Editor’s Note: This post was originally published on February 3, 2020, and has been revised and updated based on recent developments.
On March 13, 2020, the Canadian Parliament ratified the United States—Mexico—Canada Agreement (USMCA) to replace its predecessor, the North American Free Trade Agreement (NAFTA). This completes the ratification process across all three countries. Previously, the U.S. Senate had approved the USMCA by an 89-10 margin and President Donald Trump signed it on January 29, 2020. The Mexican government had already ratified the agreement in June 2019. However, the agreement is expected to enter into force in mid-2020. The time for companies to get ready is now.
“Now that the USMCA has been approved by all three countries, a historic new chapter for North American trade has begun. […] USMCA is the gold standard by which all future trade agreements will be judged, and citizens of all three countries will benefit for years to come.” U.S. Trade Representative Robert Lighthizer said on Canada’s Approval of the USMCA. “The USMCA […] contains robust and enforceable labor and environmental standards, […] embraces the promise of the digital economy, [it has] strong, enforceable disciplines against unfair, market-distorting subsidies and currency manipulation, […] it contains a ‘sunset’ provision [to make sure that] the USMCA will never become outdated and out of balance.”
The agreement expires 16 years after entry into force but can be renewed.
The USMCA’s Timeline
Negotiations on the new deal first started in August 2017, and the USMCA was initially signed on November 30, 2018, by all three countries at the G20 Summit in Buenos Aires.
In the first half of 2019, US ratification stalled on the grounds of labor rights provisions, treatment of steel and aluminum, intellectual-property rules on pharmaceuticals and dispute settlement procedures. The deadlock was broken on December 9, 2019, where trade negotiators from the US, Canada and Mexico agreed to changes to the USMCA trade pact that paves the way for legislative approval in the US. All three parties need to ratify the treaty according to their domestic systems for the deal to be able to enter into force. On December 12, 2019, Mexico’s Senate passed the revised agreement. In late January 2020, the Canadian government unveiled legislation to ratify the deal.
Being Ready on Day One
Free trade agreements (FTAs) like the USMCA offer significant cost-savings opportunities from day one. That means there’s no time to spare in preparing to leverage the opportunities the USMCA provides:
- Exemptions from unilateral auto tariffs
- Reduced restrictions for dairy products
- Intellectual Property (IP) protection and enforcement of IP rights, particularly crucial for biopharmaceuticals
- New definitions of what constitutes certain American products
- Protections against misappropriation of trade secrets
- Prohibition of customs duties and other discriminatory measures against digital trade
- Commitments to refrain from unfair currency practices
Changes to “De Minimis” Shipment Value Levels
In addition, to facilitate more significant cross-border trade, the USMCA addresses “de minimis” shipment value levels, covering goods with only minimal formal entry procedures:
- Canada will double its de minimis threshold — the maximum value of an item that Canadians can order duty-free from a foreign country—from C$20 to C$40 before any sales taxes are levied
- Canada will also provide for duty-free shipments up to C$150 (a significant change from the current C$20) so that Canadians ordering US goods do not have to pay duty on products up to this threshold
- Mexico will continue to provide USD $50 tax-free de minimis and offer duty-free shipments up to the equivalent level of USD $117
Challenging Times for the Automotive Industry
New USMCA rules of origin and the increase (from 62.5% to 75%) in the amount of North American content required in vehicles to meet duty-free treatment requirement is a significant challenge for the US and international automotive industry. Soliciting information from suppliers and dealers to trace the supply chain in line with USMCA requirements is equally demanding.
Changes Lead to New Opportunities
When the USMCA enters into force, the terms of trade between countries will change. Duty rates, procedures and processes vary. How are you preparing right now to make sure that you are not only compliant with the modified provisions, but you take full advantage of these from day one?
E2open’s Trade Agreements application, part of a suite of comprehensive Global Trade Management intelligent applications, is ready today to assist companies with the qualification, vendor solicitation and administration of the USMCA. Existing customers can benefit from a seamless transition from NAFTA to the USMCA with updates and features which will allow them to benefit from all the opportunities the new agreement provides. The automotive industry, in particular, can leverage an “off-road averaging” functionality in E2open’s Trade Agreements application, a feature specifically designed to support complex rules of origin calculations under the USMCA.
Not only that, but we support more than 150 trade agreements around the globe, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). E2open Trade Agreements customers seamlessly identify qualifying goods by using our Global Knowledge® trade content database that contains the rules of origin, product classifications and duties and taxes for all significant preferential trade programs around the globe.
We’re ready to help open new markets for your company by simplifying the compliance and qualification processes. With new trade agreements either on the horizon or recently passed around the world, global trade compliance becomes key to the opportunities ahead.