Dec. 12, 2019

Say Goodbye to NAFTA and Prepare for USMCA

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Global trade has dominated the news all year with tariffs, Brexit, and various international disagreements. But now, just in time for the holidays, comes the opposite: a trade agreement between the US, Mexico, and Canada called USMCA (United States-Mexico-Canada Agreement).

On Tuesday, the US House of Representatives signaled its support for the trade bill, effectively greenlighting the agreement’s ratification in 2020.

So what does USMCA (called CUSMA in Canada and T-MEC in Mexico) mean for US importers and those who do business with them? Will it, as the Office of the US Trade Representative claims, modernize NAFTA into a 21st-century trade agreement leading to freer markets, fairer trade, and robust economic growth in North America? Or is it essentially a rebrand of the same old NAFTA, but with additions that do more to restrict rather than expand trade?

What are the pros of the deal?

The most obvious benefit of the agreement is that it was reached before NAFTA could be torn up, as President Trump threatened, without a replacement. For the most part, the zero tariffs that predominated under NAFTA will still be zero tariffs under USMCA, which also governs newer aspects of trade, like e-commerce. The USMCA also takes a page from the TPP (Transpacific Partnership), by adding labor and environmental rules that aim to make the highest standards apply to all trading partners. Enforcement mechanisms are stronger, too. Customs may, for example, exclude not just a shipment but the factory where it originated from tariff protections. “Companies have more reasons to comply, but not necessarily more clarity on how to do so,” points out Tom Gould, Flexport Vice President of Customs and Trade Advisory.

What are the cons of the deal?

Opponents argue there are too many complex requirements that will have the opposite of their intended effect. Take USMCA’s goal of protecting automobile manufacturing jobs. Under NAFTA the RVC (regional value content) requirements for autos was 62.5%; USMCA takes it to 75%. Will that steep rise protect jobs or cause automakers to throw up their hands and pay the import duty instead of trying to meet this and other complex requirements? “The agreement, by imposing restrictive rules of origin, some of which appear unworkable, would make it harder to produce autos in North America,” cautions Flexport Chief Economist Dr. Phil Levy.

How will importers be affected?

As Levy noted, the new auto rules are complex, which could lead to different interpretations between countries, and even ports and customs offices. Many product categories could suffer from these same uncertainties of interpretation in how rules are applied.

“If you listen to the announcement, you'll hear ‘enforcement, enforcement, enforcement.’ This is likely to be a hallmark of USMCA,” says Gould. The USMCA effectively gives customs agencies a new mandate and impetus to prove their worth. Importers are likely to see their claims scrutinized far more closely. Any company that plans on taking advantage of the new USMCA should prepare for audits and other enforcement activity. Even experienced NAFTA importers should review the new rules of origin, changes to the regulations, and all other provisions that impact their claims.

E is for enforcement

“Enforcement” was a key word in the US House of Representatives announcement of its support for USMCA, suggesting that US Customs is ready to act to enforce its many new provisions. To learn how you can prepare, register for the upcoming webinar, The State of Trade: December Q&A, which will cover the latest on the USMCA and China-US tariffs, how to mitigate the cost of tariffs to your supply chain, and other timely topics.

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