USMCA (NAFTA 2.0): What it means for SMEs

​On 30 September 2018, Canada, Mexico, and the US announced that they had reached an agreement on a modernized NAFTA just hours before a self-imposed 1 October deadline. The new agreement has been renamed the United States-Mexico-Canada Agreement (USMCA), otherwise known as NAFTA 2.0. While commentators have joked that the name is the only thing to have changed, there are several substantial alterations and additions, along with some notable omissions, that may impact the trade operations of US small- and medium-sized enterprises (SMEs) should the agreement pass and enter into force. 

The USMCA is far from a done-deal. All expectations point to it passing and entering into force sometime in 2020, but the process won’t be easy.[i]  The agreement is scheduled to be signed by all three parties at the end of November, and then will need to be passed by legislatures in each of the three countries. In the US, partisan politics and the results of the November mid-term elections seem certain to have an impact on the ratification process.
 
Leaving the political procedures aside, we at TradeMoves have analyzed important elements of the 1,800+ pages, 34 chapters, 4 annexes, and 12 side letters in the new agreement focusing on impact to US SMEs. SMEs are not only major stakeholders but also integral to North American supply chains. According to data from the US International Trade Commission, of the more than 57,000 US firms that import from Mexico 81.4% have fewer than 100 employees. That same statistic is 83.7% of the more than 86,000 US firms that import from Canada.[ii]  
 
Overall, the agreement is a positive step towards alleviating some of the uncertainty surrounding US economic relations with its two most important trading partners and neighbors, stemming from President Trump’s repeated threat to take the US out of NAFTA altogether. Additionally, the USMCA remains a trilateral agreement despite several weeks of doubt as to whether Canada would sign on to what the US and Mexico had already agreed bilaterally. Looking more closely at the details, the negotiated agreement contains both opportunities and challenges for SMEs to consider.
 
Wins/Opportunities for SMEs:

1. Preferential duty-free access remains in place.  The new agreement continues NAFTA duty-free access for trade between US, Mexico, and Canada.
2. Enhanced customs and trade facilitation provisions including single window approach for efficiency and coordination will greatly benefit SMEs especially into Canada and Mexico.
3. Expedited release of Express Shipments is good for SMEs.
4. Increased the de minimis threshold and no formal entry procedures required for products at a level of not less than USD $117 for duties and taxes (up from USD $50) into Mexico and CAD $150 for duties and CAD $40 for taxes into Canada (both up from CAD $20) making it easier for SMEs to contribute to cross-border supply chains.[iii]  These provisions will not only alleviate burdensome duties and procedures, but will also increase SME competitiveness and encourage new traders to reach consumers across borders at lower costs.[iv]
5. New access for dairy, poultry and eggs into Canada via preferential tariff rate quotas (TRQs) which benefits US farmers and processors of all sizes.
6. Increased access for sugar and sugar-containing products into the US which benefit manufacturers in the processed food sector – including smaller producers -- given sugar shortages in the US market.
7. Provisions to level the playing field on environment and labor are important to US SMEs. All three countries have agreed to abide by enhanced labor and environmental protections. This is especially critical to US SME competitiveness via-à-vis Mexico, which historically has had lower levels of protections for workers.
8. Improvements to protect and enforce intellectual property (IP) rights. The USMCA’s new IP chapter updates and enhances protections for innovators. SMEs will be better protected from copyright infringements and IP theft.
9. New chapter on Digital Trade, a crucial step in bringing NAFTA into the 21st century. The digital trade provisions will make it less burdensome for data to be stored and traded across borders and should also increase trade in digital services.[v]
10. Regulatory cooperation enhancements and addition of Chapter 25 on “Small and Medium-Sized Enterprises”.  The USMCA contains a 6-page chapter dedicated to SMEs, the first of its kind in a US trade agreement.  This chapter encourages cooperation and trade promotion amongst SMEs in all three countries. In addition, the parties have agreed to create a Committee on SME Issues comprised of government representatives from the US, Canada, and Mexico that will meet on a yearly basis. The Committee will identify ways to assist SMEs in realizing the trade benefits of the agreement as well as facilitate the creation of export support programs and other SME competitiveness programs. The Committee will also serve as a liaison between SMEs and governments for matters related to the agreement. The inclusion of this chapter reveals that SME voices were heard throughout the negotiation process and will continue to be heard going forward.

 
Challenges and Issues Remain:

1. Section 232 steel and aluminum tariffs and countermeasures remain in place.  Unfortunately, the USMCA does not resolve the US-imposed Section 232 tariffs on steel and aluminum imports from Mexico and Canada, nor the retaliatory tariffs in place on a wide-range of US products into Canada and Mexico. Some analysts believe that US dairy export gains will be eclipsed by the losses to farmers and other sectors of the economy resulting from the retaliatory tariffs imposed by Canada and Mexico.[vi] These tariffs are especially burdensome to SMEs which have limited abilities to absorb those increased costs. With the negotiation process over, the hope is that there will be more time to resolve the Section 232 tariffs and countermeasures, but for now these trade restrictions remain obstacles.
2. 16-year termination clause may be problematic for supply chain stability.  A major setback in the USMCA is the inclusion of a perpetual 16-year sunset clause. The term-limit is a compromise, as President Trump originally called for a 5-year sunset clause. Under the USMCA, parties will meet after six years to decide whether or not to renew the USMCA for another sixteen years. Only one party needs to reject renewal to trigger re-negotiation.  Analysts and advisors, such as those on the Industry Trade Advisory Committee on Small and Minority Business (ITAC 9), are split on whether or not this is a positive transformation.[vii] While some argue that the sunset provisions allow the agreement to be modernized incrementally, others like TradeMoves’ President Shawn Jarosz believe that it embeds uncertainty into the agreement and could impact the longer-term supply chain decisions and customer relationships made by SMEs. 
3. More restrictive rules of origin could impact US SMEs. Some critics have suggested that the USMCA backslides on free trade due to the more restrictive rules of origin meant to encourage the use of more North American content.[viii] The changes to the rules of origin for autos have received particular attention. The required North American content of cars and light trucks has been raised from 62.5% to 75% in order to qualify for duty free preference. Additionally, 70% of the aluminum and steel used in auto manufacturing must be North American, and 40-45% of automobiles would have to be made by labor earning at least $16 per hour. The compliance costs of these changes may be so high as to encourage automakers in Canada and Mexico to source from outside North America. Firms may choose to pay the 2.5% MFN tariff on cars into the US, rather than comply with the new rules.[ix] In practice, these new provisions may end up producing the opposite of their intended effect, with US SME suppliers passed over for cheaper alternatives outside of the region. It could also reduce the competitiveness of the North American auto sector globally and raise prices for consumers.[x] Similarly, more restrictive changes have also been incorporated for the textile rules of origin. Overall, it remains to be seen whether or not these changes will be a boon or a bust for US companies.
4. No increase in certificate of origin threshold. Unfortunately, the USMCA does not increase the threshold above $1,000 for shipments requiring a certificate or origin, a missed opportunity to reduce regulatory barriers for SMEs. US SMEs recommended $2,500.  Even adjusting for inflation would have been a good start as $1,000 in 1994 is over $1,650 in today’s dollars. The lack of increase has devalued this important benefit. 
5. Restrictions on duty drawback and deferral programs remain. Another missed opportunity was the failure to eliminate restrictions on duty drawback and deferral programs. These programs concern refunds on duties paid for imported goods that are then re-exported. Canada and Mexico have more preferential programs for their other FTA partners, putting US manufacturers at a disadvantage. Eliminating these restrictions would have promoted more US exports to both Canada and Mexico.[xi]

 
Outlook
A lot remains uncertain and the impacts of the USMCA if it is passed and enters into force will take years to measure. What is clear is that US SMEs and those across North America are much better off with the USMCA than with no FTA at all. The USMCA does provide for some new trade promoting opportunities for SMEs, but there are equally as many challenges and uncertainties. Not every sector will be impacted in the same way or to the same extent. For example, changes to the rules of origin will require major supply chain adjustments in the automotive and textile sectors, while other industries will be largely unaffected. The worst-case scenario of a complete breakup of NAFTA has been avoided, something for which the business community can breathe a sigh of relief. However, SMEs and businesses around the country still have work to do in order to analyze the changes and assess the impacts on their finances, supply chains, and investment decisions if and before the agreement enters into force, most likely sometime in 2020.

We would love to hear from you. Send us your thoughts on the USMCA on our LinkedIn or Twitter.

Scott McCallum
[email protected] 
​240.389.9003

[i] Caporal, Jack and William Alan Reinsch, “From NAFTA to USMCA: What’s New and What’s Next,” Center for Strategic and International Studies, https://www.csis.org/analysis/nafta-usmca-whats-new-and-whats-next.
[ii] “SBE Council Responds to new USMCA Trade Deal (NAFTA 2.0),” Small Business & Entrepreneurship Council, https://sbecouncil.org/2018/10/01/sbe-council-responds-to-new-usmca-trade-deal-nafta-2-0/.
[iii] Hufbauer, Gary Clyde and Euijin Jung, “Higher De Minimis Thresholds: A Win in the USMCA,” Peterson Institute for International Economics, https://piie.com/blogs/trade-investment-policy-watch/higher-de-minimis-thresholds-win-usmca.
[iv] “United States-Mexico-Canada Trade Fact Sheet Modernizing NAFTA into a 21st Century Trade Agreement,” Office of the United States Trade Representative, https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/october/united-states%E2%80%93mexico%E2%80%93canada-trade-fa-1. 
[v] Chander, Anupam, “The Coming North American Digital Trade Zone,” Council on Foreign Relations, https://www.cfr.org/blog/coming-north-american-digital-trade-zone.
[vi] Schott, Jeffrey, “For Mexico, Canada, and the United States, a Step Backwards on Trade and Investment,” Peterson Institute for International Economics, https://piie.com/blogs/trade-investment-policy-watch/mexico-canada-and-united-states-step-backwards-trade-and.
[vii] “A Trade Agreement with Mexico and potentially Canada: Report of the Industry Trade Advisory Committee on Small and Minority Business,” ITAC 9, https://ustr.gov/sites/default/files/files/agreements/FTA/AdvisoryCommitteeReports/ITAC%209%20REPORT%20-%20Small%20and%20Minority%20Business.pdf.
[viii] Ikenson, Daniel, “NAFTA 2.0: The Best Trade Agreement Ever Negotiated (Except for All of the Others),” CATO Institute, https://www.cato.org/blog/nafta-20-best-trade-agreement-ever-negotiated-except-all-others.
[ix] Long, Heather, “U.S., Canada and Mexico just reached a sweeping new NAFTA deal. Here’s what’s in it.” Washington Post, https://www.washingtonpost.com/business/2018/10/01/us-canada-mexico-just-reached-sweeping-new-nafta-deal-heres-whats-it/?utm_term=.44d9d299c6db.
[x] Brown, Chad, “The 5 surprising things about the new USMCA trade agreement,” Washington Post, https://www.washingtonpost.com/news/monkey-cage/wp/2018/10/09/the-5-surprising-things-about-the-new-usmca-trade-agreement/?utm_term=.2560ebaf9edc.
[xi] “NCBFAA Urges Elimination of Drawback Restrictions in NAFTA,” National Customs Brokers & Forwarders Association of America, Inc., http://www.ncbfaa.org/Scripts/4Disapi.dll/4DCGI/cms/review.html?Action=CMS_Document&DocID=20143&Time=-1894173038&SessionID=2847913279f9616c83ft2m53q0j98fl37sfnp0i18n7cu066424x2f5w5kma2r3q&MenuKey=about.