Beyond NAFTA: USMCA Goes into Effect July 1

International Trade Update

Date: June 30, 2020

Key Notes:

  • Manufacturers across North America must reanalyze their products to determine whether they continue to qualify for duty-free treatment under USMCA.
  • New USMCA certificates of origin are required to replace NAFTA certificates of origin.
  • Many companies must examine their supply chains to confirm continuing eligibility for duty-free treatment.

On July 1, the United States-Mexico-Canada Agreement (USMCA) goes into effect. It will have a significant impact on manufacturers across North America as they reanalyze their products to determine whether they qualify for duty-free treatment.

On June 3, the U.S. Trade Representative published Uniform Regulations regarding rules of origin (ROO) contained in Chapter 4 of USMCA and related provisions for textile and apparel goods contained in Chapter 6. ROO are used to determine whether imported goods receive preferential tariff treatment under USMCA. Specific tariff provision rules for preferential tariff treatment will be identified in the Harmonized Systems of the United States, Mexico and Canada. There are significant changes from the North American Free Trade Agreement regarding ROO, including an increase in the de minimis standard to 10% of the transaction value or the total cost of the good (or for textiles, generally, 10% of the weight); new rules for the chemical industry; changes to originating analyses regarding sets; elimination of government-formatted certificates of origin; and the inclusion of importers as certifiers for certificates of origin. The most significant changes concern the automotive industry. For example, USMCA:

  • Sets higher regional value content (RVC) for motor vehicles. The RVC for new passenger vehicles and light trucks will be 75% when all stages of implementation take effect.
  • Requires that “core parts” of passenger trucks and light trucks (e.g., engine, transmission, body and chassis, axles, etc.) must be originating goods.
  • Increases the RVC thresholds for parts of motor vehicles.
  • Establishes a Labor Value Content requirement, which requires that at least 40% of the value of passenger cars and 45% of the value of light trucks must be produced in North American facilities where high wages (at least US$16.00, CA$20.88 and MXN$294.22 an hour) are paid.
  • Requires that 70% of steel and aluminum purchases for a passenger vehicle, light truck or heavy truck must be originating.
  • Provides a transition period for North American producers. However, even during the transition period, certain content requirements, including steel and aluminum purchases, must be met.

Questions and concerns have already been raised about the Uniform Regulations, including:

  • They do not appear to allow companies to average the RVC across light and heavy trucks, which was permitted under NAFTA.
  • Whether goods produced in a foreign trade zone with non-USMCA qualifying components can qualify under USMCA is still unclear, although a specific restriction under NAFTA will be removed when NAFTA is no longer in effect.

Other questions will undoubtedly arise and be clarified over the next several months.

A significant but welcome change is that USMCA eliminates provisions relating to the country of origin marking rules, which are currently found in 19 C.F.R. § 102.20 of the customs regulations. This means that there will no longer be two sets of rules to be analyzed (as was the case under NAFTA) – one for qualifying the good and the other to determine which country of origin should be used for marking purposes. On June 16, U.S. Customs and Border Protection issued Updated Interim Implementing Instructions for USMCA, further clarifying that “[t]he rules of origin contained in 19 CFR Part 102 determine the country of origin for marking purposes of a good imported from Canada or Mexico in accordance with the requirements of 19 CFR Part 134.” This means that the rules of origin contained 19 C.F.R. § 102.20 will be reconciled with or replaced by nonpreferential marking rules contained in Part 134 of the customs regulations. Further, after USMCA takes effect on July 1, a good does not need to first qualify to be marked as a good of Canada or Mexico to receive preferential tariff treatment under USMCA; the product-specific rules of origin contained in GN 11 determines whether a good originates under USMCA.

FOR MORE INFORMATION

For more information, please contact:

Francesca M.S. Guerrero
Partner, International Trade
202.973.2774
Francesca.Guerrero@ThompsonHine.com

Michelle Li
Associate, International Trade
202.263.4162
Michelle.Li@ThompsonHine.com

William L. Matthews
Senior Manager of International Trade
Not licensed to practice law
202.263.4137
William.Matthews@ThompsonHine.com

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