The USMCA will be replacing the 25-year-old trade agreement between the US, Mexico and Canada called NAFTA. The NAFTA or the North American Free Trade Agreement was finalized in 1993. It had effectively lowered or even cut most of the tariffs and duties pertaining to the trade between these three countries. 2018 saw new reforms made to NAFTA’s many guidelines, and USMCA was born or as many call it NAFTA 2.0.
Let’s review if the USMCA is just a new cover for an old book or if the content inside has actually changed!
1. The Automobile Reform
USMCA will provide automobile makers with zero tariffs if they agree to manufacture 75% of the components in the US, Mexico or Canada. Earlier the cut off was at 62.5%.
Also, USMCA put another guideline in the mix by stating that zero tariffs are only applicable if 40% from the 75% comes from manufacturing plants that upkeep a minimum wage of $16 per hour.
The new trade deal also makes it easier for the form unions in Mexico.
2. Dairy farmers in the US rejoice!
Canada was always protective of their domestic dairy market. With USMCA, Canada will open doors for the import of dairy products from the U.S. The trade deal it makes it easier for the export of Class 7 dairy to Canada from the U.S.
The U.S. once used to export a significant amount of dairy to Canada. But in recent years, Canada tightened the ropes on regulations, preventing many products from entering Canada.
With the new trade deal, Canada will have to open its market to the U.S. In addition, USMCA has put in some regulations to Canada’s dairy exports, enabling the U.S. dairy farmers to sell more products internationally.
3. Dispute Settling Mechanisms
NAFTA uses three dispute-settling mechanisms in trade – Chapter 11, Chapter 19, and chapter 20.
Chapter 11: Chapter 11, also known as ISDS (Investor-state dispute Settlement) enabled foreign investors to sue countries without approaching domestic courts. NAFTA maintained this law between three participating parties. However, this has caused Canada a lot of money in settling court cases.
The USMCA eliminates chapter 11 between Canada and the US. From 2019, Canada won’t be liable for direct court cases from outside parties anymore.
Chapter 19: Chapter 19 pertains to Anti-dumping laws and countervailing duties. It allows the participating parties to question each other of their illegal trades in front of an expert panel.
Chapter 19 faces no change is directly carried over from NAFTA.
Chapter 20: Chapter 20 in NAFTA deals with disagreements with the participating countries on a set of established rules. It is the core dispute settling mechanism of NAFTA.
The USMCA has carried over chapter 20 intact from NAFTA without interfering in it.
4. The inclusion of a Currency chapter
The Currency chapter is a brand new chapter that is going to be brought into use by the USMCA. The new chapter binds the participant countries to maintain market exchange rates without devaluating their currencies to get the competitive edge in trade. The binding chapter uses the Articles of Agreement of the IMF to set the rules for stopping countries from using any currency manipulation. Devaluating currencies will help counties to export goods at lower export rates and imports at higher rates. The new chapter will prevent the three countries from using such fraudulent methods.
5. The Sunset Clause
The three countries have come to a mutual agreement that USMCA will expire in the 16 years unless the parties agree to extend it. However, the clauses of USMCA will be reviewed every six years.
6. Steel and Aluminum exports from Canada
Trump had imposed quite a significant amount of tariff on steel and aluminum imports from Canada using Section 232. It still remains intact, and there are no major tariff changes in sight. Trudeau remarked this move as “insulting” since both countries are longtime allies.
Final verdict – USMCA/NAFTA 2.0
In essence, even though there were major changes brought in by the USMCA, a large part under the hood is still the tried and tested NAFTA. There are many opinions on who gains the most after the new deal, however, that is still be determined, and we will see it in the coming months.
The USMCA will take effect from 2019 as the official signing ceremony is slated for December 1st,2018.
Concerned about how it will affect your tariff payments and paperwork? Don’t worry we will take care of it all. We are always prepared to change with the current laws and regulations. Let’s get started