The United States-Mexico-Canada Agreement (USMCA) has officially been ratified by all three North American parties, now what? For one thing, the United States, Canada, and Mexico must develop uniform regulations with an effective date prior to, or on June 1, 2020 which is the official implementation date of the USMCA. Additionally, the countries must all implement the other measures outlined in the agreement, such as complying with new e-commerce, intellectual property, environmental and labor rules. Upon completion of these measures, the countries will exchange certifications of compliance, and only then will the agreement become effective and officially replace NAFTA.
The uniform regulations are an essential part of previewing how each government intends to interpret and apply the new rules under the USMCA. While each country has been working on its implementation of uniform regulations, there are concerns that the current global COVID-19 pandemic will affect when such regulations are published and that companies will not have sufficient time before June 1 to review and ensure compliance with any changes, especially in regards to rules of origin. While companies can look to the currently published USMCA text, companies are concerned that unique interpretations can appear in the uniform regulations, thus impacting how certain rules should be applied. However, while we await each government’s publication of the regulations, it is still advisable for companies to immediately begin analyzing their supply chains (if they haven’t already) and evaluate the rules of origin impacting their businesses even if it is based on the currently available USMCA text. It will likely be easier to identify any changes between the USMCA text and the uniform regulations and report them through the business, versus starting a new review while racing against time.
One positive note is that in many cases, the rules of origin are more simplistic and originating status can be more easily met. Thus, many companies may determine that a higher number of goods will qualify under USMCA than did under NAFTA. In other cases, such as with the automotive sector, the rules are more complex with various overlapping thresholds.
Prudent companies should also consider changes to internal procedures that are necessary to ensure supply chain compliance. This includes evaluating whether any substantive differences between the USMCA and NAFTA exist. Meaning, businesses should be aware that items that qualified before under NAFTA may no longer qualify under the revised rules so that they will have to explore various strategies that can help ensure goods are originating. One such strategy, the de minimis rule, increased the amount of non-originating content from 7% to 10% that is permitted if all foreign inputs fall to meet the required tariff shift rule. In other words, if a good has a tariff shift rule of origin and certain inputs do not shift, the di minimis rule can be used to certify the good as originating as long as those inputs that do not shift are less than 10% of the value of the good.
These changes coupled with new rules of origin mean businesses need to coordinate with their entire supply chain on how to track these differences moving forward, and how it may affect overall global operations. Tracking these differences will likely be an involved, time-consuming process, and could take up to 6-8 months because businesses need to understand where its components are coming from (i.e., a costed bill of material is required) whether the inputs and finished good have been properly classified and whether the correct country of origin has been assigned to all inputs. While companies should have done this under NAFTA, often the required evaluation processes have not been maintained or there have been critical failures in the analysis itself. (Anecdotal evidence shows that at least 80% of NAFTA claims are not valid). However, this will likely be a beneficial exercise for companies as it will help navigate the internal changes that must be made to ensure the finished product meets the new USMCA rule of origin.
Understanding one’s global supply chain will help companies understand how to deal with the complex changes within the agreement. Some of which include:
- The USMCA does not prescribe a format an origin certification must take, meaning that a certificate of origin, if containing all the data elements, could be included on an invoice, or could be a separate document altogether. By planning now which avenue you want your company to accept/take, you can successfully plan ahead by incorporating these terms into new and existing agreements.
- The Exporter is no longer the only party that can execute the certification, the importer or producer can also execute the certification. The problem is that the importer generally does not have the information necessary to certify so procedures should address who should certify.
- The NAFTA Marking rules are being eliminated in lieu of the substantial transformation rule to determine country of origin. Consider whether some of your products are originating but nevertheless do not meet substantial transformation rules for purposes of marking and how to resolve these differences, such as ensuring that the manufacturing process is complex as opposed to simple, an important factor in meeting a substantial transformation.
- Make sure your Trade Compliance department and Accounting department work hand in hand to become familiar with procedures on how to respond to Origin Verifications. The new rules under USMCA provide the authorities to seek all the accounting records of an importer or exporter electronically via a questionnaire whereas under NAFTA these requests were not allowed unless the authorities performed an onsite visit. Thus, now thousands of documents can be required in order for an authority to confirm originating status. Responses should be carefully crafted to be responsive, but hopefully to avoid having to turn over a veritable library of information.
- Where a company fails to properly meet the rules of origin or fails to maintain or provide the records an authority deems necessary to verify originating status, penalties and additional duties can be imposed.
Special Automotive Considerations:
- Local content of steel and aluminum increasing to 70% in the automotive sector. Companies should begin asking suppliers and suppliers’ suppliers where their steel and aluminum originates.
- Automotive RVC requirement changes with the RVC threshold rising to 75%. Meaning, businesses should consider their supply chain and become familiar with new designations such as Core, Super Core, Principal and Complementary Parts.
- Increases in labor requirement. Businesses should consider whether at least 40% of automotive sector value content originates from labor making an average $16/hour
With the plethora of new requirements, it would be beneficial for companies to take this interim time to develop a plan for compliance. With bi-partisan support for the USMCA, it is likely that the new and updated provisions of the USMCA will be under more scrutiny when it is ultimately enforced.
We strongly encourage companies to schedule meetings with their supply team leaders to determine how to track supply chain compliance moving forward. Companies will need to consider (1) budgeting for this activity, (2) determining how/what type of certification they will accept from suppliers or that they will supply to their customers upstream, (3) whether auditing procedures should be implemented, and (4) how sourcing decisions impact whether a good can be certified as originating. While adapting to the new regulations may be cumbersome, it will put your company in a better position to comply with new regulations and ease the adjustment into this new era of the USMCA.
For any additional inquiries, or if you would like to discuss the transition from NAFTA to USMCA in more detail, please contact Adrienne Braumiller at Adrienne@braumillerlaw.com.