From NAFTA to USMCA: All Trade Agreements Are Not Created Equal

As the first half of 2020 comes to a close, one thing we can say with certainty is that the year’s first six months have been an unprecedented challenge for those tasked with keeping supply chains moving in a profitable manner. As many companies are navigating through the COVID-19 pandemic toward an as yet undefined new normal, there is one constant in the world of global trade: change.

Furthermore, many companies focused on overcoming operational challenges of the pandemic have been able to delay response to a regulatory action that’s been outside the spotlight.

Until now.

USMCA v1On July 1, the United States-Mexico-Canada Agreement (USMCA) replaces the existing requirements of the North American Free Trade Agreement (NAFTA), with an exception for certain automotive products that will have a three-year transitional period. Many elements of NAFTA were retained in the new agreement; however, there are distinctions in the USMCA that require review and consideration by trade participants to ensure they effectively manage compliance during this program transition. According to a recent survey, there appears to be some confusion among supply chain managers on how to implement these changes and mitigate non-compliance risk to maintain company profitability.

Importers’ goods that qualified under NAFTA may also be eligible for USMCA; however, there are subtle changes that may impact those determinations. USMCA due diligence should be conducted by all trade participants as a demonstration of compliance, for all companies participating in North American trade between the United States, Mexico and/or Canada.

5 Differences Between NAFTA and USMCA

  1. Importers will no longer be required to complete a formal NAFTA certification document. A certificate of origin may now be completed based on information provided by the producer. U.S. Customs and Border Protection (CBP) is not mandating a standard format for certificates of origin as long as they contain all of the required data elements. A best practice is to have the certification in hand before making a claim. Previous NAFTA certificates and certification documentation under USMCA must be kept for a minimum of five years.
  2. The de minimis threshold increases. NAFTA’s threshold of 7 percent for FOB value increases under USMCA to 10 percent. The de minimis for textiles and apparel is different.
  3. The terms of the USMCA will remain in effect for 16 years, after which time the parties can choose to revisit and/or renegotiate those terms, or withdraw from the agreement altogether. The agreement is also subject to a review every six years, at which point the United States, Mexico, and Canada can decide whether or not to extend the agreement if they feel doing so would be beneficial.
  4. Merchandise Process Fee (MPF) refunds will not be made on post-importation claims. An importer who fails to claim preferential tariff treatment at the time of entry will not be able to recoup their MPF through a post-summary correction or reconciliation later.
  5. Changes were made to the Rule of Origin for various goods (e.g., manufactured goods, pharmaceuticals, healthcare products, textiles and apparel, agricultural goods, etc.). However there are significant changes within the automotive sector concerning eligibility based on regional value content. In general, USMCA now requires the total North American-based content of a vehicle to equal 75 percent (up from 62.5 percent). USMCA also requires that 70 percent of a vehicle’s steel and aluminum must originate in North America.

How should importers prepare for the USMCA transition to ensure compliance?

Importers should carefully review their imported goods to ensure they understand the new rules of origin and can verify that they qualify under the new agreement. Binding rulings that determine parameters of origin determination under NAFTA will be invalid, and a new binding ruling will be required for USMCA.

We also recommend performing a comprehensive review of imported goods through internal or external compliance means to demonstrate USMCA Compliance due diligence. For example, there may be cases where goods did not qualify under the terms of NAFTA but may now qualify under USMCA.

And above all else, it is imperative that importers maintain a proper record-keeping system. This means you must document where all of your goods originate, and you must have on file a detailed description of your sourcing, production and determination process that clearly defines that the goods qualify.

Our Experience is Your Compass

compassIt is a grave error for importers to assume their goods qualify under USMCA, even if they were NAFTA eligible.

To help guide you through the necessary process to determine whether or not your products do meet USMCA rules, Transportation Insight’s team of international compliance consultants are ready to help you outline and execute a personalized scope of work plan to ensure your USMCA program is in full compliance.

While your focus today on maximum supply chain efficiency can improve your ability to meet arising market demands, a partner with expertise in international trade compliance brings you peace of mind - and so much more. We take over the work of helping you navigate through the change from NAFTA to USMCA so you can progress toward global supply chain mastery.

Make sure your trade compliance processes are updated to protect your business financial risk that emerges during the implementation of complex new regulations. Contact one of our global trade compliance experts today for a free consultation.

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