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The USMCA Is Coming: Are You Ready?

It is only a matter of time — and Canada — before the USMCA comes into force. In this QAD Precision Report, we look at some of the key differences between the USMCA and Nafta.

On Thursday, 16 January, the US Senate voted to approve the United States Mexico Canada Agreement (USMCA). The trade deal passed with a comfortable majority — 89-10 — and will now be signed into law. Thursday’s vote followed the US House of Representatives vote on 19 December 2019. The House of Representatives required changes to the revised trade agreement to enforce labor rights and environmental rules before passing the legislation.

Mexican President Andres Manuel Lopez Obrador welcomed the Senate’s approval. Mexico initially ratified the updated free trade agreement on 20 June 20, 2019. Furthermore, on 12 December 2019, Mexico’s Senate approved changes to the trade deal, including agreeing to dispute resolution panels to protect workers’ rights.

It may be some time before the USMCA comes into force. Canada has not yet approved the deal. Nonetheless, the wind is at the USMCA’s back. Canada’s Deputy Prime Minister, Chrystia Freeland, claimed that approving the USMCA will be a “a top priority” when Canada’s parliament returns to session on 27 January.

The updated trade agreement shares many similarities with its predecessor, the North American Free Trade Agreement (Nafta). However, there also are a number of key differences. We will discuss the most striking ones here.

Keeping Cross-Border Trade & E-Commerce Flowing

The USMCA introduces some changes to cross-border trade. These take into account the explosive growth of e-commerce. Under USMCA, the signatory countries will simplify the cross-border transportation of goods by using technology to reduce administrative delays and minimize transaction costs. As a result, the US, Mexico and Canada will use a single portal to electronically submit cross-border documentation.

A second important change is that Canada and Mexico will increase their de minimis shipment thresholds. Under Nafta, shipments imported into Canada with a value of more than C$20 are subject to duties and require customs documentation. When the USMCA comes into force, this will increase to C$40 for tax and C$150 for customs duties. In a similar manner, Mexico’s tax-free de minimis will be $50 under USMCA, while shipments valued at $117 or less will be duty-free.

This is good news for retailers and online shoppers in all three countries. Cross-border e-commerce is on the rise. The UPS Pulse of the Online Shopper survey found that in 2017, 83 percent of online shoppers in Canada, 78 percent in Mexico, and 47 percent in the US purchased goods from an international seller. 

Automobile Content Changes

One of the most notable differences between USMCA and Nafta concerns automobile manufacturing. Under the USMCA, car makers will need to increase the number of parts made in one of the three signatory countries for their finished products to qualify for preferential duties. Nafta regulations specified 62.5 North American content; USMCA requires 75 percent by 2023 — rising to a possible 80 percent, depending on the method of calculation. 

Furthermore, the new trade deal also includes labor provisions. Under USMCA, 40 percent of the overall content of a passenger car or light truck (and 45 percent for trucks) must be produced by workers earning at least $16 per hour. This provision covers R&D staff as well.

Rules of Origin Changes

The automobile industry is not the only one likely to feel the impact of the USMCA. There are also changes to Rules of Origin for a number of products, including textiles and chemicals. 

The USMCA also introduces changes to regional value content (RVC) calculations. The new agreement uses the same two methods as Nafta to calculate RVC —  net cost or transactional value — but there are some significant differences. Under the USMCA, non-originating material may qualify as originating, depending on the value of the processing, and the value of the originating material used in the production of the non-originating material.

The de minimis threshold for non-originating content has also changed. Under Nafta, the threshold was 7 percent, while the USMCA ups this to 10 percent. 

Another significant difference is the USMCA’s provision for recovered materials. Under the new trade agreement, recovered materials from the signatory countries will qualify as originating when used in remanufactured goods.

When USMCA comes into force, products that are currently eligible for preferential treatment under Nafta may no longer be eligible under the new agreement. In a similar manner, goods which do not currently qualify for duty-free status may do so under the USMCA.

How QAD Precision Can Help

QAD Precision Free Trade Agreement simplifies free trade agreement compliance by automating the most time- and labor-intensive steps. Using QAD Precision, enterprises can automatically qualify goods according to current preferential Rules of Origin legislation. Companies can verify FTA origin determination in real-time — and in fractions of a second.

QAD Precision’s Free Trade Agreement solution complies with the FTA requirements for all trade agreements recognized by the World Trade Organization. Furthermore, the solution allows enterprises to create “What if” scenarios for upcoming free trade agreements, such as the USMCA.

In addition, QAD Precision’s Global Trade Compliance and Transportation solutions automate import and export processes, along with documentation production and customs reporting. This includes capturing the value of goods being shipped, along with licence or permit requirements. As a result, enterprises gain a competitive advantage by mitigating compliance risk, avoiding unnecessary costs, and reducing cycle-times for the seamless import or export of goods. 

Are You Ready for USMCA?

Find out in 4 easy questions if your company is ready for the USMCA. Please take our USMCA benchmark.

About QAD Precision – Trusted Global Trade and Transportation Execution

QAD Precision, a division of QAD Inc., provides industry-leading global trade compliance, and multi carrier transportation execution solutions from a single, integrated platform. An ISO-certified company, QAD Precision assists companies to streamline their import, export and transportation operations, optimize deliveries, and increase logistics ROI. QAD Precision’s scalable and extensible solution easily integrates with existing ERP and WMS solutions. Industry leaders in every region of the world rely on QAD Precision’s global support centers to leverage thousands of carrier services and manage millions of global trade and shipping transactions every day. For more information about QAD Precision, visit www.qadprecision.com.

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