have to pay a duty). This focuses on the Country of Origin mandate. If a product comes from a country that is not the US, Mexico, or Canada - the product can still qualify under USMCA if the product goes through a change significant enough for it to qualify under a change in the tariff classification.
For example, if bolts come from China and are placed inside a car built in Mexico to be exported to the US or Canada, this would create a tariff-shift where the bolts would no longer be imported under the tariff classification for bolts. It would now be imported under the tariff classification applicable for cars which will be reflected on the Certificate of Origin document.
What is a Certificate of Origin
When determining the country of origin, an importer must complete a Certificate of Origin document. The Certificate of Origin document is a legal document that certifies the product being imported comes from one of the three USMCA countries. The certificate of origin has new changes such as:
It now may be completed by an importer, in addition to the producer and exporter,
There is no uniform Certificate of Origin used in all three countries as previously with NAFTA, and
There are nine data elements that must be stated on the document.
Download a Sample USMC Certificate of Origin
While the country of origin is a critical issue in USMCA and international trade, all three countries had created changes that were beneficial to each country which is discussed in the next section.
II. Canada’s Wins and Losses under USMCA
Canada is a unique country because it is one of the few countries that shares its border with only one country, and that country is the US - the world’s largest economy and most dominate military power in existence. Therefore it behoves Canada to maintain a good working relationship with the US because the majority of Canadian exports are to the US.
Canadian pride was protected and even drafted into the USMCA.
During the negotiations, Canada was particularly concerned about maintaining Canadian cultural and identity and not being swallowed up by US culture. Therefore, Canada has often used non-tariff barriers to protect local industries from foreign competition primarily from the US. For example, the Invest in Canada Act requires government approval for companies looking to invest more than $5 million into a Canada company. This culture exemption was maintained in the USMCA. Canada is free to ban foreign digital content, primarily from the US, and may require a foreign company to pay money into a government program in exchange for its media content reaching the Canadian market. In addition, Canada’s banks and telecommunication companies have maintained overall control of those respective industries in Canada.
In addition, Canada was also successful in getting better dispute resolution tactics. Now if there is a treaty violation, companies and investors can no longer bypass Canadian courts and sue Canada in a private international tribunal. Companies must sue in domestic Canadian courts. This was a major victory for Canada.
Concessions made by Canada include US dairy related products now have larger access to Canada. In addition, Canada’s big data no longer has to be physically stored in Canada.
Overall there was wide consensus in the passage of USMCA for Canada.
III. Mexico’s Wins and Losses under USMCA
Mexico and the US are critical trade partners. Many of the statistics show that:
Mexico is a key trade partner to the US and the USMCA fully protects the products and services that flow from each side of the border.
Mexico is the third largest commercial partner for the US,
28 US states have Mexico as their first or second largest commercial partner,
6 million jobs in the US depend on trade of goods and services with Mexico, and
40% of Mexican exports to the US have value added to them in the US.
Based on these market statistics, and despite what the media shows, both the US and Mexico were eager to come to an agreeable solution. Mexico wins by maintaining the prohibition on export duties. However, Mexico implemented plans for stronger methods to combat corruption and bribery. In addition, increased labor and environmental rules are implemented.
III. United States Wins and Losses under USMCA
Since President Trump pressed for the change in NAFTA, it is important to state the improvements for the US. One of the most positive changes pertain to automobiles. 30% of work completed on passenger vehicles must be performed by workers earning at least $16 per hour. The percentage will increase to 40% in 2023. This is a way to force car makers to bring jobs back to the US. 75% of passenger vehicles and light truck components must be manufactured in a USMCA country by 2023. In addition, 70% of steel and aluminum purchases must originate in a USMCA country.
Other changes include greater access to Canadian markets as well as the US increases its de minimis exception to 10%.
IV. Conclusion
Overall, USMCA allows all three countries to walk away from the negotiation table satisfied. With new regulatory clarity, companies can implement strategies to increase their return on investment. Foreign companies will likely continue to create manufacturing facilities in Mexico. This will allow them to use Mexico’s cheaper labor and its proximity, to export goods to the US duty free and avoid country specific import quotas. Companies can also create distribution facilities and warehouses in Canada to fulfill its US orders to take advantage of USMCA’s de minimis exception and lack of import duties. US exporters can continue to minimize risk by taking advantage of the EXIM bank’s insurance policies against export nonpayment.
Geremy Johnson, Esq. is a customs and trade lawyer that offers various trade and customs legal services. Please contact him with your trade and legal needs.