After many months of uncertainty and a lot of back-and-forth negotiations, the U.S.-Mexico-Canada Agreement (USMCA) is finally becoming a reality for all three countries.
On January 29, U.S. President Donald Trump signed the USMCA, and Mexico has also approved it. And Canada’s House of Commons supported the first reading of the bill, so ratification in the near future may come rather easily. That will pave the way for the pact to take effect later this year, replacing the current North American Free Trade Agreement.
Approval from both the U.S. Senate and the House came last month after “negotiations between Democrats and the White House produced pro-labor revisions and jettisoned drug-exclusivity language sought by the pharmaceutical industry,” according to the Washington Post. “The 12 million-member AFL-CIO was closely involved in negotiating the changes and backed the agreement, along with some other major unions.”
Financial experts said it is difficult to calculate the USCMA’s precise economic impact, but they are hopeful the effect, even though small, will be positive for the three countries. The International Trade Commission projected the agreement will add 176,000 U.S. jobs, increasing employment by a modest 0.12%, and raise U.S. GDP by $68.2 billion, or 0.35%, by its sixth year.
The impact will be acute for three industries
However, companies in the automotive, chemical, and agricultural sectors may feel an outsized impact, and those industries should carefully review the USMCA’s new rules of origin and other requirements to determine the effect on their supply chains.
The automotive industry will feel the biggest impact given the Trump Administration’s goal of increasing the number of cars made in the United States. USMCA provisions include tighter rules spelling out how cars and car parts qualify for lower tariffs. “Those changes will require that companies make significant and costly changes to how they make their cars,” Politico reported. “Auto manufacturers are being given three to seven years, depending on the type of car, to fully comply with the complicated new requirements.”
The USMCA would require vehicles to have 75% of their parts manufactured in North America, up from 65% in most cases under NAFTA. Adding complexity, automotive parts categorized as heavy duty, light duty, and other have been broken down even further to now include core parts, principal parts, and complementary parts. The USMCA also adds a Labor Value Content provision that would require 40% to 45% of automotive parts to be made by workers earning at least $16 an hour — a change expected to shift manufacturing from Mexico to the United States and Canada.
Companies in the automotive, chemical, and agricultural sectors may feel an outsized impact, and those industries should carefully review the USMCA’s new rules…
Meanwhile, the chemical industry’s rules of origin have been made clearer and more transparent. Documentation requirements have been reduced to allow many chemical manufacturers to no longer be required to determine regional value content and submit conferred documentation. The primary benefits of the new rules include offering additional qualification options to increase the amount of originating products.
Agriculture also will be significantly impacted by the USMCA, and farmers in the three countries have been anticipating the changes. First, the United States sees the new deal as a big win that will give American farmers more access to the Canadian market — to the tune of $70 million for both dairy and poultry. U.S. farmers will have the ability to sell more Class 7 items that include milk, ice cream, cheese, and other dairy products. The USMCA also has provided new tariff quotas for poultry that can now be exported into Canada, which will allow farmers to recognize increased sales and profit. Overall, the USMCA will likely increase annual U.S. agricultural and food exports by $2.2 billion.
Clarity begins to replace uncertainty for companies
After months of uncertainty and mountains of published information on the USMCA, the prospect of a deal and clarity regarding the details is a welcome development for companies in all three countries.
Overall, roughly 85% of the USMCA agreement looks a lot like a modernized NAFTA. Many of the changes, however, are significant. Here are a few takeaways that corporate trade managers can discuss with their various internal stakeholders and partners:
- The new agreement, as envisioned, will be valid for 16 years with a mandatory review every six years.
- There will be no formal certificate of origin provided within this agreement.
- In summary, the United States will have new access to the Canadian dairy market, the new automotive rules of origin will require higher levels of North American content in vehicles, and the chemical industry will have additional originating options.
- Given that the USMCA looks to level the playing field for the U.S., Mexico, and Canada, it could create pressure on businesses in these countries to find new ways to be more competitive. This may well trigger a cycle of innovation, risk-taking, and market disruption. Finding creative solutions within the labor market may be one way of increasing your competitive edge.
- Disrupted companies can explore new sourcing options within the USMCA territories and also within Free Trade Agreements in other regions in order to add trade diversity to their supply chains and potentially reduce costs, increase efficiency. and increase revenues.
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