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After 26-and-a-half years of governing trade among the United States, Canada and Mexico, the North American Free Trade Agreement (Nafta) is no more. Its replacement, the US-Mexico-Canada Agreement (USMCA), enters into force today, but with new US customs guidance indicating that full enforcement won’t take place until the end of the year, the trade deal looks to have been implemented in name only.
While seen as unlikely to move the needle on North American trade in any tangible sense, the USMCA does contain certain key changes from Nafta that broadly impact importers, exporters, and manufacturers. These include an increase in the de minimis threshold – the percentage of a good that must be produced in a USMCA market in order to qualify as an originating good – from 7% to 10%, as well as changes to the rules of origin for the automobile sector.
Getting the deal over the line has been a challenge. After the last signatory, Canada, ratified the new pact in March, USMCA’s implementation date was set for July 1, which was already seen as a tight deadline even before the Covid-19 pandemic confined lawmakers and industry leaders to their homes. In an open letter to US trade representative Robert Lighthizer, senators Chuck Grassley and Ron Wyden, members of the US Senate Finance Committee, called for a postponement, warning that businesses would struggle to obtain the information they need to adjust to the new rules and comply by that date.
The interim regulations providing guidance to industry on the new requirements under USMCA were only released on June 16, leaving manufacturers, particularly carmakers, at a loss as to how they might examine and adjust their production chains in time to meet the new rules, particularly as lockdown measures are still in place.
“There are a lot of unanswered questions,” says Richard Mojica, trade lawyer at Miller & Chevalier. “There are areas that have not been fully resolved and importers still have questions that have not been fully responded to.”
He points to several issues, including the onerous process of re-certifying products that qualified under Nafta – there is no grandfathering in of previously qualified goods, even if they adhere to the new rules, as well as the lack of a unified certificate of origin under USMCA – a standardised form that was available under the old deal. “There is no certificate,” he says. “There is no prescribed format. Some companies are including it in their commercial invoices, others are creating their own stand-alone certificates. Companies are having to adjust and figure out the best way to do it.”
Nonetheless, the Trump administration would not be swayed in its commitment to getting the deal done on schedule, Mojica tells GTR.
“Lighthizer has been adamant about rolling out the agreement by July 1,” he says. “For the Trump administration it was very important, because it is consistent with its overall trade narrative of decoupling supply chains from China. This is seen as a major milestone that will enable companies to invest and manufacture in North America as opposed to China.”
However, nestled amid the pages of a US Customs and Border Protection (CBP) document on USMCA interim implementing instructions are several paragraphs that indicate that, while the deal has officially gone into force, enforcement activity will take a back seat while industry gets itself up to speed with Nafta’s replacement.
“CBP understands that the trade may need time to adjust business practices to comply with the new requirements under the USMCA, particularly relating to the preferential tariff treatment of goods,” the document says. “During the first six months after entry into force, CBP will focus on supporting the trade’s efforts to fully comply with USMCA requirements, including providing webinars and other outreach efforts to educate the trade on the new agreement.”
It goes on to say that in order to provide US companies with sufficient time to adjust to the new requirements, CBP may “show restraint in enforcement” over the period, as long as importers are making “satisfactory progress” toward compliance with the rules to the extent of their ability.
“What this means is that for the first six months of the agreement, customs will seek to educate traders on how to do things correctly rather than hitting them with penalties,” says Mojica.
This transition period is not a usual feature of trade agreements. Indeed, the normal process is that adjustments are made by traders prior to implementation, with entry into force meaning just that. Through a deft sleight of hand, therefore, the US has succeeded both in getting the revised trade deal, one of President Donald Trump’s top legislative priorities, over the line by the deadline – on paper at least, while in practice holding off on actually enforcing it until later on in the year.