The U.S. government has taken steps to allow the United States–Mexico–Canada Agreement (USMCA) to enter into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA). On April 24, 2020, the United States Trade Representative (USTR) notified Congress that Canada and Mexico had taken additional measures to comply with their commitments under the USMCA. The U.S. government also notified the governments of Mexico and Canada that it had completed its domestic procedures to implement the Agreement. Pursuant to its terms, the USMCA will come into force on the first day of the third month after all three Parties certify their readiness for implementation (and of the three parties, the United States was the last to issue these notifications).
Although the Trump administration has been pushing toward a July 1 entry-into-force date, several points remain under discussion within the United States and among the three nations. Below, we discuss some of the U.S. government’s recent actions related to the USMCA and outline some remaining challenges.
CBP Releases Interim Implementing Instructions on the USMCA
On April 20, 2020, U.S. Customs and Border Protection (CBP) released interim implementing instructions that provide importers and other interested parties with early guidance on the new requirements under the USMCA. For importers of goods from Mexico and Canada, the instructions shed additional light on the new USMCA requirements and the impact they may have on business operations. These instructions will be updated once CBP and other federal agencies issue new USMCA regulations.
Among other changes, the value threshold for “de minimis” non-originating content in a product is being raised from seven to ten percent. Accordingly, where under the NAFTA a product containing eight percent content that did not satisfy the rules of origin could not qualify for preferential tariff treatment, under the USMCA such a product will qualify.
In addition, under the NAFTA there has been a set of “marking rules” used to determine what country of order must be placed on products imported from Canada and Mexico, which are based on the concept of “tariff shift” (i.e., whether the tariff classification of a component or material imported from a third country is sufficiently different from the tariff classification of the finished product). After efforts over the years by CBP to use the “marking rules” for other countries were abandoned, under the USMCA the United States is cancelling the marking rules and instead will rely on the traditional “substantial transformation test” that is applied to imports from all other countries.
The rules of origin for automobiles are being changed in a significant manner, including higher regional value content thresholds, mandatory steel and aluminum purchasing requirements, and a labor value content requirement. But as discussed below those rules are being phased in over time.
USTR Establishes Procedures for Alternative Staging Regime Petitions
On April 21, 2020, the USTR published in the Federal Register a notice establishing a petition process for North American producers of passenger vehicles or light trucks to request an alternative to the standard staging regime for the rules of origin for automotive goods under the USMCA. An alternative staging regime allows vehicle producers a longer transition period to meet the rules of origin for automotive goods, although the extensions will be limited to a portion of a manufacturer’s total production. According to the notice, vehicle producers must submit petitions with a draft staging plan by July 1, 2020, and final staging plans by August 31, 2020.
President Trump Establishes New Labor Panel
Following USTR’s notification to Congress, on April 28, 2020, President Trump issued an Executive Order (EO) establishing an interagency labor committee to facilitate the enforcement and monitoring of the USMCA labor provisions. In particular, the Panel is tasked with ensuring that Mexico complies with the agreement’s labor rules and recommending enforcement actions.
The USMCA will create a new dispute settlement mechanism allowing petitions to be filed complaining of labor law violations at particular companies and plants. Congress has indicated its expectation that the mechanism will be used promptly and frequently. Because the procedure is largely unprecedented, it is difficult to predict how it will operate in practice and how many petitions may be filed.