As the United States-Mexico-Canada Agreement awaits ratification from each of the three countries’ legislatures, many companies and trade associations are intensifying their efforts to see it pass.
Referred to by some as NAFTA 2.0—the 21st century version of the now-antiquated North American Free Trade Agreement—the new United States-Mexico-Canada Agreement (USMCA) was signed by leaders of the three countries on Nov. 30, 2018. The USMCA portends big changes in the global trade compliance space on such issues as rules of origin, labor standards, certificate of origin documentation, de minimis thresholds, and much more.
Despite the new trade compliance obligations the USMCA would impose, many companies welcome its passage. On Feb. 26, more than 200 U.S. trade associations, chambers of commerce, and companies representing a wide variety of industries—including agriculture, manufacturing, technology, pharmaceuticals, and financial services—announced the launch of the USMCA Coalition, a group that over the coming weeks and months said its aim is to make the case for “expeditious passage” of the agreement to members of Congress.
“USMCA establishes best-in-class rules for e-commerce, digital trade, customs, and intellectual property protection,” Laura Lane, president of global public affairs at UPS and coalition co-chair, said in a statement. Other corporate members of the coalition include drug makers Bristol-Myers Squibb and Pfizer; technology companies Microsoft, Cisco Systems, and Honeywell; manufacturing companies Emerson Electric and ArcelorMittal; and financial services firms JPMorgan Chase, Mastercard, and Citi, to name just a few.
“USMCA has key improvements for the services sector, including a modernized financial services chapter that for the first time prohibits data localization requirements in the region,” said Candi Wolff, executive vice president for global government affairs at Citi and coalition co-chair.
On March 1, leaders representing the agricultural industry—the National Corn Growers Association (NCGA), American Soybean Association, National Association of Wheat Growers, and National Sorghum Producers—announced their support for the USMCA. “Mexico and Canada are the U.S. corn industry’s largest, most reliable corn market; Mexico is corn’s number one buyer and Canada is one of our largest ethanol importers. We cannot afford to risk losing this market,” said NCGA President Lynn Chrisp. “USMCA is NCGA’s top legislative priority for 2019, and we will be working closely with the Administration and members of Congress to get it ratified.”
Supply chain operations
If ratified, the USMCA will result in significant changes to global supply chains, forcing companies to rethink their operations. Some of the most significant changes concern the Rules of Origin. Automakers, for example, would qualify for zero tariffs on cars and trucks if 75 percent of their vehicles’ components (up from the 62.5 percent requirement in NAFTA) are made in the United States, Canada, or Mexico.
This is driving many automakers to source components from suppliers near North American assembly plants, rather than, say, China. A recent survey of 100 executives at U.S.-based automakers found that 61 percent believe suppliers near assembly plants will be favored somewhat or significantly, and 78 percent said finding North American suppliers or identifying alternate suppliers will be a near-term priority for their supply chain.
The survey, conducted by supply-chain solutions provider LevaData, also found that auto executives plan to aggressively seek savings in the supply chain to reduce the impact of higher production costs. Specifically, 36 percent plan to renegotiate part-supply deals to pass costs to suppliers, and 35 percent said they will look for cost savings in the production process.
Tariffs imposed on Chinese imports are also top of mind, with 30 percent of auto executives expressing concern over their impact, compared to 9 percent who expressed concern over the USMCA’s impact. Forty-nine percent said both will have an impact.
“The adoption of USMCA, threats of tariffs on Chinese goods, and concerns about the security of tech components made in China are going to be major concerns for the automotive industry in the coming years,” LevaData Founder and CEO Rajesh Kalidindi said in a statement. “Auto makers will require a better upstream assessment of geopolitical risk considerations going forward. Knowing where tariffs might be applied and how they could impact cost and supply will be increasingly important.”
Overall, 78 percent of auto executives said they believe the changes required by the USMCA will have a positive impact on their company. Moreover, nearly all (93 percent) auto executives said it’s likely they could meet the full USMCA requirements by January 2023, while 91 percent said they could be ready by 2020.
For the USMCA to pass, the biggest sticking point that must be ironed out is the Section 232 tariffs on steel and aluminum. The Section 232 tariffs, which took effect in June 2018, impose a 25 percent tariff on aluminum and 10 percent tariff on steel originating in Canada. In response, Canada imposed equivalent tariffs on steel and aluminum originating in the United States, as did Mexico.
In a Jan. 23 letter to Department of Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer, nearly 50 trade groups urged the lifting of the tariffs on steel and aluminum imports and removal of all retaliatory tariffs on trade among the parties. “For many farmers, ranchers, and manufacturers, the damage from the reciprocal trade actions in the steel dispute far outweighs any benefit that may accrue to them from the USMCA,” the letter stated.
“The continued application of metal tariffs means ongoing economic hardship for U.S. companies that depend on imported steel and aluminum, but that are not exempted from these tariffs,” the letter continued. “Producers of agricultural and manufactured products that are highly dependent on the Canadian and Mexican markets are also suffering serious financial losses.”
The USMCA was also a topic of discussion at the winter meeting of the National Governors Association on Feb. 26. “We want to ratify the USMCA, but we have a serious challenge in Canada. It is the fact that those tariffs on steel and aluminum are still in place,” said Marc Garneau, Canadian Transport Minister, speaking on a free-trade panel. “I would be remiss if I did not say that this will present us with real challenges as we begin the process of ratification in Canada. I don’t know if we’re going to get there.”
“If the tariffs on steel and aluminum are removed, Canada will move expeditiously toward the ratification of the USMCA. We believe very strongly in it,” Garneau said. “We will also drop the $16 billion in counter-tariffs that we felt obliged to impose, which we know are affecting many American companies.”
White House economic advisor Larry Kudlow, who shared the stage with Garneau, said the tariffs are a “negotiating tool” for President Trump and that he doesn’t want them. “They are part of his quiver,” Kudlow said.
During testimony before the House Ways and Means Committee on Feb. 27, Lighthizer expressed his own doubts about passage of the USMCA. “We want to very much to work out an agreement with Canada and Mexico, and we’re in the process of doing that,” Lighthizer said. “Whether we’ll succeed or not, I don’t know.”