July 25, 2019 – After 1,809 pages, 34 chapters and 14 months of painstaking – and, at times, fractious – negotiations, the United States, Canada and Mexico came to terms on an update to the North American Free Trade Agreement (NAFTA) on September, 30 2018.
The smooth passage of the Canada-United States-Mexico Agreement (CUSMA, or USMCA as it’s known in the U.S.) is, however, by no means a sure thing. The revamped free trade agreement may have been agreed to – and signed by the leaders of all three countries in November 2018 – but it still requires legislative ratification.
US tariffs on steel and aluminum were one stumbling block. Citing national security reasons, the US imposed duties of 25 and 10 per cent respectively on steel and aluminum, including imports from Canada and Mexico. Both neighbours were unhappy about the tariffs.
In May 2019, the US halted the tariffs after Canada and Mexico agreed to increase measures to prevent Chinese imports making their way into the US. With this hurdle now out of the way, ratification is more likely. Canada’s Minister of Foreign Affairs, Chrystia Freeland, said that with tariffs no longer an obstacle, Canada would move quickly to ratify the trade deal.
Mexico’s labour laws were another sticking point. In the US, Democrats have argued that the CUSMA must give workers in Mexico the right to unionize. Towards the end of April, the Mexican Senate passed a bill to strengthen the rights of trade unions. Mexico’s President Andres Manuel Lopez Obrador also urged the US to ratify the NAFTA replacement.
There may be a rocky road ahead, but free trade is the backbone of all three countries, and the economies of the US, Mexico and Canada are inextricably intertwined. If all goes well, CUSMA should come into effect on January 1, 2020. But it would be wise for manufacturers to proceed as if the CUSMA is a fait accompli.
Automobile manufacturing, tariffs and the supply chain
Much of the discussion around CUSMA concerns how it impacts automobile manufacturers. This is indeed the most striking change between the new agreement and its predecessor. Under NAFTA, manufacturers were required to use 62.5 per cent of North American content in their cars to qualify for preferential duties. The new rules raise this to 75 per cent by 2023 – and possibly up to 80 per cent, depending on the method of calculation used.
The labour provisions are even more noteworthy – 40 per cent of the overall content of a passenger vehicle or light truck (and 45 per cent for trucks) must be produced by workers earning at least $16 per hour. This provision covers R&D staff as well.
Ford welcomed the news. In a statement, the manufacturer said that CUSMA “will support an integrated, globally competitive automotive business in North America.” Ford has invested in US manufacturing facilities, and the majority of its US sales are cars that are made in the US.
Automobile manufacturers will need to make some hard decisions. If they do not increase North American content, they face being subjected to a 2.5 per cent tariff on the cost of the entire automobile. Alternatively, they could reconfigure supply chains. Either option is likely to impact the bottom line, and/or increase the final price cost to consumers.
Cross-border trade and e-commerce
CUSMA will keep trade and transportation flowing across North America, and has been welcomed by organizations such as Canadian Manufacturers & Exporters, American Trucking Associations, among others. The new agreement aims to streamline the movement of goods across the border by leveraging technology to reduce administrative delays and minimize transaction costs. To this end, all three signatory countries are to establish a single portal for the electronic submission of documents.
Under the new rules, both Canada and Mexico will increase their de minimis shipment thresholds. Under NAFTA, shipments imported into Canada valued at more than C$20 are subject to duty collection and customs documentation. This will increase to C$40 for tax and C$150 for customs duties. When the CUSMA comes into force, Mexico’s tax-free de minimis will be $50, while shipments valued at $117 or less will be duty-free.
The Office of the US Trade Representative fact sheet stated that this would be a boon for traders and carriers. “New traders, just entering the Mexico and Canada markets, will also benefit from lower costs to reach consumers. United States express delivery carriers, who carry many low-value shipments for these traders, also stand to benefit through lower costs and improved efficiency.”
The UPS Pulse of the Online Shopper survey found that in 2017, 83 per cent of online shoppers in Canada, 78 per cent in Mexico, and 47 per cent in the US had made an international purchase. This means CUSMA is good news for retailers and consumers, removing some impediments to cross-border shopping.
Rules of origin changes
It is worth bearing in mind that the auto industry is not the only one likely to feel the impact of CUSMA. There are changes to rules of origin for a number of products, including textiles and chemicals.
CUSMA also introduces changes to regional value content (RVC) calculations. Although the new agreement uses the same two methods as NAFTA to calculate RVC — net cost or transactional value — there are some differences. Under CUSMA, non-originating material may be counted as originating, depending on the value of the processing, and the value of the originating material used in the production of the non-originating material.
Another significant change is the raising of the de minimis threshold for non-originating content. Under NAFTA, the threshold was seven per cent; CUSMA allows for 10 per cent.
A further important update is CUSMA’s provision for recovered materials. Recovered materials that come from one of the signatory countries will qualify as originating when they are used in remanufactured goods.
All this means that CUSMA could potentially impact manufacturers and supply chains in a wide range of industries. Products that are duty-free under NAFTA may no longer be eligible for preferential treatment under the new agreement. Likewise, goods which do not currently qualify may do so when CUSMA comes into force.
It is as yet unclear if the ratification process of all three signatory countries will be finalized for CUSMA to come into effect in January 2020. However, manufacturers should take the intervening time to examine how the changes will impact their duty obligations, and if adjustments to the supply chain are needed or warranted.
Anne Sexton is a marketing and communications professional with QAD Precision. She writes extensively about global trade, transportation and logistics.