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The USMCA: Two-year anniversary update

By Sophia Limpert

Cross Border, Global Trade Compliance, International Ecommerce,

Zonos graphic illustrating the two-year anniversary update of the United States-Mexico-Canada Agreement. (USMCA)

1 July 2022 / 0 min read

:information_source:   Each signatory country refers to the agreement differently by listing itself first, but the agreements are exactly the same.

  • In the United States (U.S.): USMCA (U.S.-Mexico-Canada Agreement)
  • In Canada: CUSMA (Canada-U.S.-Mexico Agreement)
  • In Mexico: T-MEC (Tratado entre México, Estados Unidos y Canadá)

For the purposes of this blog it will be referred to as the USMCA.

The USMCA went into effect on July 1, 2020, two years ago today. The USMCA replaced NAFTA (North American Free Trade Agreement), and like NAFTA, promoted easier trade and economic growth by implementing duty-free trade between the three signatory countries. However, the USMCA introduced new rules when replacing NAFTA and implemented enforcement procedures. NAFTA was enacted in 1994, and by 2020, adjustments were needed.

Keep reading to learn the following:

  • How do the three countries benefit from the USMCA?
  • What are the main changes that the USMCA introduced?
  • What happens if you don’t comply with the USMCA?

How does the USMCA benefit the U.S., Mexico, and Canada?

 ➡  How the U.S. benefits from the USMCA

  • The USMCA increases U.S. duty-free access to Mexican and Canadian markets.
  • The USMCA makes U.S. producers and workers more competitive by removing Mexican and Canadian duty-related barriers.
  • Canada and Mexico raised their de minimis values for the USMCA, which allows U.S. businesses to export more freely to Canada and Mexico with less paperwork and apply duty-free treatment to more shipments.
    • Canada’s de minimis varies depending on the shipping method.
      • Courier shipments – Tax de minimis: $40 CAD Duty de minimis: $150 CAD
      • Postal service shipments – Tax de minimis: $20 CAD Duty de minimis: $20 CAD
    • Mexico’s duty and tax de minimis is $50 USD.
      • If the shipment is $50.01 USD or greater, then a tax rate of 17%-19% will be applied.

 ➡  How Mexico benefits from the USMCA

  • The USMCA continues Mexico’s agricultural gains acquired under NAFTA.
    • In 2015, Mexico had $21 billion USD in agricultural exports to the U.S., and in return, had $17.7 billion USD in imports from the U.S. These advantageous transactions continue under the USMCA.
  • Mexico will generate 40-45% of its automotive production at an hourly wage of $16 USD by 2023, which is a major increase from the $3.73 wage in 2019.
  • The USMCA increases the stability of the Mexico-U.S. trade relationship.
    • 83.5% of Mexico’s exports were sold to the U.S. in 2019.
  • Mexico is implementing stronger investment structures and more transparency, accuracy, and safety for businesses.
  • Under the USMCA, the three countries are required to enforce their labor laws and adhere to national ideals. Mexico passed a labor reform in recent years giving workers more rights.

 ➡  How Canada benefits from the USMCA

  • The USMCA assists Canada to compete at a global level and succeed in a healthy, unified North American economy.
  • Canada and the U.S. share one of the world’s longest secure borders. Hundreds of thousands of goods and services (worth billions) cross the border daily.
  • Canada and the United States have one of the largest trading relationships in the world under the USMCA.

What are the main changes the USMCA introduced?

USMCA dairy deal

The USMCA made the agricultural market more accessible between the U.S. and Canada. The intent was to create new market access opportunities for the U.S. exports to Canada of dairy, poultry, and eggs, and in exchange, the U.S. provides new access to dairy, a limited amount of sugar and sugar-containing products, peanuts, and processed peanut products for Canada.

The USMCA increased market access for the following American products:

  • Fluid milk
  • Cheese
  • Cream
  • Skim milk powder
  • Butter and cream powder
  • Concentrated and condensed milk
  • Yogurt
  • Buttermilk and powdered buttermilk
  • Natural milk constituent products
  • Ice cream and ice cream mixes
  • Whey
  • Margarine

The U.S. agreed to reciprocate on a ton-for-ton basis for imports of Canadian dairy products. Additionally, Canada is taking measures to control its surplus of skim milk products in foreign markets. This expansion of the agricultural market also applies to poultry and egg products.

While negotiating the agreement, Canada agreed that milk and products used to produce milk alternatives would not be priced lower than a level based on the United States price for nonfat dry milk in order to level the playing field. Canada also agreed to provide a new exclusive tariff-rate quota for the U.S. However, there’s trouble in paradise.

In May 2022 the U.S. challenged Canada’s devotion to the agreement. Canada has not upheld its dairy tariff-rate quota allocation measures, nor its promise to fully allocate its annual dairy tariff-rate quotas. U.S. Ambassador, Katherine Tai said, “We communicated clearly to Canada that its new policies are not consistent with the USMCA and prevent U.S. workers, producers, farmers, and exporters from getting the full benefit of the market access that Canada committed to under the USMCA.” Government officials are working to resolve the dispute.

Notwithstanding this hiccup, the USMCA has opened agricultural trade between Canada and the U.S. in a way unprecedented under NAFTA.

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The product’s birth certificate (Rules of Origin)

The USMCA implemented more meticulous Rules of Origin (ROO) and stipulations for the Certificate of Origin (COO) to combat the rampant fraud committed by those taking advantage of duty-free privileges in the past. The ROO is used to determine whether a good qualifies as an “originating good” under the USMCA. An originating good or originating material means a good or material that came from one or a combination of the three participating countries.

Qualifying for duty-free treatment under the USMCA is easier than under NAFTA for some products but more rigorous for others. It is important to clearly identify where products are made. Origin labeling is generally as simple as adding “Made in [insert country]” on the product and its packaging.

The ROO takes into account where the product was grown, assembled, or obtained. Only items that meet the ROO will be considered for preferential treatment. If you are involved in obtaining, producing, and/or manufacturing a good being shipped to and from the U.S., Mexico, and/or Canada, then you need to be aware of the ROO. For the full ruling please see the Office of the United States Trade Representative’s chapter concerning Rules of Origin. The ROO most notably impacts agriculture, prescription, and non-prescription drugs, wool and fur products, textiles and apparel, as well as automobiles. The ROO will require more particular labeling and information for these products to determine their origin.

  • The USMCA textile and apparel origin requirements are based on the “yarn-forward” concept. The “yarn-forward” concept necessitates that the production of yarn, weaving or knitting of fabric, and snipping and sewing of attire or other articles must take place in one or more of the USMCA countries to receive preferential treatment.
  • The changes of the ROO for automobiles state that 75% of a vehicle’s components must be built in Canada, the U.S., or Mexico in order to receive zero tariffs. The 75% is an increase compared to the 62.5% that NAFTA required previously. Also, 40-45% of an automobile’s parts must be made by workers earning a minimum of $16 USD per hour.

The USMCA is the Arnold Schwarzenegger (Terminator 😉 ) of fraud

The preferential and duty-free treatment produces a lot of financial benefits, so fraud is an unfortunate side effect. Fraudulent shippers attempt and often succeed in claiming counterfeit ROO/COO benefits. The USMCA has undergone modifications to terminate the days of unwarranted preferential treatment by incorporating:

  • Stronger rules of enforcement
  • Elimination of loopholes and streamlining of the dispute settlement system with rapid response (e.g. the U.S. dispute over Canada’s dairy tariff-rate quota policies)
  • Robust monitoring of the agreement’s labor obligations
  • Accountability is held up by and between the USMCA countries to enforce laws

These are the overarching modifications, but there are more specifics concerning these changes. It is vital that these rules and regulations are easy to enforce and monitor; otherwise, all these changes are for naught.

Anticorruption

The U.S. has been adamant about the inclusion of commitments to combat corruption in international trade into its free trade agreements (FTAs) by implementing chapters on transparency and anticorruption into agreements. The USMCA declared its intention to counter and combat corruption amid international trade.

Repercussion discussion

The U.S. Customs and Border Patrol (CBP) will assess fines and penalties if they determine USMCA compliance issues. If the CBP determines one’s claims of USMCA eligibility are invalid, then this could lead to significant duty charges and possible financial penalties to whoever produces false or unsupported claims. To lower the possibility of invalid USMCA certifications and claims, companies should confirm they possess the essential qualifications for their goods to receive the USMCA’s preferential and duty-free treatment.

Recap

The USMCA will remain in place until 2036 but will be re-evaluated in six years. The USMCA intends to continue improving economies, and the agreement will stand as the new model for all future U.S. trade deals. The USMCA aids in eliminating fraud, providing freer trade, and promoting economic growth for all.

References

Sophia Limpert
Sophia Limpert

I discovered my love for writing when I was just 13. I’m fulfilling my passion for writing at Zonos and expanding my professional and creative writing career amongst the cross-border ecommerce community. I’m working to teach readers in an enticing and educational way about the ecommerce world.