What this Means for U.S. Manufacturers and Distributors
As a new decade begins, will manufacturers and distributors see the ‘roaring twenties’ with continued growth? Or will we see a pullback in this activity? Time will tell – we could have either or both occur over the next ten years. One item that could have a significant impact to manufacturers and distributors in the next decade is the USMCA Trade Agreement. This USMCA (United States – Mexico – Canada Agreement) is a rewrite of the NAFTA (North American Free Trade Agreement), which took effect on January 1, 1994. The Administration has pressed hard to adopt the USMCA. The agreement has many steps in its approval process, including being passed by Congress, and on December 19, 2019 it was approved by a wide bi-partisan margin in the House. The agreement next moved to the Senate, where it also passed in a bi-partisan vote on January 16, 2020.
Background on the USMCA
There are many aspects within the USMCA. The main goals for the U.S., Canada, and Mexico are to create more balanced, reciprocal trade that supports high paying jobs and to grow the North American economy. Several of the USMCA objectives from a U.S. standpoint include:
- Creating a level playing field for American workers, including improved rules of origin for automobiles, trucks, other products, and disciplines on currency manipulation;
- Benefiting American farmers, ranchers, and agribusinesses by modernizing and strengthening food and agriculture trade in North America;
- Supporting a 21st century economy through new protections for U.S. intellectual property and ensuring opportunities for trade in U.S. services; and
- New chapters covering digital trade, anti-corruption, and good regulatory practices, as well as a chapter devoted to ensuring that small and medium-sized enterprises benefit from the Agreement.
In addition, USMCA provides new protections for digital trade practices containing curbs on data localization, consumer data safeguards, and prohibits tariffs on digital products. After much negotiations, there will also be expanded entree into the U.S. and Canadian dairy markets.
What the USMCA Could Mean for Manufacturers and Distributors
A major provision under the USMCA involves auto manufacturers. The goal of these changes is to encourage more parts and vehicles to be made in North America. A key item the countries negotiated into the USMCA is that in order to receive a zero tariff, 75 percent of the content of a vehicle must be made in the U.S., Canada, or Mexico. This is a hefty increase from the current threshold of 62.5 percent.
In addition, the USMCA dictates that 40-45 percent of a vehicle’s parts must be manufactured by workers (from the U.S., Canada, or Mexico) earning $16 per hour or more. This could have a significant impact, as many auto workers in Mexico now earn less than $10 per hour. This higher labor rate could result in not only higher wages paid to Mexican workers, but also perhaps some production being relocated to the U.S. or Canada with a comparable wage being paid. It could impact suppliers to auto manufacturers as well. Last, it will likely result in higher prices to consumers for vehicles due to these higher labor rates.
Nonetheless, there are other changes in the USMCA impacting manufacturers and distributors. A key achievement is that the USMCA will establish new standards with stronger “rules of origin” and enforcement. The countries agreed to stronger rules of origin not only for vehicles and parts, but for other industrial products such as chemicals, steel products, glass, and optical fibers.
Further, the USMCA trade deal establishes procedures: (1) that streamline certification and verification of rules of origin; and (2) that promote strong enforcement. This includes new cooperation and enforcement provisions that help to prevent duty evasion before it happens. The new USMCA rules will help make certain that only producers using sufficient and significant North American parts and materials receive favorable tariff benefits.
“Market Access” is another key aspect of the USMCA for manufacturers and distributors. The new Market Access provisions will more effectively support trade in manufactured goods between the United States, Mexico, and Canada by removing provisions that are no longer relevant; updating key references; and affirming commitments that have phased in from the original agreement. From a USMCA Fact Sheet by the Office of the United States Trade Representative, it indicates the Market Access chapter of the agreement provide as follows:
- Maintains duty-free treatment for originating goods
- Maintains the prohibition on export duties, taxes, and other charges and the waiver of specific customs processing fees
- Adds new provisions for transparency in import licensing and export licensing procedures
- Prohibits parties from applying:
- requirements to use local distributors for importation
- restrictions on the importation of commercial goods that contain cryptography
- import restrictions on used goods to remanufactured goods
- requirements for consular transactions and their associated fees and charges
- Updates provisions for duty-free temporary admission of goods to cover shipping containers or other substantial holders used in the shipment of goods
Timeline and Next Steps
As noted above, the United States-Mexico-Canada Agreement Implementation Act (H.R. 5430) passed the House on December 19, 2019 by a wide bi-partisan vote. Several Senate committees then gave their approval, and the full Senate approved the measure on January 16, 2020. No changes were made to the bill in the Senate, and thus, the agreement moves on to the President for his final approval (Sikich Update on the USMCA: the President signed the USMCA into law on January 29, 2020). A copy of this legislation is addressed in the resources below.
Here are several resources for your reference on the USMCA:
- Full text of the United States-Mexico-Canada Agreement (USMCA)
- Full text of HR. 5430 (United States-Mexico-Canada Agreement Implementation Act)
Fact Sheets provided by the Office of the United States Trade Representative (USTR) detailing information on various industries and how they will be impacted by the USMCA:
- Digital Trade
- Intellectual Property
- Energy and Energy Products
- Automobiles and Automotive Parts
- Textiles and Apparel
- Small and Medium-Sized Businesses
Please contact your local Sikich expert to discuss how this can impact your manufacturing or distribution company.