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    USMCA

    USMCA | What Is The New Agreement & Does It Replace NAFTA?

    What is USMCA?

    The United States-Mexico-Canada Agreement (USMCA) was established on September 30, 2018, as the successor to the 25-year-old North American Free Trade Agreement (NAFTA). The agreement between the US, Mexico, and Canada came into force on July 1, 2020. It is the continuation of a structured free market trade among the member nations and aims to reduce costs and increase predictability for cross-border business transactions.

    The USMCA resembles NAFTA in many ways. However, the updated USMCA country of origin rules for traded goods is more likely to influence regional commerce. In this sense, some businesses may have to evaluate their current operational strategies and adapt their supply chains to meet the new requirements under this Free Trade Agreement (FTA).

    Highlights of USMCA

    The key highlights of the USMCA are listed below:-

    • The agreement creates a significantly fairer playing field for the American workers. This includes improved rules of origin for automobiles, trucks, and other similar products and disciplines.

    • It works in the favor of the American farmers, ranchers, and all those in the agricultural sector. The clauses of the USMCA are aimed at modernizing and strengthening the food and agriculture trade in North America.

    • It supports the future economy by providing new protections for US intellectual property while also ensuring better and greater opportunities for trade across various US services.

    • The addition of new chapters to cover topics such as digital trade, anti-corruption, and good regulatory practices will also prove useful in the long run. A specific chapter is devoted to ensuring that the small and medium-sized businesses (SMBs) benefit from the agreement.

    • The agreement states that there will be no duties on online cross-border shipments worth less than US $150 to Canada. The minimum purchase price that qualifies for duties and taxes known as the de minimis threshold has been increased from US $20 to US $40.

    • The agreement also includes a termination provision to prevent the deal from becoming outdated. The agreement states that the deal is valid for 16 years but a mandatory joint review must be taken within the first six years. This review is aimed at determining whether the concerned parties want to extend the agreement for another 16 years. However, the ‘six months opt-out of the deal’ notice that existed in NAFTA has been maintained in the USMCA too.

    USMCA Pros & Cons

    Some of the major pros and cons of the USMCA are as follows:-

    Pros:-

    • It gives a boost to productivity and trade within North America and also protects vulnerable industries and individual businesses.

    • A reduction or elimination of tariffs helps reduce the cost of production and trade. This has a direct bearing on the retail prices. The lower prices also benefit the companies as they can now concentrate better on increasing their sale, turnover, and profit.

    • By protecting the workers in Mexico, the agreement aims to increase employment opportunities for the US-based workers as well, thus decreasing wage gaps.

    • The agreement also focuses on labor rights and fair play for work, especially in Mexico by incorporating stringent labor laws.

    • Protection measures for healthcare and data markets have been restructured in the agreement so that firms remain competitive while maintaining incentives for growth.

    Cons:-

    • It gives less protection to certain industries.

    • The drug manufacturers cannot claim monopolistic control over biologics.

    • The production costs may rise marginally as higher-wage factory regulations set in.

    In short, the advantages of the USMCA revolve mainly around restructured protections and incentives aimed at making production in North America more profitable and efficient. These protections also help maintain ethical boundaries and result in the prevention of labor exploitation. However, the very same protections can also necessitate an increase in costs. Experts believe it is a small price to pay for ensuring North America enjoys sustainable manufacturing and trade prospects.

    USMCA V/s NAFTA

    The USMCA cannot merely be regarded as a continuation of NAFTA. Most of the provisions of the USMCA are updates to rules that were framed decades ago. Here are some major differences between the two agreements that promote and protect trade amongst the three North American countries.

    Provisions of dispute settlement

    Under the USMCA, Canada has to completely withdraw from the Investor-State Dispute Settlement. However, the settlement will be used in some cases between the US and Mexico. Investors from both these countries will not have access to investor-state dispute resolution anymore.

    Rules of origin for automobiles

    The US administration had voiced concerns that NAFTA encouraged the outsourcing of automobile production which was damaging manufacturing and jobs in the US. According to NAFTA, automobiles must have 62.5% of their components made in Mexico, the US, or Canada to claim zero tariffs. The USMCA has raised that to 75% while also stating that 40-45% of the automobile components must be manufactured by employees earning more than US $16 an hour.

    Intellectual property

    The USMCA has added more provisions to address the issue of intellectual property and the digital economy. The USMCA has extended the copyright-terms to 70 years from the existing 50 years beyond the life of the author. There are other clauses added to protect the interest of internet enterprises and ensure they are not held liable for any content their users create. The NAFTA rules were comparatively more flexible in the areas of Internet Protocol (IP) and the digital economy.

    De minimis threshold

    The USMCA has increased the threshold of de minimis (duty-free) from US $20 to US $150 for imports into Canada, and from US $50 to US $100 for imports into Mexico. This can affect the business prospects and profitability of retailers in Canada and Mexico, especially while importing low-value goods.

    Government procurement

    The USCMA allows preferential treatment of all SMBs. The agreement also recognizes and encourages the use of electronic tendering procedures and has measures that provide protection against corruption and fraud for business dealings in government procurement.

    Environmental standards

    The USMCA specifies the need to carry out an environmental impact assessment for all the projects that have the potential to adversely affect the environment. As per the agreement, all the businesses must comply with the Environmental Policy Act when they are carrying out such projects in the US. The NAFTA regulations in this regard were less stringent.

    Canadian dairy market

    The USMCA has introduced more reforms to the Canadian dairy pricing system, one such being the exclusive access to US farmers in the Canadian dairy market. These reforms are expected to increase the US dairy exports by more than US $314 million annually.

    Certification of origin

    All the participating countries can get a Certificate of Origin under the USMCA which can be obtained through informal documentations. Unlike under NAFTA, businesses are no longer required to complete a formal Certificate of Origin. Instead, it can be completed by the producers, importers, or exporters.

    Sunset clause

    There was no update deadline or a sunset clause in NAFTA. This incongruity has been set right by USMCA’s sunset clause. Under this clause, all the participating parties have to re-examine and renegotiate their terms. They have the right to withdraw from the agreement on or before its 16th-year post-implementation. This also ensures that trade issues are not ignored.

    USMCA’s Rules of Origin

    The general principles for determining the origin of goods under the USMCA are similar to those mentioned in NAFTA. A product will qualify as originating and will therefore be eligible for preferential tariff treatment under the USMCA if it satisfies any of the following criteria:-

    • The product is wholly obtained or produced entirely in the territory of one or more parties. This remains largely unchanged from the NAFTA rule which states that goods originate if they are produced entirely in Canada, Mexico, and/or the US exclusively and are using materials that are considered to be originating according to the terms of the agreement.
    • The product is produced entirely in the territory of one or more of the parties using the non-originating materials. The product must satisfy the applicable rules of origin stated in the agreement.
    • The USMCA’s product-specific rules of origin are similar to those mentioned in NAFTA. They are based on the changes in tariff classification, regional value content (RVC) requirements, and other product-specific processing requirements.
    • The goods are produced entirely in the territory of one or more of the parties and are classified with their materials. It must also satisfy the unassembled goods definition/requirements and must meet the RVC threshold.

    USMCA Certificate of Origin

    The USMCA Certificate of Origin requirement doesn’t entail using a specific form, unlike the NAFTA. A request for preferential treatment under the USMCA should contain specific data elements. It must also establish clearly that the product claiming preferential treatment originates and meets the requirements of the USMCA Chapter V. This information can be provided on the invoice or any other document as long as it establishes the originating product in sufficient detail so that its identification is enabled and conforms to the requirements of the agreement.

    How to get an USMCA Certificate of Origin

    For availing the USMCA Certificate of Origin, the following steps must be completed:-

    Step 1:- Fill the appropriate application form and have it notarized, however, keep in mind that not all the chambers require notarization.

    Step 2:- Show where the goods are manufactured through the manufacturer’s documentation or commercial invoice.

    Step 3:- Complete the Certificate of Origin document. Using the services of an agency or a broker can help you wrap up the process faster.

    Step 4:- Take your affidavit, Certificate of Origin document, and the corresponding invoices to your Chamber of Commerce. You may have to pay a fee for stamping the Certificate of Origin. This fee is reduced for the members.

    An electronic Certificate of Origin (eCO) is a better option as creating a hard copy of the same can be time-consuming and expensive. You can submit the eCO online and get the certificate stamped by the authorities in less than a day or even earlier.

    You can download the sample USMCA Certification of Origin form from HERE.

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    Alexandra Ortiz
    Alexandra Ortiz
    Content and PR at Drip Capital
    10 min read