NAFTA vs. USMCA: The North American Free Trade Agreement and the U.S.-Mexico-Canada Agreement

David Noah | December 12, 2018 | NAFTA, Free Trade Agreements
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NAFTA vs. USMCA | Shipping SolutionsIf you’ve been paying attention to the news, you’ve probably seen or heard something (maybe a lot of things) about the end of NAFTA, the North American Free Trade Agreement, and the beginning of a new trade agreement called the United States-Mexico-Canada Agreement or USMCA.

Here’s the most important thing you need to know about free trade between the United States, Canada and Mexico: Nothing has changed! At least, not yet.

As of now, NAFTA is still the free trade agreement in force between the three countries. You should continue to do everything your company is currently doing to take advantage of duty-free trade under NAFTA.

Nothing has changed for importers and exporters yet, and until the USMCA becomes official—and there’s no guarantee it will—the existing rules and procedures guiding the use of NAFTA remain in effect. (Although the president has threatened to pull out of NAFTA if Congress doesn't adopt the new agreement.)

NAFTA Background and Renegotiations

NAFTA was created to ensure that goods traded among Canada, Mexico and the United States receive preferential tariff treatment. The NAFTA deal grants benefits and reduces tariffs only on goods that qualify under the NAFTA Rules of Origin.

President Trump campaigned against NAFTA, and his administration sent a letter to Congress on May 18, 2017, announcing his intent to renegotiation the deal.

NAFTA is still in force! Make sure you know when and how to complete a NAFTA COO.

The U.S. Trade Representative released two versions of a document outlining the United States’ goals for the renegotiation, one in July 2017 and one in November 2017. Within the document, several goals were listed, but the four main goals include the following:

1. Rebalance trade between the three countries.

2. Move the other two countries to match the United State's $800 de minimis level.

3. Automate the import/export border transit process, including:

  • Reducing the number of forms required at the border.
  • Providing more support to small- and medium-sized enterprises.

4. Add a sunset clause requiring the three parties to take a proactive approach to renew the agreement.

USMCA Facts

The USMCA will potentially account for more than $1.2 trillion in trade in one of the world’s largest free trade zones.

According to the Washington Post, the main aim of the USMCA is to have more automobile parts made in North America. Under the new deal, “Starting in 2020, to qualify for zero tariffs, a car or truck must have 75% of its components manufactured in Canada, Mexico or the United States, a substantial boost from the current 62.5% requirement.”

The dairy industry will also be impacted, with more American dairy exported to Canada. Key changes to labor and environmental standards are also provisions in the USCMA.

On August 27, 2018, the U.S. and Mexico announced they had reached an agreement; Canada reached an agreement with the other two countries in the following month, on September 30, 2018. All three countries’ leaders signed the USMCA agreement on November 30, 2018.

Section 232 Steel Tariffs

One area the announced USMCA didn’t address was the additional tariffs President Trump leveled against Canada, Mexico and other countries on U.S. imports of steel and aluminum. Section 232 of the Trade Expansion Act of 1962 allows the president to levy such additional tariffs if he views the import of certain items a threat to national security.

As of now, that “threat” continues to exist.

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What Happens Next?

Now that the agreement has been signed, three key things must happen in order for USMCA, the “new NAFTA,” to be implemented:

  1. Within 60 days of the agreement being signed, the administration must notify Congress of all the necessary changes to U.S. law that need to be made to enact the USMCA.

  2. Within 150 days of the USMCA being signed, the U.S. International Trade Commission must release an economic impact report.

  3. At least 30 days before submitting the USMCA to Congress, the text of the legislation must be released to the public.

The Ratification Process

After the above requirements have been met, the USCMA must then be approved by the legislatures of all three countries; each party must notify the other two once that has happened. The agreement comes into force on the first day of the month following the last notification.

USMCA Implementation

Most experts expect that the earliest estimated date of full implementation of the USMCA will be in early 2020, although it could be delayed beyond that. In fact, there is no guarantee that it will be ratified at all.

If that were to occur, then the existing NAFTA rules will continue to guide trade between the three countries. If the President were to follow through with his threat to withdraw from NAFTA if the USMCA isn’t approved, then pre-1994 trade rules would go back into effect.

Bottom line: Until the time that the USMCA is ratified and implemented or the U.S. formally withdraws, NAFTA rules are still in force, and U.S. companies should follow the existing procedures for exports and imports.

That being said, I do recommend that companies start reviewing the changes outlined in the USMCA and start preparing appropriately. There are many things exporters will need to prepare for as this new agreement will potentially change many of the regulations and documentation requirements for international trade.

Exporters who use the Shipping Solutions export documentation and compliance software and have a current maintenance subscription will get free updates to the software if and when the USMCA replaces NAFTA including a new certificate of origin form.

And we will continue to provide updates about the USMCA here on the International Trade Blog. Subscribe now using the blue subscription box in the right column of this page to get email notifications of free blog posts.

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