The long-awaited implementation of the new United States-Mexico-Canada Agreement (USMCA) may be happening just in time for Christmas this year! On 12/10 Speaker Pelosi announced that Democrats had reached an agreement with the Trump administration on moving forward with the USMCA trade agreement.
The USMCA will modernize an outdated NAFTA that went into effect on January 1, 1994. The purpose of the new USMCA is to continue to support a free market and fair trade between the United States, Canada, and Mexico, while modernizing the agreement to incorporate new technology and current trade trends. The changes between NAFTA and the USMCA will impact multiple industries, but none more than the automotive industry. The USMCA sets a higher regional value content (RVC) threshold for different automotive sectors. (RVC) rules require that a product include a certain percentage of originating content. For example, the RVC for passenger vehicles and light trucks is now 75% under the USMCA, whereas it was 62.5% percent under NAFTA. Further, the RVC for principle parts and complementary parts increased to 70% and 65% respectively, whereas NAFTA maintained lower RVC thresholds of approximately 60% (net cost) for those items. Along with an increase in the RVC threshold, the USMCA includes a new Labor Value Content (LVC) requirement. This means that in order to qualify for preferential treatment, at least 40% of the value of passenger cars and 45% of the value of light trucks must be produced in North American facilities where workers make an average of $16 per hour. This is a major change from NAFTA, as it did not have a set threshold, or even requirement to use high-wage North American labor in vehicle or parts production.
The USMCA will also change multiple provisions that affect Country of Origin (COO) requirements. First, the USMCA eliminates provisions relating to the Country of Origin marking rules which are currently found in Part 102.20 of the Customs Regulations. This is a significant (but welcome) change, as there will no longer be two sets of rules to be analyzed – one for qualifying the good, and the other to determine which country of origin should be used for marking purposes. We assume the non-preferential marking rules contained in Part 134 of the Customs Regulations would be the replacement for the NAFTA Marking Rules.
Second, the USMCA modifies the requirements for certificates of origin. The biggest change is that the certificate can now be completed by the importer, producer, or exporter if that individual has the documentation to indicate the good is originating. Also, under the new agreement, there is no prescribed format for the certificate to take, meaning that the data elements that indicate the good is both originating, and meets the USMCA requirements, may be provided on an invoice, or any other document. This is a significant difference from the rules under NAFTA, which required a specific NAFTA certificate form to be validated at the time of entry. While this change makes it easier for more parties to certify that goods qualify under USMCA, it may make it more difficult to spot deficient or invalid claims due to varying templates or disparate forms.
Third, USMCA increased the de minimis threshold for non-originating content from 7% to 10%. While there are some exceptions, a good will now qualify as originating if the value of all non-originating material is not more than 10% of the transaction value or total cost of the goods. This change should result in helping companies qualify more products for USMCA treatment than are eligible under NAFTA.
The regulatory changes under the USMCA can induce major ramifications for your business; therefore, businesses should take proactive measures to understand how changes will affect it in its respective industry. For instance, both U.S. importers and exporters should review specific origin rule changes on a product-by-product basis to determine whether there are any differences between NAFTA and the USMCA. Further, if a company is involved in the automotive sector, it may be required to source more of its products from the United States in order to meet higher RVC requirements. In addition, a company with a manufacturing facility in Mexico may be required to increase its current labor rates to meet the new LVC requirements.
The International Trade Commission recently released a report that estimated that the USMCA would raise U.S. real GDP by $68.2 billion and U.S. employment by 176,000 jobs. The report also estimated that U.S. exports to Canada would increase by $19.1 billion and to Mexico by $14.2 billion, while U.S. imports from Canada would increase by $19.1 billion and from Mexico by $12.4 billion. As such, now is the time to review the new USMCA rules and evaluate any internal changes that need to be made. Companies should begin updating their compliance policies and procedures so that when the USMCA is enacted, there are no surprises. As an added measure, businesses should begin training key personnel of the various nuisances of the USMCA to ensure that they remain compliant though the imminent transition period.