Five Things To Know about USMCA
By Juan Francisco Fregoso, Managing Director of SCRG Mexico
After 26 Years It’s Goodbye NAFTA, and Hello USMCA
July 1st marked the first day that goods and services in North America were traded under the new United States – Mexico – Canada Agreement. There is no doubt that most companies are still trying to figure out exactly what this means for their business.
Mexico is home to massive EMS industry in Juarez, Guadalajara, Monterrey, Tijuana, and a dozen other cities, mostly in the northern half of the country. This new trade agreement has dozens of pages and hundreds of specific call-outs impacting the vast array of products that these EMS providers produce and ship within the trading block. The rules of origin section of the agreement alone is 264 pages long. Last year alone, the US imported more than $63.5B dollars of electronics from Mexico under the NAFTA agreement, all of which are now governed by the rules, procedures, and calculations detailed in the USMCA.
A quick aside here: What is often missed when discussing NAFTA, is how much the agreement also expanded US exports, especially of electronic products and components. From 1994 through 2019, Mexico expanded its exports of electronics to the US by some 343%, while the US over the same time period expanded its export of electronics to Mexico by more than 305%.
Here are five things to know:
5) Wage & rights enforcement. For all the attention the USMCA received in the US, the basic structure of import duties under USMCA is virtually unchanged from where things left off under NAFTA. The primary changes are around workers rights, benefits, and pay in Mexico and the ability of Canada and the US to both audit and enforce these provisions. Without any doubt, the single greatest beneficiary of the USMCA is the Mexican worker.
4) Automotive industry targeted. Under NAFTA rules, automobiles were required to have local (trading region) value content of 62.5% to be free from import duties when shipping between North American trading partners. Under USMCA, the required local value content has been increased to 75%, which was in part, a shot specifically at Volkswagen which imports a lot of cars in the US from its plants in Mexico. In addition, the USMCA phases in a requirement over the next several years whereby 45% of the automobiles produced in North America must be made with labor making a minimum of $16 per hour – yet another boost for Mexican workers
3) Elimination of local presence requirement. Long a source of minor irritation for many OEMs, the USMCA sunsets a previous NAFTA provision which required companies to have a local presence, and a legal entity in the trading block countries to take advantage of key provisions of the free trade agreement. With the enacting of USMCA, it is likely that a lot of small companies in Mexico, like Topeka Sprinklers de Mexico S.A., will be phased out as they are now unnecessary.
2) Not all electronics are created equal. Although the duty-free movement of locally produced goods between the three major North American economies has been renewed under USMCA, not all products have the same definition for locally produced. The vast majority of electronic products produced and shipped under HS code 85xx require 50% local (regional) value content to be free of duties when shipped across borders. But there are some notable and mildly confusing exceptions as shown below:
And in true David Lettermen style, we’ve saved the best for last. Here’s the number one thing users of EMS services need to know about USMCA.
1) Packaging material does not count – except when it does. When determining the value of goods produced locally (in the trading block), the value of packaging material, even if it is fully packed-out in retail “pretty pack”, is to be disregarded in the obtained vs. produced calculation. As the actual agreement states:
Article 4.15: Packaging Materials and Containers for Retail Sale.
- Each Party shall provide that packaging materials and containers in which a good is packaged for retail sale, if classified with the good, are disregarded in determining whether all the non-originating materials used in the production of the good have satisfied the applicable process or change in tariff classification requirement set out in Annex 4-B (Product-Specific Rules of Origin) or whether the good is wholly obtained or produced.
Seems clear enough, until you go on to read the second half of the requirement, which makes it a bit more clear that packaging material is disregarded in the calculations of produced versus obtained goods, but is used when calculating the regional value content.
- Each Party shall provide that if a good is subject to a regional value content requirement, the value of the packaging materials and containers in which the good is packaged for retail sale, if classified with the good, are taken into account as originating or non-originating, as the case may be, in calculating the regional value content of the good.
So on July 1st 2020, a new North American trading agreement was born. I know it took us all several years to really understand the ins and outs of NAFTA. I suspect it will also take us some time to understand the specifics of USMCA, especially as it relates to requirements that are specifically designed to phase in over the next 5 years.
Happy birthday USMCA.