USMCA Succeeds NAFTA Rule Governing Trade in North America

This post first appeared on Risk Management Magazine. Read the original article.

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
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.

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