The United States-Mexico-Canada (USMCA) Agreement – In Effect on 1 July 2020

On 24 April 2020 the Trump Administration notified Congress that the United States Mexico Canada (USMCA) Agreement will take effect on 1 July 2020. We give a summary of its key provisions and what its potential effects might be.

A. History – NAFTA and the USMCA

The USMCA is the replacement for the North Atlantic Free Trade Agreement, the trilateral trade agreement that was signed in 1992 by the United States, Mexico, and Canada. The NAFTA agreement eliminated tariffs on most products traded between the three countries and liberalised trade in agriculture, textiles, and automobile manufacturing. This integrated the three economies closely together and led to Mexico becoming a ‘nearshoring’ destination for many US and Canadian companies. The agreement also focused on protecting intellectual property, establishing dispute resolution mechanisms, and implementing labour and environmental safeguards.

In 2017, President Trump demanded that the NAFTA agreement should be re-negotiated as part of his plan to bring more jobs back to the US. He was particularly critical of Mexico’s low labour costs which he saw as giving an unfair trading advantage to Mexico. After he threatened to withdraw the US from the agreement, Mexico and Canada agreed to renegotiate the agreement. On November 2018, the three countries signed the final draft of the 2,325 page USMCA agreement which was to take effect in 2020.

The last 2 years were extremely turbulent, with Canada and the US placing retaliatory tariffs on one another in 2018, and the USA threatening in 2019 to raise tariffs against Mexico should they fail to stem the inflow of Central American migrants trying to enter the US through Mexico. However on 10 December 2019, the three nations agreed to additional amendments and on 16 January 2020, the US Senate approved the final USMCA.

B. What does the USMCA do?

The USMCA’s provisions address these key areas:

  • Intellectual property protection and digital trade
  • Financial services and currency regulation
  • Labor rights
  • Environment protection
  • Manufactured goods
  • Agriculture products

We summarise the changes that are likely to affect importers the most.

  1. De Minimis Threshold
  • The UMSCA increases the tax-free threshold for Mexico and Canada. Mexico will provide USD $50 tax free de minimis while Canada will raise their de minimis level from C$20 to C$40. Mexico will also allow duty free shipments up to the value of USD$117. The US’ threshold reamins at USD $800. As most small to medium size businesses have shipments exceeding these de minimis thresholds, it is unlikely that the new changes is going to significantly change the existing customs procedures and taxes they face.

2. Automotive Rules of Origin and Regional Value Content

  • In order to qualify for zero tariffs, the total North American content of a vehicle must be 75% (up from 62.5% under the NAFTA agreement). 70% of all the steel, aluminium and glass used in the production of the automobile must originate in North America.
  • A proportion of the vehicle must be produced using an average labor wage of USD $16/hour (this will require Mexico to ensure that a minimum wage of USD$16/hour is instituted).

3. Certification of Origin

  • Importers will not be required to complete a formal certification document and can instead use informal documentation e.g. commercial invoices. These can be completed by the importer, exporter or producer.

4. Intellectual Property

  • The general provisions goes towards strengthening copyright and patent protections for US creators and innovators. They also aim to curtail digital piracy and illegal copying of digital content.

The rest of the USMCA provisions concern enhancing environment protections, increasing the US’ access to Canada’s dairy markets, and requiring Mexico to make it easier for workers to form unions.

How to find your USA-Mexico tariff rate

Here’s a short guide to help you with finding the tariff rate for importing from Mexico to the USA, and how to compare it against the current US-China tariffs.

When sourcing from Mexico, the first thing you’re going to want to know is what your tariff rate is going to be. If you’ve been sourcing from China, then you’re probably having a wild rollercoaster time with trying to navigate through the US’ constantly changing tariffs on Chinese imports. At present, the US and China have reached a Phase 1 trade deal which still leaves most Chinese imports with tariff rates at 25%. The Phase 1 trade deal operates mainly to reduce tariffs on agricultural goods from 15% to 7.5%. Weaver and Tidwell L.L.P have prepared an excellent summary table which links you to the official lists of affected imports.

Generally tariff policy announcements can be found on the Office of the United States Trade Representative’s website and actions taken China is contained in the ‘‘Section 301 Investigations’ section. The USA’s tariff rates and import-related information can be found on the United States International Trade Commission’s Dataweb.

As these websites can be fairly tedious to navigate through, I thought I’d prepare a guide to show you where to get your tariff rate for importing in the US. We’re going to focus on finding the US’ tariffs on Mexican products.

Finding the US tariff rate on Mexican products

  1. Go to the UITC’s Dataweb – Once there, go to ‘ HTS Search’

HTS stands for ‘Harmonised Tariff Schedule of the United States’ and it’s the US’ system for classifying goods and assigning each good with a classification number e.g. apparel made out of reptile leather has the HTS code 4203.10.20. You use this code to find out your tariff code.

2. Find your product’s HTC code

If you don’t know your product’s HTS code, then you may want to consult with a customs agent. It’s fairly straightforward if you were importing leather shoes (which has its own HTS code), but a bit more ambiguous if you had a product which could fall into different HTS categories.

For example, you have a belt that has a mother-of-pearl buckle. It could be classified as ‘accessories’ (HTS 3926.20), ‘women’s belts of leather or of composition, each valued at $7.00 or more’ (HTS 9902.16.64, if it was a women’s belt made of leather).The US Customs though classified it as 9601.90.2000 – ‘worked ivory, bone, tortoise-shell, horn, antlers, coral, mother-of-pearl and other animal carving material, and articles of these materials (including articles obtained by molding): other: worked shell and articles thereof’ – due to its mother-of-pearl buckle.

To find your HSC classification code, you can do the following:

  • Primary Method – Using DataWeb’s HTS Search: In HTS Search, simply key in a few keywords that describe your product and you will get a list of possible classification categories. Try to keep your terms as broad as possible in the beginning before refining it further. Here’s an example for apples:

Note that the HTS Database has been updated to reflect the US’ 2019 tariffs on Chinese imports. To get the most recent changes to tariff rates in light of the continuing US-China trade negotiations and find out whether your product may be affected, you can go to this official page.

3. Now that you’ve found your HTS code, you’re pretty much there!

Once you’ve keyed in your HTS code, you’ll find a table with ‘Rates of Duty’ listed on the right. That’s where you’ll find your tariff rate! If your product qualifies for special tariff rates due to trade agreements (read: sometimes free), you’ll find these rates in the ‘Special’ column.

In the table above, ‘MX’ stands for Mexico and you’ll see that for apparel items, there are no tariffs if the products come from Mexico! This is because the North Atlantic Free Trade Agreement, just replaced by the United States Mexico Canada Agreement, reduces or eliminates tariffs on imports from Mexico to the US. This is one of the major reasons why Mexico is particularly advantageous as a ‘Make in Mexico’ location.

The ‘General’ column sets out the tariffs that will apply generally unless there is a special trade agreement that sets out different tariff rates. That means that if you do not see ‘MX’ in the ‘Special’ column, you can expect the General rates to apply. You don’t have to worry about Column 2 as that does not apply to Mexico. For more information about how the ‘Rates of Duty’ table operates, you can read this document.

Mexico COVID Update – April 13, 2020

We update you on the current COVID-19 coronavirus situation in Mexico, with particular regard to the effect on industry activities.

As of 13 April 2020, the number of COVID cases in Mexico stands at 4,661 with Mexico City having the highest number of confirmed cases (1,328). The rest of the states in Mexico average around 200 cases. So far there have been 296 deaths.

Current COVID Measures in Mexico

On 31 March 2020, the Mexican federal government declared a national health emergency and issued a decree which only permits essential activities to be undertaken. Non-essential activities are to be suspended until 30 April 2020.

There is quite an extensive list of permitted essential activities but here is a summary of those relevant to business and to industry:

  • Activities related to the medical sector, including the manufacturing of supplies, medical equipment and health care technology. This includes those parties involved in the supply chain for such services and products.
  • Infrastructure, transportation and logistics services e.g. energy, water, cargo and passenger transportation, airports, ports, are permitted.
  • Chemical industries, agriculture, and businesses producing cleaning products are permitted to continue.
  • Activities that are in the fundamental sectors of the economy, the suspension of which could have irreversible effects on the economy.

Individual states have also adopted social distancing measures such as:

  • Closing non-essential businesses e.g. restaurants and cafes, movie theatres.
  • Requiring people to stay at home and not travel for non-essential purposes.

Travel restrictions

The US and Mexican governments have agreed that US citizens and lawful permanent residents can return to the US. Individuals traveling for essential reasons i.e. to work in the US, engage in lawful cross-border trade, are also permitted to enter the US. Please note however, that individual states in the US will have their own quarantine requirements.

Travel to Mexico is not advised. There are quarantine requirements for international visitors arriving via air. While it is still possible for US citizens to enter Mexico through the land crossings, we also do not recommend this because the border controls are in a state of confusion at the moment. It will also be hard to maintain social distancing. Domestic travel within Mexico is also not advised.

Impact on business and industry

Businesses had already implemented their own COVID measures before the federal government made the emergency declaration. Many instructed their staff to work from home. In some factories, examples of the COVID measures implemented were: working with a reduced workforce, checking the temperature of any person before he or she enters the facility, instructing staff to maintain distance from one another and also reconfiguring the workplace to enable social distancing, and getting the staff to wear protective gear.

As the federal government’s declaration has significant ambiguities on which activities are considered ‘fundamental to the economy’, many factories and industries continue to function and maintain a ‘business as usual’ trading approach as much as possible. From what we can see, on the ground level, individual businesses are making their own decisions on whether they want to continue operating. Some companies, like Endeavour Silver, have decided to suspend their operations until 30 April 2020.

We will continue to update our readers of the COVID situation.