USMCA takes effect. How does it affect supply chains?

The U.S.-Mexico-Canada Agreement entered into force Wednesday morning after three years of trilateral negotiations, trade disputes and amendments by the U.S. Congress.

While the agreement has been hailed for raising standards for and increasing enforcement of certain labor, environmental, pharmaceutical and digital trade provisions, shippers are still struggling to determine how the transition from the North American Free Trade Agreement (NAFTA) to the USMCA will impact their business.

During a Flexport webinar on June 17, 60% of respondents to an attendee poll said they will "probably make some changes, but I’m not sure what I need to do" in order to remain in compliance and take full advantage of potential trade benefits under the new rules.

"I actually wasn’t surprised," Tom Gould, VP of customs and trade advisory at Flexport, told Supply Chain Dive in an interview. "The devil is in the details," and a lot of the regulations in NAFTA and the USMCA are highly product-specific, he said.

While the USMCA retains a similar structure to NAFTA, hence the nickname NAFTA 2.0, changes to rules of origin (ROO) requirements, labor enforcement, de minimis levels and a new Sunset Clause will have wide-ranging impacts for shippers going forward.

If supply chain managers prepared for the shift in advance, establishing visibility into their supplier networks for example, they’ll be well positioned to take advantage of the agreement’s trade streamlining benefits, Gould said. Managers left with more questions than answers when the law takes effect on Wednesday can begin bracing for impact in the four aforementioned areas.

Rules of origin introduce new level of complexity

Changes to ROO requirements under the USMCA will impact shippers, particularly those in high-tech machinery or auto manufacturing, whose products contain hundreds of globally-sourced components.

"If you look at the USMCA auto rules and compare them to the NAFTA rules, the level of complexity that's been introduced by USMCA is significant," Gould said. "When in the past we had to track one or two factors in order to qualify a car for NAFTA, under the USMCA it's more like five or six different factors that we have to track all the way back through the supply chain. So it's one thing to know where an engine was built, but it's another thing to know where the steel was mined."

As the coronavirus outbreak stabilizes in some regions and spikes in others, procurement managers are working to build resilience in their operations through diversifying and regionalizing their supply chains. Doing so often involves onboarding additional suppliers and shifting geographies when a disruption (such as a factory shutdown due to a coronavirus outbreak) occurs.

To do this effectively, investing in visibility tools that allow supply chain managers to quickly qualify, onboard and monitor suppliers remotely will be key throughout the pandemic and in the months ahead.

"Supply chain managers should review previous NAFTA Certificates of Origin and ensure that their suppliers are complaint with the new USMCA deal," Tim Yu, a supply chain risk intelligence analyst at Resilience360, told Supply Chain Dive via email. "For instance, this could be ensuring that North American suppliers meet their regional content requirements as this could be impacted if a firm is continuing to source certain percentage of parts/components from China."

USMCA factors into reshoring decisions

U.S. companies working through new rules of origin requirements under the USMCA will have to make decisions about whether nearshoring more operations to Canada or Mexico, or absorbing tariff costs from overseas suppliers is the better financial and/or logistical option.

Auto manufacturers must now certify that 75% of their steel and aluminum comes from Canada, Mexico or the U.S. to qualify for duty-free trade under the USMCA, up from 62.5% under NAFTA. In addition, there is a Labor Value Content (LVC) requirement, stipulating that a certain percentage of a finished vehicle is made by workers earning a minimum of $16 per hour.

"I don't think [auto companies] have really expressed what their plans are going to be based on all these new complexities, all these new costs," Gould said, but he expects to see the industry continue its shift away from procuring raw materials, components and labor in North America.

"There's going to be a lot of talk in the short term about nearshoring. But I'm not sure there's the stomach on the part of either consumers or businesses to incur the cost to make that a reality."

Marc Busch

Karl F. Landegger Professor of International Business Diplomacy at Georgetown University

If companies already know their current sourcing models won’t allow them to qualify for duty-free trade under the USMCA, "you don't really care where the steel or the aluminum comes from, you don't care what the labor rate is," Gould said. This opens up opportunities for supply chain managers to pursue low-cost sourcing and labor elsewhere and absorb the tariff cost if that works out to be less costly than going through Canada or Mexico.

Auto manufacturers will have a buffer period of nearly a year to fully comply with these measures, Brenda Smith, Customs and Border Protection’s executive assistant commissioner for trade, told reporters June 30, according to a Reuters report. While they must certify that their current and future sourcing plans are compliant with USMCA rules by the end of 2020, CBP will work with shippers until June 2021 under an "informed compliance period" to help them correct remaining errors instead of imposing punitive tariffs.

Despite the initial hurdles that may come with the agreement’s implementation, nearshoring to Mexico remains top-of-mind for a lot of shippers looking to diversify amid ongoing trade tensions with China.

"There's going to be a lot of talk in the short term about nearshoring. But I'm not sure there's the stomach on the part of either consumers or businesses to incur the cost to make that a reality … for the long haul, it's incredibly costly," Marc Busch, a professor of international business diplomacy in the school of foreign service at Georgetown University, told Supply Chain Dive in an interview.

"I have to believe that there's only so much latitude that some of these businesses have in terms of where they can go and where they can remain price competitive." Busch said. "So in the long term, I do believe that the market will win. But in the short term, [navigating trade] politics will give everybody a big headache."

Companies that map their supply chains and gain a deep understanding of their sourcing are better positioned to benefit from the USMCA through nearshoring, according to Gould. It’s "the companies that are not willing to invest the time and efforts to learn how their products are made are going to be the ones that are going to bite the bullet and stick it out in Asia," he said.

Reducing barriers for cross-border shipments

Businesses sending goods to the Canadian and Mexican markets stand to benefit from changes to de minimis rates and customs paperwork.

Under the USMCA, Canada will raise de minimis levels from 20 Canadian dollars ($15.29) to 40 Canadian dollars ($30.59) and provide duty-free shipments for items valued up to 150 Canadian dollars ($194.66). Mexico’s de minimis values will remain at $50 and provide duty free shipments up to the equivalent level of $117.

The new rates are designed to provide better access to the Canadian and Mexican market for American small and medium-sized enterprises (SMEs). These businesses "often lack resources to pay customs duties and taxes, and bear the increased compliance costs that low, trade-restrictive de minimis levels place on lower-value shipments, which SMEs often have due to their smaller trade volumes," according to a fact sheet from the Office of the U.S. Trade Representative.

Under NAFTA, and now the USMCA, shippers seeking to import products tariff-free from Canada or Mexico must fill out a certificate of origin.

"USMCA's process of obtaining a certificate, however, will be administratively less burdensome," according to a whitepaper from Hogan Lovells, because there is no longer a mandatory format for the certificates. "Instead there is specific information that must be included in the certification of USMCA origin."

UPS created its own certificate form shippers can fill out with the following information:

Which party is making the certification (importer, exporter, or producer).
Certifier, exporter, importer and producer details: Name, title, address, phone number and email.
Description and HTSUS number (to, at least, the 6-digit level).
Origin criteria.
Blanket period (if applicable).

Similarly, shippers working with the U.S. Postal Service need to "provide accurate and detailed information on customs labels for their outbound international shipments … and should also consult with USPS Sales representatives, who can offer solutions for payment of Canadian duties and taxes," in the event that is required, a USPS spokesperson told Supply Chain Dive via email.

Cross-border postal rates are also going up on Wednesday per an agreement reached by the Universal Postal Union last fall. Rate increases will vary, however the International Mailers Advisory Group estimates prices for shipments from the U.S. to Canada could increase by 50%.

The Sunset Clause brings added uncertainty

Unlike NAFTA, which once enacted was intended to remain valid indefinitely or until a new agreement replaced it, the USMCA is designed to expire. The trade deal will come to an end 16 years from the date it entered into force on July 1, 2036, per its Sunset Clause.

In order for the deal to continue, six years from the USMCA’s entry into force, in 2026, the member countries must submit any changes or recommendations for the deal to a "joint review." If all parties can agree on the submitted proposals and confirm in writing that they wish to renew the deal, it will be extended for another 16 years. Joint reviews take place every six years that the deal remains in place.

If one of the member states does not agree to remain in the USMCA during a given review, then the joint review process will take place annually until the 16 year term has expired.

"Companies will need to think carefully of how they may need to restructure their supply chains keeping the sunset clause in mind."

Tim Yu

Supply chain risk intelligence analyst, Resilience360

"The added uncertainty brought due to the USMCA's 'sunset clause' will mean that North American businesses will need to make contingency plans over the long term due to its possible termination," Yu wrote. "Given the strict ROO and [Regional Value Content] requirements imposed under USMCA, companies will need to think carefully of how they may need to restructure their supply chains keeping the sunset clause in mind."