On July 1, 2020, the North American Free Trade Agreement, or NAFTA, is set to expire, and the United States-Mexico-Canada Agreement (USMCA) will take its place. NAFTA had a good run. It went into effect in 1994 and created the world’s largest free trade zone between the United States, Canada and Mexico.
The goal of NAFTA was to bolster trade by reducing or eliminating most trade barriers (primarily in the form of tariffs), and bolster trade, it did. Between 1993 and 2017, trade between the three countries rose from $290 billion to more than $1.3 trillion.
Now, the USMCA will take its place. The new agreement modernizes NAFTA and addresses topics that were less relevant in 1994, such as e-commerce and the flow of international data.
A United States International Trade Commission study on the estimated impact of the USMCA predicts that United States exports to Canada will likely increase by $19.1 billion USD, exports to Mexico will rise by $14.2 billion USD, and exports to the world, including Mexico and Canada, will grow by $54.2 billion USD.
So how does the USMCA look different from NAFTA? And what, if anything, do exporters need to look out for? Here’s a list of things to be aware of as we make the switch to a new trade agreement.
The first thing to know about the changes from NAFTA to the USMCA is that there won’t be many. The two agreements are largely similar.
NAFTA reduced or removed most tariffs between the United States, Mexico, and Canada, so the USMCA will focus instead on rule changes and non-tariff barriers. Zero tariff products under NAFTA will remain so under the USMCA. Most of the impact of the USMCA will be small, and industry specific.
This one is big. As you have probably heard, the USMCA raises the regional content requirements for passenger vehicles from 62.5% to 75% to meet duty-free standards. In addition, 70% of the steel and aluminum used in production must be sourced from North America. The USMCA does away with "deemed originating" and "tracing" components, something that was allowed under NAFTA.
Finally, a new labor valuation content requirement will require 40-45% of automotive content to be produced by workers making at least $16 per hour. These changes will likely raise the cost of production somewhat, and that cost will likely be passed on to consumers.
The change to automotive regulations is expected to be one of the most impactful provisions of the USMCA, but car components won’t be the only goods facing new rules of origin requirements. The USMCA will require certain yarns and parts of garments to be sourced from North America.
It also adds several process methods to the list of criteria for determining the origin of chemicals. This should provide manufacturers with another option for conferring origin in the Harmonized Tariff Schedule. Although these changes are expected to have a minimal economic impact overall, they are important for exporters to be aware of.
There will be a few changes to intellectual property rights under the USMCA. The agreement will lengthen the copyright on intellectual property for 70 years after the life of the author (under NAFTA, it was 50 years), and will extend intellectual property rights enforcement to digital products.
The USMCA also contains a chapter on digital trade, which prohibits customs duties from being applied to electronic products (e-books, videos, music, etc.). The agreement bans data localization, and ensures that suppliers will not be restricted in their use of electronic signatures. NAFTA did not cover these topics because it was negotiated in 1992, prior to the advent of most of these technologies.
Another way that the USMCA takes steps to galvanize trade is by reducing tariff rate quotas. In case you aren’t familiar, tariff rate quotas are a mechanism that lets countries import a limited amount of a product with reduced or removed import taxes. Once the quota is exceeded, said country can impose duties.
Canada is one example. Our northern neighbor uses a quota system to shield its agriculture industry from competition. According to the Congressional Research Service, Canada’s over-quota tariffs can reach 315%.
As part of USMCA negotiations, Canada has agreed to expand its tariff rate quotas for 14 categories of dairy products, covering 51 lines in the Harmonized Tariff System. This could give exports in the United States access to up to 3.6% of the Canadian dairy market.
The USMCA raises the de minimis threshold for products that are imported from Canada and Mexico. When NAFTA was enacted, e-commerce was not what it is today, and cross border shipments of relatively low value items was not a big priority. Now that e-commerce has blossomed into a $637 billion dollar industry, cross-border, lesser-value shipments are getting another look.
When the USMCA goes into force next month, Canada’s de minimis threshold will rise from $20 CAD to $150 CAD. Mexico will raise its de minimis threshold on July 1 as well, and won’t collect duties until purchases reach $117 USD, up from $50 USD.
One new feature of the USMCA is its review and term extension’, also known as a sunset clause. The text of the USMCA reads, "This Agreement shall terminate 16 years after the date of its entry into force, unless each Party confirms it wishes to continue this Agreement for a new 16-year term." Unlike NAFTA, the USMCA is meant to expire.
While NAFTA did include a Free Trade Commission (which is retained in the USMCA) made up of three trade ministers with the ability to review and update the agreement, it did not include language regarding expiration.
Six years after the USMCA is implemented, the United States, Canada, and Mexico will jointly revisit the agreement, at which time they can decide whether to extend it for an additional 16 years. If the three countries decide unanimously to renew the USMCA, it will push the sunset period back. If not, additional reviews will take place for the following decade until concerns are resolved or the agreement expires.
The big takeaway is that changes from NAFTA to the USMCA will be limited. The USMCA is more of a facelift than an overhaul. Certain industries will no doubt be impacted, but as long as you are prepared, the transition is not something that should keep you up at night.