On January 16, 2020, the U.S. Senate voted 89 to 10, with one member not voting, to approve the U.S.-Mexico-Canada Free Trade Agreement, which serves as a replacement or update to the current North American Free Trade Agreement. The U.S. implementation now goes to the President for signature. Prior to coming into effect, Canada must complete its legislative process and the three countries must implement Uniform Regulations.
Form most companies engaged in international trade, the agreement is a worthwhile modernization of the NAFTA. For automotive manufacturers, the agreement will require a major overhaul of compliance processes. Beyond trade in goods, the USMCA addresses several areas of concern in North American trade including intellectual property, digital trade, services, labor and the environment.
An important change is that the USMCA permits a claim for preferential treatment to be based on a certificate of origin, or “CO,” completed by the exporter, producer, or the importer. This may alleviate some issues that arose under the NAFTA where producers provided CO to the exporter, who did not always provide their own CO or did not do so correctly. Allowing the importer to self-certify will be helpful for multinational companies where the compliance activity is, for example, centralized in the US for related producers in Canada or Mexico. Under the USMCA, the importer can perform the analysis and complete the CO in its own name. Previously, this required written authorization from the exporter. Of course, anyone who completes a CO is required to maintain records to support it.
The CO itself need not be in any particular form. Thus, exporters will no longer need to complete the CF 434 or an approved equivalent. The CO, however, must be separate from the invoice and from other commercial documentation issued by a non-Party. The agreement also specifically authorizes the use of electronic certificates with electronic or digital signatures. Certificates will not be required for importations the value of which does not exceed $1000 (or its equivalent), provided the importation is not part of a series of importations undertaken to
evade the requirements to pay duty or otherwise comply with the law.
The agreement recognizes that not all defects in a CO are fatal. It states that the customs authorities shall not reject a CO due to “minor errors or discrepancies” if those discrepancies do not create doubt as to the accuracy of the claim. Where an error is fatal, the importer is now granted an express period of five days to secure a corrected certificate.
Rules of Origin
For many products, the rules of origin under the USMCA will look familiar to those who have been operating under the NAFTA. That, however, is not always the case. The USTR previously reported changes to the rules of origin for optical fibers, chemicals, glass, steel, titanium and the automotive sector. The details matter. It is, therefore, important that certifiers and importers confirm and properly apply the applicable rule.
Relating to motor vehicles and related products, the USMCS introduces several important changes. These include:
• Increasing the required Regional Value Content from the current 62.5% for passenger cars and light trucks to 75% by 2023;
• Eliminating the “deemed originating” impact of light-duty tracing;
• Allowing for the collective analysis of select “super core” components;
• Introducing the Labor Value Content requirement that mandates the certain workers earn, on average, $16 per hour; and
• Requiring producers of passenger vehicles, light trucks, and heavy trucks, to certify that 70% of their steel and aluminum purchases are of originating materials.
The sometimes-vexing NAFTA drawback rule continues in the USMCA. Under this rule, most drawback on exports to another USMCA party will be eliminated. Technically, the rule permits drawback or other duty deferral up to the lowest duty paid in either the country of first importation or the second importation. That means that parts are imported to the U.S. and subject to a duty of $10, then processed into a USMCA-originating article that is duty-free when imported into Canada, the maximum drawback allowed in the U.S. is zero, which is the lesser of the two duties owed. This scheme ensures that duty is paid at least once in North America. There are numerous exceptions including for merchandise exported in the same condition as when it was imported.
Under the agreement, Canada will raise its de minimis level to C$150 for duties and to C$40 for other taxes. Mexico will allow duty free entry for shipments of up to USD $117.
The main focus of the USMCA seems to be to address areas of continuing friction between the parties. Highlights of these elements include:
• Full national treatment for copyrights and related rights
• Minimum copyright term of the life of the author plus 70 years (with a 75-year minimum)
• Strong protection for geographical indications
• Prohibit customs duties on digital products including e-books, videos, music, and software when distributed electronically
• Limits on data localization requirements
• Mexico will commit to legislative changes to enhance the recognition of the right to collective bargaining
• The parties will adopt the labor rights recognized by the International Labor Organization
• Prohibit harmful fisheries subsidies including those that benefit illegal, unreported, and unregulated fishing and enhanced customs enforcement measures
• New protection for marine species including whales and sea turtles, including a new prohibition on shark finning
• Modernized process for public participation in environmental cooperation