NAFTA 2.0 - Provisions and Effects of the United States-Mexico-Canada Agreement

Posted on July 09, 2020

On July 1st, the new United States-Mexico-Canada Agreement (USMCA) went into effect. Also known as the Canada-United States-Mexico Agreement (CUSMA) and the Tratado entre México, Estados Unidos y Canadá (T-MEC) in Canada and Mexico respectively, this free trade agreement was designed to replace the 26-year-old NAFTA. Rather than completely restructuring the previous NAFTA, the USMCA is primarily a renegotiation of the original agreement intended to benefit each participating country. In addition to renegotiated terms, the USMCA also includes new stipulations on labor rights, environmental standards, intellectual property, and digital trade.

Some of the significant provisions outlined in the USMCA are:

De Minimis Values

  • De Minimis values are the cost thresholds which a good must exceed to be subject to taxes and/or duties. Canada will raise their De Minimis value for the first time in years (to CAD 40), and Mexico will raise its limit also. This change will make cross-border shipping simpler for smaller businesses by raising the cost threshold to keep up with years of inflation.

Automobiles

  • The USMCA requires that 75% of an automobile's value must come from the origin region, up from 62.5% in the NAFTA. Considering that the US has the most robust automobile industry of the three nations, this will favor domestic sourcing of automobiles to promote US employment rates. Some automobile manufacturers who were reliant on outsourcing a portion of their production may find their supply chains disrupted by this change.

Dairy

  • One of the significant inclusions of the USMCA is to allow the US greater access to the Canadian dairy market. US farmers are now allowed tariff-free access to 3.6% of the 15 billion dollar market. Furthermore, specific pricing provisions have been lifted, and the duty-free limit for purchases from the US increased to $150 (from $20).

Labor

  • The USMCA dictates that 40%-45% of US automobile parts must be manufactured by workers earning at least $16 an hour, by 2023. Mexico was also required to pass new labor laws that gives greater protection and bargaining power for unions.

Intellectual Property

  • The USMCA features stricter protections on various types of intellectual property. Copyright length in Canada has been extended to 70 years beyond the life of the author (from 50 years). Patent length for biological substances has been extended to 10 years (from 5) and industrial designs were also extended to 15 years (from 10). Critics are worried that the increase in patent length for biological substances will further exacerbate prices in markets such as pharmaceuticals.

Digital Trade

  • The USMCA seeks to promote digital trade by explicitly prohibiting customs duties from applying to any digital products distributed electronically. Additionally, local physical data storage requirements have been relaxed due to companies no longer needing to maintain headquarters in other countries. Companies are also further protected by the USMCA against content that their online users may produce.  

The updated and new provisions regulate which goods qualify for preferential tariff treatment, but there have been minimal process changes from an actual shipping perspective. The primary change is the updated proof of origin requirement for shipments meeting certain value thresholds. The new “Certification of Origin” replaces the previous “Certificate of Origin”. There is no set format outlined for the Certification of Origin, but the following data elements are required.

  1. Indicate the Certifier (Importer, Exporter or Producer)
  2. Name, Address and Contact Information of the Certifier
  3. Name, Address and Contact Information of the Exporter (if different from the certifier)
  4. Name, Address and Contact Information of the Producer (if different from the certifier, or exporter)
  5. Name, Address and Contact Information of the Importer
  6. Description and HS Tariff Classification (6 digit level) for the Goods
  7. Origin Criterion for the Goods, as set out in Article 4.2: Originating Goods of the USMCA Rules of Origin
  8. Blanket Period (date range up to 1 calendar year)
  9. Authorized Signature and Date

               Compared with the NAFTA, whose provisions mostly went unchanged for 24 years, the USMCA has more frequent reviews and a shorter minimum lifespan. Some businesses affected by the new trade agreement are worried that the agreement could end up being too short-lived. The USMCA features enhanced favor for domestic production of goods, which leads to a greater incentive for countries to shift production to the dominant US consumer market. If the USMCA’s lifespan ends up being shorter than expected, the businesses which fund US-based production and supply chain infrastructure to take advantage of these favorable tariffs may not see a return on their investment.

The USMCA must be reviewed by the three constituent nations every six years. The agreement is set to expire after 16 years unless the countries agree to extend the deal during these reviews. Further information on the USMCA can be found on the US Trade Representative website: https://ustr.gov/usmca

Contributor: Tyler Lesley


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