July 1 marked the official implementation of the USMCA, a new trade agreement linking the United States, Canada and Mexico. This new agreement replaced NAFTA, the North American Free Trade Agreement, which had governed trade on the continent since 1994.
Industries and companies that are subject to the United States-Mexico-Canada Agreement (USMCA) will need to focus on complying with its new aspects. At a high level, the USMCA retains many elements of NAFTA, which should assist with compliance efforts. That said, the USMCA has replaced some longstanding NAFTA requirements with new or enhanced rules. As always, the devil is in the details—many of which were spelled out in USMCA’s Uniform Regulations, published on June 3, 2020.
Overview of General Changes
Many of USMCA’s changes are broadly applicable to all importers, exporters and manufacturers. For example, the agreement raises the de minimus threshold to 10%, up from 7% under NAFTA. This means that a good or product featuring non-originating content of up to 10% will not be deemed non-originating, even if it otherwise fails to satisfy an applicable tariff change or regional content requirement. As with NAFTA, the USMCA includes a list of products, including particular food and agricultural products, that are not eligible for these de minimus exemptions. Also new under the USMCA, the de minimis customs threshold for duty-free treatment is now set at $117 for Canada and Mexico, while the tax-free threshold is set at $50 for Mexico and C$40 for Canada.
The new agreement has also made changes to the certification of origin (COO) process. One such change affects who may complete a COO. Whereas only exporters or producers were eligible to do so under NAFTA, the USMCA allows importers to do so as well, based on information received from the producer. Additionally, there is no longer any prescribed format for the COO; any form of certification generally will be acceptable, provided that it contains all of the required data elements outlined in the agreement. Thus, a COO under the USMCA may be provided on an invoice or other document issued by one of the countries. Also new, each nation has now agreed to allow a COO to be completed and submitted electronically, featuring an electronic or digital signature.
USMCA implementation eliminated a NAFTA benefit relating to refunds of Merchandise Processing Fees (MPF). Unlike NAFTA, the USMCA does not authorize refunds of MPF for post-importation claims. Thus, if an importer does not claim preferential tariff treatment at the time of entry, it cannot later obtain a refund for MPF through a post summary correction or reconciliation. The U.S. government is trying to address this issue legislatively, with at least one bill pending that would update the current USMCA implementation provisions to that effect.
The USMCA also includes new rules to resolve trade disputes and address labor-related issues. While it maintains NAFTA’s state-to-state mechanism for most disputes arising under the agreement, as well as the binational dispute settlement to review trade remedy disputes, the USMCA contains notable changes in the area of investor-state dispute settlement (ISDS). In particular, the USMCA eliminates ISDS for US-Canada disputes; maintains ISDS only between the U.S. and Mexico for claimants regarding government contracts in the oil, natural gas, power generation, infrastructure, and telecommunications sectors; and maintains U.S.-Mexico ISDS in other areas, provided the claimant exhausts civil remedies first. The USMCA also removes procedures allowing a party to block the formation of a dispute settlement panel. Access to ISDS for disputes between Canada and Mexico will be possible, not under the USMCA rules, but rather under a separate trade agreement of which the U.S. is not a signatory. Additionally, those concerned about the protection of labor rights will now have access to a special rapid response mechanism to file complaints about labor practices in Mexico.
In the area of intellectual property rights, the USMCA retains NAFTA’s central protections for copyrights, patents (including exclusivity periods for test data), trade secrets, trademarks and geographical indications, as well as specific enforcement requirements. The USMCA removes provisions on biologic data protection, however, and includes the following additional intellectual property-related provisions and changes: extending the copyright term to 70 years (from 50 years under NAFTA); imposing prohibitions on circumventing technological protection measures; imposing criminal and civil penalties for trade secret theft, including by state-owned enterprises and cybertheft; and creating copyright safe-harbor provisions applicable to internet service provider liability.
Key Changes in the Automotive Industry
Arguably the USMCA’s most noticeable difference from NAFTA are the new automotive rules of origin. The new agreement raises the level of North American content required from 62.5% to as much as 75% for certain parts receiving preferential treatment. The requirements phase-in over four years and the level of regional value content is determined by which of the three categories a specific part falls into: core, principle or complimentary.
The Uniform Regulations that govern USMCA implementation provide for limited flexibility to comply with new requirements, aside from a six-month duty deferral to give the industry until the end of the year to gather the necessary documentation required to demonstrate compliance. While automotive companies are still required to pay the duties if they did not meet the new USMCA standards by July 1, this grace period is expected to save them a significant amount of money.
In a notable change from the NAFTA regime, the USMCA introduces a labor value content calculation requiring motor vehicle manufacturers to certify that specific percentages of content were made by high-wage workers through a staging period. After a three-year staging period, the ultimate requirements stipulate that at least 40% of vehicles and 45% of trucks must be made by high-wage workers. Breaking down these requirements further, at least 40% of the manufacturing labor incorporated in a passenger vehicle (45% for trucks) must have a wage rate above $16 per hour. Only up to 10% of this amount may come from so-called “technology expenditures,” such as high-value engineering/design or R&D activities, with up to an additional 5% for “assembly expenditures.”
Enforcement and Penalties
While the USMCA took effect on July 1, 2020, there will be a 90-day grace period before enforcement begins. Companies should take this time to familiarize themselves with new requirements under the agreement to ensure compliance and avoid potentially costly penalties.
Significantly, USMCA allows authorities to seek all accounting records of an importer or exporter electronically via a questionnaire. In contrast, under NAFTA, these requests were not allowed unless the authorities performed an on-site visit. Companies will need to implement recordkeeping systems that collect and retain all relevant origin-related records, while also enabling quick access and production of those records for government authorities. Compliance with USMCA’s rules of origin, as well as the new wage and other requirements applicable to motor vehicle manufacturing, will require close coordination across supply chains. Noncompliance with rules of origin and other USMCA requirements could result in the payment of tariffs, fines and surcharges or the imposition of penalties for alleged customs fraud.
As noted above, the USMCA also includes new criminal penalties for the theft of trade secrets, including against state-owned enterprises. Other penalties and enforcement provisions contained in the USMCA provide for:
- Ex officio authority for law enforcement officials to stop suspected counterfeit or pirated goods at every phase of entering, exiting and transiting through the territory of any of the signatory nations.
- Criminal procedures and penalties for unauthorized camcording of movies (a significant source of pirated content online).
- Civil and criminal penalties for satellite and cable signal theft.
Sunset Clause
Unlike NAFTA, the new USMCA includes a sunset provision. Under the sunset clause, the United States, Mexico and Canada must conduct a joint review of the trade deal six years after it goes into force, at which time the countries can evaluate how the agreement is working and raise any concerns. If, during the review, the three parties agree to keep the deal in place, it will be extended for sixteen years, with another review required six years into the new extension. If one or more of the countries do not agree to extend the agreement, the USMCA will be terminated after ten years. During this period, the three countries would still have the opportunity to continue negotiations over any disagreements in order to keep the agreement in place.
The inclusion of the sunset clause was a high priority for the United States during negotiations with their North American trading partners. One of the Trump administration’s most significant criticisms of NAFTA was that it was outdated and had not been adjusted in any way to account for economic changes or to recognize the advancements in digital commerce and trade over the past 25 years. The sunset provision will force regular reviews of the agreement and provide opportunities to modify the deal as well as hold the parties accountable. However, it also can create a level of uncertainty in that these regular reviews will offer more frequent opportunities for one of the trading partners to threaten to leave the agreement if changes are not made. While it is hard to envision a country following through and withdrawing from the agreement, the clause will provide leverage to demand changes.
Despite many similarities to NAFTA, USMCA contains numerous additions and updates that organizations need to familiarize themselves with to ensure compliance. From dispute resolution to rules of origin, companies need to investigate which changes impact them directly and what changes need to be made to their supply chains.