USMCA: Challenges and Trends

According to Bloomberg Tax, replacing NAFTA with USMCA meant modifications to the existing rules of origin that will determine if a product qualifies for duty-free treatment. For many importers the transition caused concern about whether they would lose duty-saving benefits. Importers quickly began looking at their existing top imports by value to understand if they will qualify. However, as supply chains are shifting faster than ever, validating potential new opportunities to apply FTAs is as critical as determining whether existing product claims can continue.

This is particularly true for industries where USMCA simplified or expanded the opportunities for duty-free treatment, such as computer and electronic product manufacturing, which ranks as the seventh largest U.S. manufacturing industry, according to the publication U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors. Electronics is a highly integrated industry with Mexico as a major manufacturing hub for these products. In fact, Mexico is one of the global leaders in production of flat-screen televisions and computers, most of which are exported to the U.S. By recognizing the deep integration of these supply chains, USMCA negotiators generally eased the qualification by reducing regional value content (RVC) requirements, converting tariff shift requirements, and making tariff shift rules easier to meet.

Another challenge is USMCA’s mid-year implementation. This timing means that importers must assess how this will impact their current sourcing plans. Doing so requires developing a USMCA plan with clear goals, then assessing each project, and its components, in light of those goals. Not doing so increases the potential of proceeding with projects that may no longer be beneficial or could leave money on the table. While USMCA allows preferential duty treatment to be applied retroactively, it does not allow importers to reclaim the merchandise processing fee for post-entry claims. While on a per-entry basis the maximum payment is only $528, over time managing USMCA claims proactively at the time of entry can result in substantial savings. While this may be a legislative oversight that will be addressed in the future, developing a plan to analyze USMCA’s entire potential impact on your company and then prioritizing next steps can result in a more complete duty-savings picture.

Understanding USMCA’s New Requirements

With only a short time to assess the new requirements, trade professionals across industries are, in some cases, struggling to understand and apply USMCA’s rules in a real-world context. One of these challenges is adjusting to the removal of the NAFTA preference override. Unlike NAFTA, a qualifying USMCA import may potentially have a country-of-origin marking that may not be U.S., Mexico, or Canada. Imported goods under NAFTA had to both (1) qualify under the NAFTA rules of origin, and (2) meet the NAFTA marking rules to be considered as originating in a NAFTA country. Where the marking rules were more stringent than the rules of origin, importers could claim the “NAFTA preference override” to allow a NAFTA country-of-origin marking. However, the USMCA’s Implementing Instructions stipulate that under the USMCA, an import does not need to be marked as originating in Canada or Mexico to receive preferential treatment. While this change brings USMCA in line with modern FTAs, it can be confusing and a new process should be implemented to manage the requirements.

The USMCA rules to qualify vehicles and parts have been revised and broken out into a number of different categories. A new requirement requires certain vehicle assemblers to collect labor wage information from suppliers which has raised questions. For examples, certain workers are included in this formula while others are not. While “high-wage transportation or related costs for shipping”—including “drivers and loaders performing the transportation, logistics, or material handling of a part or component”—can be included in meeting labor requirements (according to the Federal Register Notice from the Department of Labor titled High-Wage Components of the Labor Value Content Requirements Under the United States-Mexico-Canada Agreement Implementation Act), importers are finding that in practice it is not clear cut.

Understanding the new rules and implementing new procedures can result in real-time product slowdowns that impact bottom lines. Working through these challenges requires time—which may be in short-supply in many trade groups.

In LFS, we offer you freight shipping solutions in Mexico, Canada and the U.S. Contact us to ease your processes and help you to import or export your loads.