A closer look at USMCA: 6 key changes shaping the ‘new NAFTA’ and its updated commercial approach

Clayton & McKervey

Southfield, Mich.—December 5, 2018—The United States-Mexico-Canada Agreement (USMCA) was signed November 30 by President Trump, President Enrique Peña Nieto and Prime Minister Justin Trudeau, and as the United States waits for final legislative approval, Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, notes that companies should be aware of the impact the new trade agreement will have on their commerce because many of the old NAFTA rules—rules that were made before the explosion of the digital economy—have been amended.

“Since NAFTA was implemented in 1994, trade volumes among the three countries ballooned from $290 million in 1993 to more than $1.1 trillion in 2016 as a result of improved competitiveness through more cost-efficient supply chains,” said Alex Martin, a principal at Clayton & McKervey who leads the firm’s transfer pricing practice and is also the firm’s economist. “Whether you love, hate or are indifferent to the USMCA really depends on your industry and line of business.”

Under the re-branded agreement, American dairy farmers will be granted more access to Canadian markets; intellectual property and digital trade protections have been bolstered; and the percentage of car parts manufactured in North America will be increased. Opponents argue that revisions don’t go far enough in allowing the free flow of goods and services across borders (tariffs), protecting American jobs, facilitating higher wages and protecting the environment.

Martin believes that while many of the NAFTA rules continue, the USMCA contains six noteworthy modifications that affect companies—all phased in over several years after the USMCA takes effect in 2020.

1.) Higher Regional Content for Vehicles
Under the USMCA, vehicles would need to have 75 percent of the regional value content sourced from the United States, Mexico and Canada to qualify for duty-free treatment, up from 62.5 percent in NAFTA. This change in the Rules-of-Origin is intended to force automakers to source more parts from U.S., Mexican and Canadian manufacturers.

2.) High-Wage Factory Production Requirement
To qualify for duty-free treatment, the USMCA would mandate that a significant percentage of parts must be produced in high-wage factories to be eligible for duty-free treatment. By 2023, at least 40 percent of components must be made in factories where workers average at least $16 per hour.

3.) U.S. Steel and Aluminum Tariffs Still Apply to Mexico and Canada
Recently imposed U.S. tariffs on aluminum and steel have not been eliminated under USMCA, nor have the Mexican and Canadian retaliatory tariffs been removed.

4.) Cap on Vehicles Exported from Canada and Mexico to the U.S.
Under the USMCA, both Canada and Mexico are limited to duty-free exports of 2.6 million vehicles to the U.S. market. The U.S. will charge duties of 2.5 percent on finished vehicles once the cap is exceeded. Mexico and Canada exported approximately 2.57 million and 1.6 million vehicles, respectively, to the U.S. over the past during the past 12 months.

5.) USMCA is a 16-Year Agreement and a Review Every Six Years
USMCA has a 16 year “sunset clause” where the agreement expires. Negotiators also agreed upon a review period every six years where each party can decide whether they wish to continue.

6.) Under-the-Radar Changes
The USMCA does provide for increased market access in the financial services and Canadian dairy industries. The agreement also enhances intellectual property protection, most notably for pharmaceutical companies. Finally, the USMCA also makes it easier for Mexican workers to join labor unions.