Scoping the impact of the new NAFTA: A Canadian perspective
The Canada-U.S.-Mexico Agreement (USMCA) is a free trade agreement that brings together Canada, the U.S. and Mexico into one regional trade bloc. The agreement, which replaces the North American Free Trade Agreement (NAFTA) as the region's trade treaty (which had been in place for 20+ years), relieves tariffs on qualifying goods, thus lowering trade barriers and cutting costs for North American importers and exporters. Interestingly, the new agreement goes by a different name in each of the three signatory countries: CUSMA in Canada (the term used in this article), USMCA in the U.S. and T-MEC in Mexico.
Many think of the agreement as NAFTA 2.0—and with good reason. CUSMA and NAFTA are very similar agreements in terms of general concepts. CUSMA continues the work of NAFTA and was negotiated using NAFTA as a baseline. That said, there are significant differences in the two agreements.
In force and expiry date
CUSMA came into force on 1 July 2020, three years after negotiations began and will expire in 2036 unless it is extended. The parties have agreed to review the agreement every six years to ensure its continued relevance in the ever-evolving trade environment.
CUSMA rules of origin
The transition from NAFTA to CUSMA underscores that import-export strategy comes down to details, most importantly that the source country alone does not determine whether a manufacturing input qualifies under CUSMA; instead, each good must qualify under its specific CUSMA rule of origin.
The trade agreement introduces both new and revised rules of origin that impact manufacturers and their supply chains, especially the auto sector. The primary provisions impacting the automotive sector address regional value content and labour value content:
- Regional value content: Trade treaties often set minimum regional content thresholds for vehicles or their components to qualify as “made in” the region and, therefore, exempt from duty when crossing the border. Treaties express these thresholds as percentages of the total vehicle that must be produced in treaty countries.
The regional value content requirement under NAFTA was 62.5%. CUSMA raised it to 75%, meaning that 75% of the inputs used to manufacture an automobile or other automobile components must be manufactured either in Canada, Mexico or the U.S.
The agreement also added a requirement that automobiles be manufactured using at least 70% of North American steel and aluminum.
- Labour value content: CUSMA requires that at least 40% of a vehicle's value is produced by workers who make at least USD 16 per hour.
Vehicle manufacturers should review their supply chains because some suppliers will be able to provide materials that meet the new 75% threshold but others may not.
While the new requirements will be phased in gradually over three to five years, the stakes are high. Manufacturers that fail to comply will see their inputs lose duty-free status and add costs to operations.
Automotive is not the only industry that saw changes or additions to its rules of origin. It is important that all importers and exporters review the agreement and the sections that apply to their specific industry to ensure duty-free entry entitlement.
How to build CUSMA into procurement decisions
As businesses review their supply chains, they may notice some of their suppliers can no longer qualify their goods as duty-free under the new agreement. However, while trade treaties are a key factor to consider when reviewing the procurement decision tree, they are just one of several factors. Considering the total cost of potential items, quality and logistics, the non-CUSMA items may still present the best option. Businesses will need to decide whether to prioritize sourcing from Mexico and the U.S. over offshore suppliers that will cost them duties.
Some businesses may take the opposite approach. With their legacy input no longer exempt from duties, they may explore procurement routes in other countries worldwide. As a result, the new sourcing model may not qualify as duty-free.
Canada has diversified its trade agreements in recent years. As a result, importers and exporters should remember the duty-free opportunities offered by newer treaties. Chief among them: the Comprehensive Economic and Trade Agreement, or CETA, which covers the EU; the Canada-UK Trade Continuity Agreement, crafted on the heels of Brexit; and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the CPTPP, primarily with important trading partners in Asia.
COVID and CUSMA
In the short term, importers and exporters may prefer to procure and ships items closer to home for a different reason: the COVID-19 pandemic.
CUSMA came into force during the heart of the COVID pandemic. As a result, importers and exporters could be forgiven for overlooking CUSMA’s impact on their supply chains. They were worried less about the duties they would pay on goods and more about landing those goods in the first place. With that in mind, Mexico and the U.S. offer a convenient source and destination while the global economy recovers from the disruption of COVID.
The concern has caused some businesses to reassess tried-and-true supply chain strategies such as just-in-time manufacturing—for the long term. Whatever the future holds, all businesses that import or export will need to layer CUSMA into their sourcing decisions.
Is CUSMA paperwork simpler than NAFTA forms?
When negotiators representing Canada, Mexico and the U.S. created CUSMA, they wanted to streamline the certification process for verifying the qualification of a good. The result? The new agreement does not require companies to complete a formal CUSMA certificate of origin.
The change from NAFTA's certificate process is welcome, but companies still need to attest to the country of origin for their goods. They still need to analyze their supply chains. They need to ensure they comply with the details of the treaty.
Adapting to CUSMA
CUSMA was born into a world of trade far different from its predecessor and it has rewritten the rules for Canadian importers and exporters. When NAFTA became effective in the 1990s, importers and exporters had options, but not like today. The business world has shrunk, and supply chains have grown longer and more complex.
Yet, the North American trade bloc cannot be overlooked. Proximity still counts, as do shared language and business culture in the case of the U.S. More than 450 million people live in the U.S. and Mexico, and the businesses they lead support robust economies. Canadian importers and exporters will continue to enjoy this access.
To adapt to CUSMA, manufacturers and other Canadian businesses will need to stay flexible in the short term. Transitioning to CUSMA will shake up processes and supply chain strategies. Many of CUSMA's changes depend on the tiniest of details. Making the most of this transition challenges business leaders to respond in kind, focusing on the specifics of their supply chain.