Change Country

International Businesses

NAFTA 2.0? New USMCA Trade Agreement Makes Subtle Changes to NAFTA—but Not a Done Deal

Posted on October 8, 2018 by

Clayton & Mckervey

Clayton & McKervey

Share This

You could hear a collective sigh of relief in some quarters when trade negotiators reached a compromise for a new US-Mexico-Canada Agreement (USMCA). The USMCA would replace the North American Free Trade Agreement (NAFTA). The USMCA deal agreed to on September 30, 2018 adds Canada to a US-Mexico agreement completed in August of this year.

What is Most Important?
Assuming legislative approval, there is still a free trade agreement among the US, Mexico and Canada.

Since NAFTA was implemented in 1994, trade volumes among the countries increased from $290 million in 1993 to more than $1.1 trillion in 2016. Closer trade integration has improved competitiveness through more cost-efficient supply chains, among other benefits. The recent threat to withdraw from NAFTA was a source of considerable anxiety and uncertainty.

Status Quo NAFTA or Something New?
While many of the NAFTA rules continue, the USMCA includes some noteworthy modifications that affect companies; all phased in over several years.

  1. Higher Regional Content for Vehicles
    Under the USMCA, vehicles would need to have 75 percent of the regional value content sourced from the US, 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 US, 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. US Steel and Aluminum Tariffs Still Apply to Mexico and Canada
    Recently imposed US 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 US
    Under the USMCA, both Canada and Mexico are limited to duty-free exports of 2.6 million vehicles to the US market. The US will charge duties of 2.5% on finished vehicles once the cap is exceeded. Mexico and Canada exported approximately 2.57 and 1.6 million vehicles, respectively to the US 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.

No Guarantee that USMCA Will Be Implemented
Trade negotiators did have a firm September 30 deadline to reach an agreement, so Mexico’s outgoing president Enrique Pena Nieto could sign the deal before leaving office December 1, 2018. However, legislatures must still ratify the USMCA, including a new US Congress starting in 2019. NAFTA passage was a difficult legislative feat in 1994, and we expect domestic political considerations may drive whether USMCA is ultimately implemented. Hold your breath!

For more information, contact Clayton & McKervey.

Related Insights

International Businesses

Bringing Mobility to Detroit

Posted on September 13, 2022 by

Teresa Gordon leader of the global accounting team at Clayton & McKervey
We’re excited to share this news from the Detroit Regional Partnership. For companies needing help planning mobility focused expansion to the US – from the UK, Europe or Asia, there is a well-connected team to help with all aspects of foreign direct investment.  Learn more about how we can help here.

International Businesses

The Future of Global Mobility Tax

Posted on September 12, 2022 by

Teresa Gordon leader of the global accounting team at Clayton & McKervey
The global mobility landscape is changing. What began as a need to work from home during the worldwide pandemic is evolving into a “work from anywhere” trend that appears to be here to stay. Learn how this impacts the competition for talent and multi-jurisdiction tax compliance.

International Businesses

Teresa Gordon Chosen for SelectUSA Mentorship

Posted on June 24, 2022 by

Clayton & Mckervey
C&M Shareholder Teresa Gordon will be participating in SelectUSA’s Select Global Women in Tech (SGWIT) Mentorship Network.

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content