USMCA Trade Agreement Updates and Changes

The USMCA trade agreement came into effect on the 1st of July 2020, replacing the old NAFTA agreement.  The new agreement brings updates and changes to Origin requirements and classification for goods being shipped between the USA, Canada and Mexico.

In this episode Christopher Wall from Zeus Logics gives insight into the USMCA trade agreement pros and cons and other important information that shippers must be aware of.  Chris explains how the trade agreement has affected the Origin Criterion requirements and how products are classified under the new deal.

Under the new USMCA deal, the old NAFTA Certificate of Origin document is not required, however shippers must provide key data elements which can be provided in different formats.  Details are evolving over time and Chris explains how the US Customs & Border Protection (CBP) have created chatbots to help provide answers and information.

• Updates and changes to tariffs and de minimis threshold for USMCA trade agreement
• No new tariffs on zero-tariff goods
• Changes to Origin Criteria when determining country of origin of products and increased percentage of originating components
• The old NAFTA Certificate of Origin document no longer required, Chris explains the key data elements that must be provided
• How Zeus Logics are providing insight and visibility into the shipping and customs clearance process

The USMCA will affect shipments between the USA, Canada and Mexico.

Hi, everybody. It’s Ben Thompson here, and welcome to the Import Export podcast. Today, we’re talking about the new USMCA Trade Agreement. If you’re involved in shipping goods between USA, Canada, and Mexico, then you’v eprobably already heard of the new USMCA Trade Agreement that has replaced the old NAFTA trade deal.

On today’s show, we’re joined by Chris from Zeus Logics. Chris is a specialist in American customs brokering and customs clearance and today, we’re going to discuss what the new USMCA agreement means and important things that shippers should be aware of. Chris, welcome to the show.

Thanks, Ben, nice to be here.

So, before we get started, Chris, can you tell me a bit about the experience you’ve had in the shipping industry and how that’s led to the work that you’re doing at Zeus Logics?

Let’s see. I started out being essentially an investor into several 3PLs and freight forwarders. And, along that entire time just noticed that technology had not been keeping a pace in the logistics world with what you could find in even the most basic consumer-grade applications.

This sort of all came to a head when I went to go take a look at one company we were doing due diligence on and found an employee who was hunched over a photocopier trying to arrange three pieces of carbon copy paper, that at one point in time had been a bill of lading. The carbon copy was missing little chunks in it, and it was impossible to figure out what some of the important numbers were on the document.

I didn’t know much about the document myself. And, when I asked that employee, I said, “Well, maybe, is this an important document?” She said, “Oh, very important.” And the employee tried to fax it, fax a carbon copy paper through an old fax machine without putting it in the sleeve. And, I don’t know, maybe five percent of the document was missing and, looking at this, it just occurred to me that there was a lot that needed to be done if we’re going to bring the logistics and supply chain management world up to the 21st century. So, that’s sort of been my start, mostly dealing with forwarders, technology, and process improvement.

Yeah, and I guess, nobody misses the days of faxing bill of lading. I think the industry has come quite a long way since then, but obviously, has quite a lot more potential as well to improve even more processes. So, by now, obviously the USMCA agreement has just come into effect as of the 1st of July in 2020. So today, I wanted to give listeners an overview of some of the important changes, and how that will actually affect shippers and their shipments.

Can you start by letting us know what are some of the key changes and that shippers should be aware of with this new trade agreement?

So, a couple of things. You may see slightly different names for this agreement. In Canada, it’s called CUSMA. And in Mexico, it’s called T-MEC, T-MEC. So, sometimes, you’ll hear of slightly different names being used. In terms of the context in which the USMCA fits within current sort of norms in global trade agreement structuring, it borrows heavily from the TPP agreement into which the U.S. was originally a sponsor of, but did not enter into following the election of President Trump.

And, a lot of the methodology, rules, and techniques applied in evaluating things are likely to find themselves into future trade agreements. So, becoming familiar with the mindset that has been used in this could be helpful in understanding future trade agreements.

One new thing that will be a relief to many people is that there are no new tariff items specifically being done. Most of the substantive changes have to do with rules that define how different items are evaluated, assessed, and categorized. That obviously leaves, they say the devil is in the details, and this really gets into a lot of details.

So, there are a great many things that have changed, and it’s also important to note that this is still an agreement. It’s a bit of a work in progress, so you can expect to see a lot of things that are ill-defined right now that will be defined over the next few years. I guess, if we can look at– If I would divide up the changes that have occurred, I’d say most of them are rule-based and not tariff-based would be one key takeaway.

So,you might, for example, find that there have been rules that have increased access for dairy farmers and poultry farmers in the U.S. into the Canadian market based on how things are categorized or classified. But, you’ve also had,on the other hand, restrictions placed on certain kinds of goods that used to be imported tariff-free, now have to have a higher percentage of manufacturing or value-added done in North America. So, it used to be that goods that were imported tariff-free into the trade zone could have had up to 62.5% of the work or the value that was done added in outside of the NAFTA zone.

The new regulation states that 75% of the changes, additions, or transformations, and also to some extent, the raw materials, must originate from within the treaty zone. This also is going to change a fair number of things in how you have to source goods where the materials are coming from, where they’re processed, and will actually be fairly meaningful in its change in supply chains. What might appear to be a mere 7.5% increase in the North American content of the goods might invalidate a very, very large number of previous products that were exempt from duties.

So,another change that’s occurring is that in an automobile, for example, 40% of the parts need to be manufactured by employees who are making north of $16 per hour. This will obviously be raising the cost, and is obviously designed to favor countries that have higher labor costs against those that have lower labor costs to reduce the value of that arbitrage in global trade. Again, these aren’t specifically new tariffs but the rules in which things are being interpreted are quite important. Any questions so far?

That’s good. That’s a good insight into a few things. Are there any other points that shippers should understand when it comes to determining the origin criteria?

So, you tapped on one of the other really, really big changes. Previously, under NAFTA, only exporters and the producers or manufacturers could complete the official certification of origin forms.

And, this defined whether good was eligible for the preferential treatment and duty exemption based on where it was from, where the manufacturing work was done. Under the new rules, importers can also provide that data and that means that you, as a party receiving product, can certify that the information is good and that it qualifies.

This opens up possibilities for certification based on a company that may be importing things from several different manufacturers and certifying that each of them are valid. It facilitates the process a little bit on the importer’s part. The old forms are no longer being used, and the new way of bringing in data is much more flexible.

For example, you can now certify data using information gleaned from commercial invoices, packing list, bills of material, and other less formal documents than official government documents and forms you have to fill in. Do note that you do have to keep that documentation for five years. So, if you’re using a packing list to certify where something came from, make sure you hold on to that packing list or that you have some organization that’s taking care of that for you, as you wouldn’t want to have your vendor go out of business or lose contact with them and receive a customs audit four years later and end up having to reimburse or pay additional duties because you weren’t able to document this.

As with many things as customs becomes more and more electronic, you can expect to see additional and further inspection of items in a more targeted way. So, it’s going to be important to make sure that you have strong in-house processes, at the same time as you benefit from more flexibility on who can submit information.

One of the other sort of changes that we’re seeing that is particularly applicable to e-commerce is that the de minimis thresholds for the point at which you are exempt from duty has been increased almost universally across the board. These days in Canada, you have up to a 40% duty and tax-free exemption. So, that means that from up to CAD$40 import value, you pay no duties. From CAD$40 to CAD$150, the items are duty-free, but the value-added taxes, both the provincial and federal will still apply. And, above CAD$150, both duty and taxes will apply. But, this is still nevertheless erasing from previous amounts and should greatly facilitate things for people who are doing e-commerce shipments.

Mexico also has an increase in their de minimis standards. So, up to $50, U.S. is duty and tax-free into Mexico. And, from $50 to $117, U.S., is duty-free, but taxes will apply. And above $117, U.S., duties and taxes will apply for packages coming into Mexico. If, for example, you’re importing fairly small value items via parcel, this obviously opens up and allows you to import additional things at low cost without running through the customs clearing process or having to worry about how you’re going to pay duties.

In the U.S. now, the amount at which goods can be brought in duty-free and tax-free is $800. Which is a fairly substantial amount and should open up a potential for a lot of people to bring in goods into the U.S. parcel goods. Whether it be from almost globally for fairly high-value goods, and probably reaching the limit of the great majority of e-commerce type shipments. So, we think overall, a great facilitation and what can be done and a big boost toe-commerce which is seen, obviously, a big upsurge in the past six months if you will.

Yeah, there’s quite a few changes there by the sounds of it. And, back to your point on, there’s more flexibility now around shippers, around the documentation for these certificates of origin. So, the NAFTA certificate of origin document is no longer required. But as you said, the data elements can be shared in different formats, whether that be commercial invoices, or packing lists, or other documentation. What are the key data elements that are required by shippers to include in their documentation to ensure that they’re meeting these requirements of the trade agreement?

So, yes, it’s true that any format is acceptable for submission and we still need to see what their preferred format will be. I suspect that sooner or later there will be a few methods of submission that are always more expedited if you will and others that are drawing more attention. But, whatever format you use, you need to provide nine points of information.

You need to provide who the certifying authority is. In other words, is it an importer? Is it the exporter? Is it the producer or manufacturer? You need to certify who the certifying party is. Then, you need to provide the certifier’s information, identity information. Their name, a copy of their signature on whatever document is being offered for certification, their title, their email, their phone. Basic contact information, such that if customs authorities want to reach the person for clarification, they know who to go back and speak with.

You also assuming that the exporter is different than the certifier, you also need to provide all the contact information that you would typically provide for customs information on an exporter. Namely, what the name of the company is, what their address is, who the responsible person is for signing documents, and anything that would allow the government to go back and try and make sure that they understand who the exporter is and make sure that their party that they believe is acting in good faith.

You also need to come up with information on who produced or manufactured the goods. Again, similar information, name, signature, title, addresses, eventually tax ID numbers. That could also be a helpful way to triangulate information in there.

Then, you need to specify who the importer is. Where’s the merchandise going to end up? Who’s going to be the end-user? And then, as often in the customs world, you need to provide a basic description and harmonized system classification or HTS code, information on the good being imported. And then, this is a little bit new. You need to provide the origin of the raw materials, as well as where the transformative labor was done. In the past, the origin of the raw materials was not looked into nearly as much as the transformative value of it. So, we’re not 100% sure yet how this is going to work. But, if your materials were sourced outside of North America, outside of the USMCA trade zone, this will also impact whether goods are eligible for preferential treatment or not.

Then, if you’re the certifier, you also need to provide a date for the period at which you certify that these goods are being imported and subject to the exemption. This is referred to as the blanket period. And, the use of identifying a blanket period that goes beyond one shipment is, you may be sourcing goods from the same provider or the same group of providers and you may want to state that you’ve made sure that the origins of the goods make them compliant with the USMCA preferential treatment. So, if you say, for example, that [IV importers certify that I know that these shipment of bowling balls coming from this company in Canada is, in fact, valid and suitable for preferential treatment. And, I know that this will be the case for six months because I have an ongoing contract with them, or we have an agreement about where all the sourcing is coming from, you need to state that period for which you’re certifying that it’s correct.

And also, you will need to provide an authorized signature and date of all the for the authorizer and make sure that you identify yourself as being a person who’s authorized to sign on behalf of the certifying company. Typically, this person will be a person who’s been either officially designated by a company board, an officer of the board, I’m sorry, a director of the company and basically aboard member, or an officer of the company that’s certifying.

Okay, great. So, a few changes there. And, some have said that the USMCA may just be a rebrand of NAFTA, but it sounds like there’s quite a few changes that have already come into place and that even more changes over time will keep being introduced. Do you see any surprises coming up down the road or any other changes that maybe are in discussions now that could come up in future?

Well, I think that, again, that we’re dealing with an evolving treaty, an evolving agreement, and there are a lot of things that have been left undetermined. When laws are written, no matter how many pages of text to go into the law, there are always areas that have to be tested out in the real world, some of them have to be tested through courts.

For example, right now, there’s a case between the Mexican Supreme Court to try and determine whether Mexican companies can be forced to disclose the price of labor for purposes of making sure that automotive parts are 40% produced by workers making $16 an hour. This is the kind of thing, that ultimately, has to run its way through the courts, and is very, very difficult to put in place ahead of time just by the sheer nature of the complexity in dealing with multilateral trade agreements.

Already dealing with one country’s laws is complex enough. If the complexity of dealing with a single country’s laws is one to the power of one, and then now you have to add in one bilateral trade partner, so it’s not one to the power– n to the power of one. You add another one’s n to the power of two,and then you add in the third person, now it’s n to the party of three.

And then, you start adding in any other number of regulations that could apply. So, there’s going to inherently be a lot of complexity in administering this process. So, there’s a lot of areas in flux. And again,there’s no new tariffs per se, but the rule changes mean that we’re going to have to adapt how we evaluate goods, the processes we put into place. And eventually, we’ll have to learn about what the new enforcement mechanisms will be, as these will also evolve over time.

It’s sort of interesting to note that the U.S. Customs and Border Patrol was receiving so many questions about this very topic. What are the new rules that they put in place a chat bot to be able to answer the questions. And it appears that they’re putting in place quite a few more chat bots to answer questions about other things as they were quite successful with having some of the more basic and simple questions explained. It’s nice to see positive change when it comes to customer service in that way.

Trying to understand other areas that are still in flux. Let’s just say, Mexico, decides that it is unconstitutional in Mexico to require companies to state what their price of labor is. Well then, companies in the U.S. might say the same thing, and companies in Canada might say the same thing. So, you could have, based on the outcome of this case in Mexico, there could be a whole bunch of new rule-making that is put into place.

One other area where there’s a little bit of uncertainty surrounds, for example, the new aluminum tariffs that were recently announced. There was a national security-driven imposition of a 10% tariff on Canadian aluminum into the U.S. for a little while. Invoking national security is a somewhat new thing when it comes to raw materials imports, or base, or metals imports. But, it’s been done now, it could be done again, it’s a big precedent and we have to be prepared for tactics like this being used again.

We don’t know if it will be used. It could just as easily be invoked by Canada or by Mexico, and we have to be prepared for somewhat unusual and new ways of dealing with trade negotiations that seem to be a little bit the hallmarks of our times. Another area I would be paying attention to try and understand how things have changed really relate to the origin of material. This is a bit of a new place for us to try and understand what the impacts maybe and is obviously very, very different from NAFTA.

So, I guess to sum things up, there are the idea of a North American trade zone carries over the idea that there is incentive for three countries that share borders and share high degrees of industrialization. To work together is carried over, but the rules are being rewritten to try and reflect the new aims of the administration and the negotiators in place. So, I’d say that we’re dealing with a substantively new treaty, rather than just a rebrand.

Yeah, absolutely. That sounds to be already quite a lot that’s been done, a lot of changes. And, as you said, moving forward, there’s a lot of variables there, there’s a lot of countries involved, there’s obviously International law and people wanting to question different rules and laws. And,maybe those things will change over time. It’s definitely something that shippers need to be aware of because as things change, if a regulation or a requirement changes when it comes to you being the company that’s shipping the goods between these countries and you’re not aware of them or you’re not supplying the right information or paperwork or communications, well then, you could be faced with higher import duties or delays and things like that. So, it sounds like there’s still a lot more to come, and hopefully it’s communicated well, as you say that it sounds like the CBP are doing a bit better job at communicating these changes and hopefully that keeps coming to keep the whole industry aware. So, tell me a bit about the work that you guys are doing at Zeus Logics in the customs clearance process?

So, our approach has been to look at the world of global trade starting with imports into the U.S.  Primarily, it’s a large market and the rules are rather complex. And, the information collection process is rather difficult. Our work is towards giving importers and their business partners in the supply chain clear visibility on what’s going on into their customs process, rather than having everything be in the hands of a customs broker or a freight forwarder.

Customers that come and work with us, have single-point visibility into their processes, they can see which documents are required, which documents have been uploaded, they can view the actual documents that have been uploaded. They can see when they’ve been uploaded, what the status of processes is.

And, when something goes wrong with the customs clearance process, if something goes wrong on a Friday right before the weekend, the customer, the importer might not be find out about it from their customs broker until midday Monday. That hold arrived right as goods were coming in, whether it be by air freight or even by ocean, and you’ve already burned through like through two days of storage before you even found out you had a problem to solve. It’s going to generate delays in your supply chain as well as additional fees and expenses. And nobody really likes having their goods delayed.

So, most of our work goes towards providing visibility and understanding into your supply chain, so that you can avoid problems in advance. And, rest assured that all the documents you need and all the forms you need have been properly submitted.

Yeah, absolutely. It’s definitely a part of the supply chain which needs more visibility. As you said, if there’s nothing worse than being aware of a problem late or not at all. And, racking up quite a lot of demurrage charges or whatever it may be, and just having absolutely no idea that these things are going on or where the problems happen within the process along the supply chain. So any work that’s done in that process is only going to be great for the industry. So, it sounds like you guys are working hard in that area, and I hope it comes along quite strongly, and shippers should embrace it I think.

Well look, thanks very much for the chat today Chris. I think you’ve given us quite a good insight into the new trade agreement. And as you said, it’s new and it is ongoing, and it’s important that shippers keep up to date with any of these changes that may come up in future so that they avoid those issues. So, I think you’ve given us quite a lot of insight and appreciate your time today, thanks for joining us.

Key Takeaways from this Webinar:

• USMCA vs. NAFTA: The USMCA introduces updates and changes to Origin requirements and classification for goods being shipped between the USA, Canada, and Mexico.
• Origin Criterion Changes: The old NAFTA Certificate of Origin document is no longer mandatory. Instead, shippers must provide key data elements in various formats. The US Customs & Border Protection (CBP) have even introduced chatbots to assist with queries.
• Tariffs and De Minimis Threshold: The webinar covers updates and changes to tariffs and the de minimis threshold for the USMCA trade agreement. Notably, there are no new tariffs on zero-tariff goods.
• Digital Transition: Zeus Logics provides insights into the shipping and customs clearance process, emphasizing the shift towards digital platforms and the benefits they offer in streamlining operations.
• E-commerce Impact: The de minimis thresholds for duty-free imports have been increased, which is particularly beneficial for e-commerce shipments.
• Future Implications: The USMCA is still evolving, with certain areas yet to be defined. The U.S. Customs and Border Patrol has introduced chatbots to address the influx of questions regarding the new rules.