From Honeymoon to the Grind: The USMCA Way in 2021

Daniel D. Ujczo | THOMPSON HINE LLP

THE “NEW NAFTA” began in the same way as most 2020 marriages—the parties were formally “hitched,” but the wedding celebration was put off until another day. Specifically, the United States-Mexico-Canada Agreement (USMCA) entered into force on July 1, 2020, and U.S. Customs and Border Protection (US-CBP) and its sister customs authorities in Canada and Mexico declared the first six months as a Phase I honeymoon, where regulatory agencies deliberately demonstrated “maximum flexibility” regarding enforcement. This may have lulled some companies into complacency regarding USMCA compliance. However, with the turning of the calendar to 2021, companies should anticipate an increase in USMCA verifications and enforcement actions. Simply stated, now is the time to ensure that your North American Customs house in is order.

The good news is that contrary to the initial outcry that the new deal would tear up North American trade, the initial USMCA implementation has demonstrated that the agreement eases the burdens on companies that import raw materials into North America and then ship value-added products across the continent. Most of the companies that have examined USMCA’s impacts on their operations find benefits, particularly in areas such as polymers, chemicals, coatings, electronics, food processing, intellectual property and customs facilitation. However, companies that import semi-finished products sourced from China and other areas around the globe face compliance challenges under USMCA. Regardless of product, all companies need to tweak their operations, most have to transition to USMCA, and some have to transform their supply chains. The threshold question for 2021 is where is your company or customer on this spectrum?

Early 2021 USMCA preparations should include the following:

1. Ensure that your product is properly classified under the Harmonized Tariff Schedule of the United States (HTSUS). In many instances, the individual or customs broker that originally classified the goods under NAFTA is no longer with the company, yet the same HTSUS code remains in place even where there have been modifications or sourcing changes to the product. USMCA provides the perfect opportunity to review these classification determinations and assess every component in your supply chain.
2. With proper classifications in hand, examine USMCA’s rules of origin to ensure that your product will continue to receive preferential tariff treatment. A product that qualified for NAFTA treatment does not necessarily qualify for USMCA. In many cases, originating goods under NAFTA will do so under USMCA, and perhaps with less compliance burden. However, areas such as automotive parts and textiles have more stringent content requirements under USMCA than NAFTA.
3. Review USMCA’s transaction value and/or net costs methodologies as there are differences in “what counts” when calculating regional value content (RVC) as compared to NAFTA. As a positive, high wage transportation costs may be included in certain RVC scenarios, as well as the new labor value content (LVC)—also known as “the $16 an Hour Rule”—in the new automotive rules of origin. These changes may provide opportunities for 3PLs to discuss USMCA opportunities with their customers.
4. Show your work. The USMCA golden rule is that substance/data trumps form. Under NAFTA, many companies simply filled out the standard NAFTA Certificate of Origin without performing the underlying analysis. USMCA is flexible as to the form (companies can certify origin on purchase orders or other transactional documents); however, companies must keep records demonstrating a review of USMCA and regular internal auditing. Again, just because the goods were originating under NAFTA does not lead to the same result under USMCA. Even where NAFTA and USMCA end up at the same destination, the company still needs to provide the analysis and rationales.
5. Assess USMCA compliance along with other international trade issues such as whether the products are subject to Section 301 (China), Section 232 (steel and aluminum) and/or Section 201 (solar/washing machines) tariffs, as well as export controls, anti-dumping/countervailing duties (AD/CVD) or other trade measures. The past several years have been a whirlwind in international trade. The dust will likely settle in early 2021 as the Biden-Harris Administration engages in strategic reviews of trade policies. This presents the ideal opportunity to ensure that the company or customer has a customs compliance manual and program in place to eliminate costly penalties and fines in the event of an audit/verification.
6. Update standard terms and conditions, brokerage agreements, purchase orders, port-of-entry procedures, intellectual property portfolios, and forms to reflect USMCA criteria and provisions.

EXPECT TO SEE LABOR ISSUES TAKE CENTER STAGE IN NORTH AMERICAN TRADE DURING 2021.

These front-end preparations will assist companies in addressing the expected increased enforcement of USMCA. Additionally, several USMCA dispute resolution mechanisms will be “taken for a spin” in early 2021. The U.S. was the first out of the barn with a request for consultations regarding Canada’s dairy quota system. Of potentially broader implications, U.S. labor organizations have pledged to invoke USMCA’s Facility-Specific Rapid Response Mechanism for Labor Complaints. Mexico is in a three- to five-year process to overhaul its labor-management relations regime that, in part, is designed to promote greater unionization. USMCA strives to ensure progress with the implementation of Mexico’s new laws by affording rapid access to complaints brought by employees, unions or other interested parties for violations at the plant level in Mexico. The potential impact of these labor changes may be the most significant since the U.S. New Deal in the 1930s. Expect to see labor issues take center stage in North American trade during 2021.

Companies should anticipate full implementation and enforcement of USMCA in 2021, coupled with some disruption arising from disputes. The honeymoon, unfortunately, is over, but the foregoing steps will assist in eliminating any friction in the transition.

Daniel D. Ujczo is Senior Counsel at Thompson Hine LLP based in Columbus, Ohio.

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