[author: Karen Kroll]
Report on Supply Chain Compliance 3, no. 16 (August 20, 2020)
The United States-Mexico-Canada Agreement (USMCA), which went into effect July 1, 2020, contains multiple provisions that will affect supply chains. While the U.S. Customs and Border Protection has stated that it recognizes businesses need time to adjust to the new agreement and will “show restraint in enforcement” through 2020, supply chain and compliance professionals will want to start now in reviewing their operations to ensure they’re in compliance.
“The USMCA is a reaffirmation of the importance of Canada and Mexico to the U.S.,” said Erik Lee, executive director with the North American Research Partnership, an independent think tank that researches how the United States, Mexico and Canada can position themselves for success in the 21st century. As of December 2019, Mexico and Canada were the U.S.’s top trading partners, according to information from the U.S. Census.
The USMCA is like version 1.2 of the North American Free Trade Agreement (NAFTA), said Seth Stodder, a partner at the law firm Holland & Knight with expertise in international trade. With a few exceptions, it builds on the principles contained in NAFTA, he added. Since NAFTA was signed in 1994, America’s trade with Canada has more than doubled;with Mexico, it has more than quintupled.
These shifts have led to “incredibly dynamic economies and integrated supply chains that cross borders,” Stodder said. The USMCA preserves much of this, he added.
At the same time, USMCA does contain significant changes. When Dan Ujczo, an international trade attorney with Dickinson Wright, analyzed the agreements, he found slightly less than 60% of the language in the USMCA is the same or similar to NAFTA, while 40% is changed. “Moreover, this includes significant changes to bedrock industries like textiles and auto,” he added.
Indeed, the USMCA includes multiple provisions designed to encourage U.S. investments in the automotive sector, according to a fact sheet from the Office of the U.S. Trade Representative. One is an increase in the regional value content, or the percentage of the value of the goods that must be from North America to qualify for preferential treatment under the USMCA. The regional value content, which under NAFTA was 62.5%, has been increased to 75%. Similarly, at least 70% of steel and aluminum purchases must originate within North America.
These changes will make it more difficult for semifinished products from Asia to move through Mexico and then qualify for USMCA treatment, as sometimes happened under NAFTA, Ujczo said. As a result, some organizations may need to change sourcing operations to meet the higher thresholds. “You want your goods to be deemed as originating within the USMCA because that usually means zero tariffs,” he added.
Another provision within the USMCA stipulates that a certain percentage of labor used in passenger vehicles must come from workers earning an average of USD 16 per hour. This provision, which had no predecessor within NAFTA, promises to be significant, given that the average Mexican auto worker’s wages hover around USD 3 per hour. “It will require auto supply chain professionals to evaluate their labor forces to assess compliance with USMCA minimum wage requirements and make adjustments where necessary, either to wages paid or to where most of the vehicles are made,” Stodder said.
The USMCA changes some of the de minimis shipment values, or maximum shipment value at which products can enter while taking advantage of lower taxes and/or fees. For taxes, Canada doubled its de minimis level from CAD 20 to CAD 40, so shipments below USD 40 aren’t subject to taxes. It also now allows duty-free shipments of up to CAD 150. Mexico will continue to provide a tax-free de minimis of USD 50 and allow duty-free shipments of up to USD 117. This should make it less expensive for companies to move small quantities of products throughout North America.
NAFTA required exporters to complete a Certificate of Origin form, certifying that the goods being exported qualified for the preferential tariff treatment accorded by NAFTA. A producer or manufacturer also could complete the certificate, which then would be the basis for an Exporter’s Certificate of Origin.
Instead of this certificate, the USMCA requires companies to identify nine data elements to claim preferential treatment. These include the name and contact information for the certifier, importer, exporter, and producer and a description of the goods and their tariff classification. This information “may be provided on an invoice or any other document.”
This shift is key for several reasons. While the information required under the USMCA is largely the same as it was under NAFTA, companies don’t need to complete a separate form. That will reduce administrative work.
At the same time, companies can’t simply rely on a certificate of origin to demonstrate their goods qualify for preferential treatment. The certificate of origin required under NAFTA had, in some cases, devolved into something like a “get out of jail free card,” Ujczo said. They would complete the form without really checking the information.
Under the USMCA, companies need to know their suppliers’ suppliers, Ujczo said. While this was always the case, the USMCA prioritizes substance over form, he noted. “Data is the key, and companies will need to be able to demonstrate that they did the analysis under USMCA,” Ujczo added.
The chapter on environmental obligations in the USMCA is “part of a very aggressive position the United States Trade Representative is taking with respect to trade,” Lee said. “That is— countries shouldn’t use relaxed environmental standards to gain an advantage in terms of trade.” The text states: “No Party shall fail to effectively enforce its environmental laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties.”
Moreover, these provisions are fully enforceable. That’s “a significant departure from NAFTA,” Lee said. “I think this is something companies should keep in mind.” While the agreement reaffirms the relationships between the three countries, it’s also a tool for the U.S. government to safeguard the interests of U.S. companies, he added.
Companies don’t need to panic over the need to comply with the USMCA, but those that haven’t begun compliance work “definitely need to do their homework now,” Ujczo advised. In addition to government agencies, many larger companies are reaching out to their suppliers. “They’re saying, ‘You need to verify you’ve done a USMCA analysis,’” he said. Companies that don’t risk losing business.
Key to USMCA compliance is knowing each supplier and their suppliers. While this also was needed to ensure compliance under NAFTA, it is a good business practice. In fact, under the Customs Trade Partnership Against Terrorism, U.S. Customs and Border Protection works closely in partnership with the private sector, as well as Canadian and Mexican border agencies, to help importers and others assess and strengthen the security of their supply chains, Stodder said. Along with analyzing whether goods qualify for USMCA preference, companies need to check on security, as well as issues like environmental compliance and preventing the illegal use of forced labor, which are banned under U.S. law, he explained.
In the near future, the importance of the USMCA likely will increase, given the impact of the COVID-19 pandemic. “The pandemic will shorten supply chains and bring many back to North America,” Stodder said. While it’s probably not realistic that all the jobs currently located far outside North America will return to the U.S., some likely will, he added, as companies evaluate the risks of long global supply chains and see the benefits of free trade under USMCA. Mexico in particular could see more jobs, Stodder noted.
The pandemic has revealed enormous vulnerabilities in supply chains for pharmaceutical products and personal protective equipment, among other products. “It’s not just supply-chain security but resilience—making sure the supply chains work, aren’t easily disrupted, and reliably deliver the important products and resources that companies and people depend on them for,” Stodder said.
Review the USMCA to identify provisions most relevant to your organization and assess your readiness for them.
Evaluate your suppliers’ suppliers, checking that they also comply (or are working toward compliance) with the USMCA.
Contact Lee at firstname.lastname@example.org, Stodder at email@example.com, and Ujczo at firstname.lastname@example.org.