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From NAFTA to USMCA: what changed?

On July 1, 2020, the United States-Mexico-Canada Agreement (USMCA), a new trade deal between the three countries, entered into force. This agreement effectively replaced the North American Free Trade Agreement (NAFTA) existing since 1994 and aimed at eliminating tariff and non-tariff trade barriers between the United States, Canada and Mexico. While both international treaties sought to liberalize the trade between the three North American nations, it is important to understand what changes the USMCA brought to the supply chain and how USMCA potentially benefits North American traders.

One of these changes concerned the de minimis shipment value level, or, in other words, the threshold set by countries under which no customs duties or taxes are applied to imported goods. De minimis provisions are specifically aimed at benefiting small and medium enterprises (SMEs) and promoting e-commerce between the neighboring economies. Within the new trade framework set by the USMCA:

  • Canada raised its de minimis from 20 to 40 CAD for taxes and allowed for shipments to enter duty free if the total value of goods did not exceed 150 CAD;
  • Mexico continued its 50 USD tax free de minimis threshold and allowed for goods with up to 117 USD in value to enter duty free while significantly simplifying customs procedures for such shipments;
  • The United States agreed to a $100 de minimis threshold aiming to benefit importers that did not otherwise qualify for the much higher personal allowance of $800 for a single importer on a single day.

Under the USMCA the three participating nations also agreed to stronger rules of origin, both general and product specific. For instance, new rules of origin replaced the previous requirements for vehicles and automotive parts that were set under the NAFTA, including the Regional Value Content (RVC) calculations and thresholds. As of July 1, 2020, 66% of the content within passenger vehicles and lights trucks was required to meet North America origin definitions in order to qualify for the USMCA’s preferential treatment, with this percentage expected to increase up to 75% (from NAFTA’s previous 62.5%) over the coming years. The RVC for heavy trucks was similarly set to increase from 60% to 70% (previously 50% under the NAFTA) by 2027. In addition to this, auto producers became expected to submit three new certifications not previously required under the NAFTA: Labor Value Content (LVC) certification, Steel certification, and Aluminum certification. These measures were aimed at incentivizing higher-wage jobs in the industry across the borders and encouraging more research and development investment by automotive companies in the region.

The USMCA likewise brought changes to origin procedures and rules of origin. In particular, the USMCA introduced a new method for origin certification. NAFTA required exporters or manufacturers to provide a specific Certificate of Origin in order to certify that imported goods in fact qualified for preferential tariff treatment. The USMCA effectively replaced the Certificate of Origin with a certification which may be included on a commercial invoice and need not follow a prescribed format as long as the certification contains nine “minimum data elements” specified in Chapter 5 of the USMCA. These enhancements aimed to improve and simplify the origin/eligibility requirements and record keeping procedures for importers in participating countries.

Many North American companies have faced challenges while transitioning from the NAFTA to the USMCA. In most cases, this transformation involved changes in business processes and international trade practices; however some have also experienced full-scale re-structuring of supply chains. Nonetheless, we at KlearNow recognize USMCA’s potential to greatly benefit businesses of all sizes in the participating countries and create various opportunities for cooperation. We have been working to extend our geographic reach to include imports into Canada, and we are very excited about our soon-to-be launched US-Canada-Mexico cross-border product. Stay tuned and follow our blog for more updates coming soon!

Sources:

https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets
https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/04-Rules-of-Origin.pdf
https://www.cbp.gov/sites/default/files/assets/documents/2020-Jun/USMCA%20Implementing%20Instructions%20-%202020%20Jun%2030%20%28Finalv1%29.pdf