USMCA –Key Changes to NAFTA and Preparing for Implementation

The United-States-Mexico-Canada Agreement (“USMCA”) is currently slated to take effect beginning on July 1, 2020.  A review of the text of the USMCA reveals that USMCA retains many elements of the North American Trade Agreement (“NAFTA”), while displacing others with new or enhanced rules.  Although the content of USMCA is publicly available, USMCA in and of itself does not provide much of the detailed information needed for importers, exporters, and manufacturers to effectively plan for the coming changes.  Instead, most importers, exporters, and manufacturer will likely rely more on the USMCA Uniform Regulations (“Uniform Regulations”), which are expected to be issued on (or around) June 1, 2020.  Nonetheless, to assist businesses in planning for the new rules, CBP published Interim Implementing Instructions (“Implementing Instructions”), pending publication of the Uniform Regulations.  Although the Implementing Instructions do not provide much in the way of additional guidance, they do provide some preview of how CBP intends to administer certain provisions of USMCA.  In light of the current status of USMCA and its implementation, we provide below an overview of some of the key import-related changes introduced under USMCA and some practical guidance for preparing for and adjusting to the new rules.

Key Changes for all Importers

A review of USMCA and the Uniform Regulations reveals certain key changes from NAFTA that broadly impact importers, exporters, and manufactures.  We recommend that importers, exporters, and manufacturers become familiar with these key changes and assess the impact.

  • De Minimis Rule: USMCA raises the de minimis threshold from 7% to 10%.

Changes to Marking Rules: Generally, CBP applies a “substantial transformation” analysis to determine the origin of a good for marking purposes.  However, under NAFTA, CBP applied special marking rules for goods imported from Mexico and Canada.  The rules often, but not always, aligned with NAFTA’s rule of origin.  Unlike NAFTA, USMCA does not specifically authorize special marking rules.  This has led many to assume that CBP would apply a “substantial transformation” analysis for marking purposes for goods imported from Mexico and Canada.  However, CBP’s Implementing Instructions suggest that CBP intends to continue to apply special marking rules for goods imported from Mexico and Canada. 

  • Certificate of Origin: Under NAFTA, only exporters or producers could complete a certificate of origin. Under USMCA, an importer can now also complete a certificate origin based on information from the producer.  However, the importer is still required to use reasonable care in relying on a producer’s information.  Furthermore, the certificate of origin need not be in a prescribed format – the certificate will be accepted provided it contains all the data elements set forth in USMCA. 
  • Refunds of Merchandise Processing Fees (“MPF”): Unlike NAFTA, USMCA does not authorize refunds of MPF for post-importation claims. Thus, if an importer does not make a claim for preferential tariff treatment at the time of entry, the importer cannot later obtain a refund for MPF through a post summary correction or through reconciliation.  Notably, sources indicate that the failure to allow for post entry refunds of MPF was the result of oversight and that Congress may act to correct the mistake before USMCA becomes effective. 
  • Rules of Origin: In addition to the changes to the de minimis threshold, USMCA has made other changes to the rule of origin for a broad range of products. However, certain areas were subject to more extensive changes than others.  In this regard, USMCA makes radical changes to the automotive rules of origin, as discussed below. 

Changes to the Automotive Rules of Origin

While all importers, exporters, and producers would benefit from understanding the major changes under USMCA, certain industry sectors are particularly impacted by the new rules, including the automotive and textile sectors.  With respect to the automotive sector, this sector is now subject to a number of new requirements that will complicate compliance and further limit the goods qualifying for preferential treatment.  Among the changes made by USMCA in connection with the automotive sector, are the following changes:

  • Increasing the RVC requirement for most vehicles to 75%.
  • Creating differing content requirements for “core,” “principal,” and “complementary” parts, which are subject to content requirements of 75%, 70%, and 65%, respectively.
  • Requiring automotive manufacturers to source at least 70% of their steel and aluminum from North America. The Implementing Instructions provides a list of steel and aluminum tariff subheadings that are covered by this requirement.
  • Creating labor value content (“LVC”) rules, which require 40% of an automobile and 45% of a light truck to be produced with an average labor wage of $16 per hour.

Adjusting to the Changes

For importers, exporters, and producers impacted by USMCA, among the areas that require special attention are sourcing, recordkeeping and accounting, and customs entry processes. Sourcing considerations are implicated by changes to the rules of origin.  Importers should review USMCA’s rules of origin to determine whether their goods are eligible for preferential tariff treatment under the new rules and adjust sourcing accordingly.  Notably, for many goods, USMCA eases the rules of origin, making it easier for goods to qualify for preferential tariff treatment.  Thus, many importers will find increased opportunities for duty savings under USMCA.  In conducting this review, we recommend importers take a “start from scratch” approach and conduct a comprehensive review of their products under the new rules.

The new rules authorize 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, it is advisable that importers implement a recordkeeping system that collects and retains all relevant origin-related records, while also enabling quick access and production of those records to the governmental authorities.  The recordkeeping system should include costed bills of materials, with corresponding material HTS codes.  Accounting records should be linked in some way to each of the materials shown in a bill of materials to facilitate verification of the cost and payment made.  For certain industries, particularly the automotive industry, these compliance systems will need to account for different kind of parts (e.g., “core,” “principal,” and “complementary”), materials, and labor.

Businesses impacted by the changes should revise company policies, standard operating procedures, work instructions, and other company documents to reflect the new changes and promote awareness of USMCA’s requirements within the company.  In addition to the rules of origin and recordkeeping/accounting requirements, company policies and procedures should address customs entry processes, including those impacting certificates of origin and special program reporting.  These policies and procedures should be supported through robust training of relevant employees.

While undertaking the process of understanding and adjusting to the new rules, importers may be able to look to CBP as a resource. Namely, CBP has launched a USMCA center to coordinate implementation of USMCA (“USMCA Center”).  The group consists of around 10 individuals in CBP from various backgrounds, including trade policy, operations, import specialists, legal, and auditing.  The USMCA Center is intended to be a resource for importers that may have questions or concerns regarding implementation of USMCA.  Importers seeking an understanding of the new rules and how they may apply to their business should consider contacting the USMCA Center.

Finally, importers should closely monitor for new guidance from CBP and other changes.  The process of passing and implementing USMCA has proved to be ever fluid, and further updates and clarification are likely to occur.