Announced on September 30th, the United States, Mexico and Canada renegotiated NAFTA and forged a preliminary trilateral trade agreement. This new agreement is known by USMCA and as NAFTA 2.0.
In anticipation of NAFTA 2.0, let’s look at a few highlights of what’s different in this proposed agreement:
Rules of Origin:
Under USMCA, some industries will see no changes to their rules of origin. Note: The rules of origin allow a good to qualify under the USMCA. Other industries like the chemical industry will see an easing of rules to qualify their goods, provided it meets one of the eight rules of the chemical or allied industries. For example, a good produced through a chemical reaction in the territory in one or more of the countries will be treated as originating.
However, the auto manufacturing industry will see a tightening of NAFTA’s already complex rules of origin which dictate the requirements to qualify for duty free or zero tariffs. The new agreement calls for even more car components to be manufactured in North America than previously under NAFTA, even if those parts cost more than other sources outside of North America. Specifically, motor vehicles and trucks must have at least 75-percent of their parts (up from 62.5-percent) manufactured in the USMCA region. If manufacturers cannot meet this requirement, they will have to pay a 2.5-percent duty. In addition, 30-percent (40-percent by 2023) of autos must be produced by workers earning an average production wage of at least $16.00 per hour.
Streamlined Certificate of Origin:
The very formal Exporter’s Certificate of Origin will no longer need to be completed. Instead a free trade declaration can be completed in any format provided it contains the minimum data elements in Annex 5-A of the agreement (attached). It can even be on the commercial invoice or electronically. It can be a single or blanket declaration and will be good for up to 12 months. Customs will allow for a declaration for low value shipments (LVS) for shipments at US $1,000 or less.
Effects on Duty Drawback and Duty Deferral Programs:
No change to previous duty drawback and duty deferral rules in the NAFTA (Article 2.5). However, automakers who are unable to hit the 75-percent threshold and find themselves having to pay the 2.5-percent duty on U.S. imports and then subsequently exported their cars, would have an uptick in duties eligible for drawback refund.
- De Minimis is now 10-percent up from 7-percent in the previous agreement.
- For express shipments, the de minimis threshold for duty-free and tax-free shipments is set at US$100 for the US, at US$100 for Mexico, and for Canada at C$150 (customs duties) and C$40 (taxes).
In summary, it is important to understand that NAFTA is still in effect. USMCA is expected to be signed by the three parties later this year or in early 2020. After that, it must be ratified by the U.S. Congress and the Canadian and Mexican legislatures. This may take months and, therefore, the agreement is not expected to take effect until January 1, 2020. Until then, continue to issue NAFTA certificates.
By Jim Trubits