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Why the USMCA is Important

Why the USMCA is Important

Why the USMCA is Important

Even if you don’t care much about trade.

The United States-Mexico-Canada Agreement (USMCA)[1] represents the most significant change in North American trade rules in over 25 years. Failure to understand and comply with these rules could expose companies to tariffs, high compliance costs, and reduced competitiveness. Such changes are especially important for companies that trade within North America or do business with such companies. Many of these changes go beyond what is normally thought of as trade.

Many of the USMCA’s new trade rules are layered, complex, and time-consuming to understand. Moreover, failure to meet even one of the rules could mean failure to meet them all. That is why it is important not only to be aware of such rules but to able to put together a compliance plan that coordinates different types of expertise, including in trade, customs, labor, and supply chain management.

Incentivizing Domestic Manufacturing

The USMCA includes several new rules that attempt to incentivize domestic production and investment. One of the primary ways (but not the only way) this was done was through changes to the rules of origin, which are rules that determine whether a product is of North American origin and receives the benefits of the Agreement. Many of the changes not only apply to automotive and transportation goods but also include non-automotive goods that are used to make such goods. There are changes to other rules as well including for steel and aluminum (including steel and aluminum-made products), chemicals, textile and apparel goods, glass, and other manufactured goods.

Many of these rules are detailed and require specific parts or materials to be made in the United States or North America, especially parts and materials that are considered important to advanced manufacturing or higher-paying manufacturing jobs. Companies will need to make informed supply chain changes that are aligned with the new USMCA rules. However, many of the regulations to implement these rules are not always clear at first reading and leave a lot of unanswered questions. Expertise on trade, customs, labor, logistics, and supply chain management need to be brought together by proficient USMCA experts in order to develop a compliance plan.

Jobs, Jobs, Jobs

The USMCA also includes unique provisions on labor that may influence supply chain decisions, not just between North America and other regions but between countries within North America. The USMCA’s Rapid Response Mechanism allows countries, for the first time, to take enforcement actions against individual factories that fail to comply with collective bargaining laws. The USMCA also includes a Labor Value Content rule, requiring that a specific percentage of vehicle content be made by “direct production workers” who earn a certain minimum wage. Such rules, combined with other USMCA requirements such as on steel and aluminum purchases, may have considerable downstream effects on supply chain decisions. Enforcement of such provisions are expected to be a priority. Trade or customs compliance experts who aren’t particularly knowledgeable about labor, human resources, or wage issues (e.g. what constitutes a “direct production worker”?) will need to build such expertise quickly.

Trade Facilitation

Many provisions of the USMCA streamline customs procedures and other documentation requirements, making it easier to trade and build supply chains within North America. New provisions on customs penalties and customs brokers should help companies reduce compliance costs if they know how to take advantage of them. The USMCA also includes new rules for digital trade that facilitate digital transactions and the transfer of data across borders. Many companies, especially small and medium sized companies, may not be fully aware of these provisions and how they could help their businesses.

Next Steps

Much of the initial implementation of the USMCA was done without a lot of attention and without all the necessary implementing regulations in place. Expertise will be clearly needed to develop further guidance as well as a roadmap for companies to understand these regulations. Some authorities have indicated that they may initially take a more relaxed view of USMCA enforcement. However, such a view is unlikely to last long. Many USMCA provisions were supported by both sides of the aisle who will want to see strong enforcement. It would be wise to take a proactive approach to get ahead of these issues and build a comprehensive compliance plan.

Setting up a compliance plan would involve adding specific expertise to customs, procurement, management, and government affairs teams. Companies should specifically look for expertise in understanding and interpreting the new USMCA rules, regulations, and guidelines, and in explaining key differences with the NAFTA rules, including preparation of origin certifications and answers to detailed, technical questions concerning tariff classifications, methodologies, and calculations related to the USMCA’s new Regional Value Content (RVC), Core Parts, Labor Value Content (LVC), and Steel and Aluminum requirements. Overall, such expertise can usually be integrated from the outside into company operations without the time or expense associated with in-house hiring.

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[1] This agreement is referred to differently by each the United States, Mexico, and Canada. In Canada, it is referred to as the Canada–United States–Mexico Agreement (CUSMA) in English and the Accord Canada–États-Unis–Mexique (ACEUM) in French. In Mexico, it is referred to as the Tratado entre México, Estados Unidos y Canadá (T-MEC).

Jason Bernstein is Founder of Trade Rules and has over 20 years of experience in international trade and investment and advises clients on how to comply with international trade rules and customs regulations such as trade and customs issues on automotive goods, steel and aluminum, and agricultural goods. Until June 2020, Jason served as Deputy Assistant U.S. Trade Representative for American Competitiveness and Enterprise at the Office of the United States Trade Representative (USTR) and was the senior U.S. trade negotiator and policy advisor on all rules of origin and customs issues. Jason previously served in multiple capacities at USTR, as an International Economist at the White House Council of Economic Advisers, and as a Senior Policy Advisor at the U.S. Department of Agriculture.

Request a private consultation with Jason at Poligage.com to discuss issues related to customs and trade rules including navigating the impacts of the United States-Mexico-Canada (USMCA) rules of origin changes in the automotive and manufacturing sectors as well as assistance with dispute settlement and arbitration issues.

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