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Leveraging the Benefits of the USMCA: A Guide for Businesses

By Alberto Villarreal - Nepanoa LLC
Managing Director

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By Alberto Villarreal | Managing Director - Tue, 04/11/2023 - 16:00

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The history of trade between the US, Mexico and Canada goes way back. A trade agreement plays an important role in shaping the relations between countries and providing the necessary environment for competitiveness and development to thrive. The North American Free Trade Agreement (NAFTA) did just that, turning the continent into a regional economic powerhouse that overhauled trade relations, deepened economic integration, established protections for intellectual property, created dispute resolution mechanisms and codified landmark labor and environmental guidelines.

Since its origin in 1994, NAFTA had been the driving force behind the countries' thriving economic partnership, but  by 2018, it was significantly lagging behind the demands of an evolving trade reality. It lacked both the foresight and the provisions required to effectively address new global trade dynamics created by digitalization, intellectual property issues, and the ever-changing landscape of industries originally governed by these accords.  Therefore, the three North American countries renegotiated a new agreement known as the United States-Mexico-Canada Agreement, or USMCA, which officially entered into force in 2020.

The USMCA not only modernized NAFTA, but also brought multiple new benefits and changes to the way North American business is carried out, streamlining and modernizing multiple trade processes and making them more cost-effective. Case in point, the USMCA has been so successful that it has played a significant role in the restoration of trade following the COVID-19 pandemic, leading to an average increase of 6% in trade activity across the region from 2019 to 2021. To adequately understand the scale of this success, it is worth noting that a record-breaking 75% of imports from Canada and Mexico into the US made these two nations the US's largest export destinations in 2021.

While the USMCA has brought significant benefits for several industries, some have experienced greater results than others. Notably, the manufacturing, agricultural, and services sectors have been among the primary beneficiaries. For the automotive industry, these benefits have tripled the production of light vehicles, from 1.1 million units annually, to a total of 3.5 million, while the production of electric cars (EV) is projected to increase almost 50% by the end of 2023. The agricultural sector also stands to benefit from the reduction of trade barriers for certain products such as dairy and poultry, creating new market opportunities and increasing profitability for farmers and other businesses related to the industry. Furthermore, nearshoring trends this year are expected to bring almost US$11 billion in investments for a variety of manufacturing industries.

Digital services companies have also been positively impacted by the USMCA, mainly because the agreement contains provisions that protect cross-border data flows. These provisions restrict customs duties on digital products, which has facilitated the growth of e-commerce, benefiting businesses that rely on these platforms to reach consumers. The USMCA’s stronger IP protections have also aided in the development of established markets. This is exemplified in the way electronics powerhouses like Samsung and LG have thrived in Mexico since the implementation of a no-duties policy on electronic transmissions, as well as the right for customs officials to seize goods that violate IP rights. IP provisions also provide stronger legal protections for creators and brand owners, which can help incentivize investments in new technologies.

Thanks to the USMCA, businesses can also expect new tariff reductions or eliminations and more streamlined customs procedures. The IMMEX program, for example, continues to exempt companies from the previously required 16% tax on temporary imported goods, encouraging businesses to set up shop in Mexico and source all the materials needed for their operations. General de minimis values have increased in both Mexico and the US, at US$150 and US$800, respectively, and certain automotive companies are even eligible for total import tax exemptions simply by manufacturing car parts across the border. These measures are why reviewing your supply chain is an essential part of cross-border growth. Delving into your own processes can help identify new ways of taking advantage of the preferential trade provisions between the member countries. These benefits can potentially create new opportunities for businesses of all sizes and from all sectors. 

Operating in a foreign country and simultaneously trying to benefit from USMCA provisions can seem like a daunting task. Thus to ensure businesses are leveraging the full potential of the agreement, companies should understand the rules of origin and monitor all regulatory compliance issues. For example, provisions regarding the automotive industry have specific rules that determine qualification for preferential treatment, while new guidelines require 40% of their manufacturing to be made directly by workers earning a salary of at least US$16 per hour. Under NAFTA, companies also had to source 60%-62.5% of their car parts from North America in order to avoid import tariffs, but under the USMCA, this number has increased to 70%-75%. Furthermore, new and stricter provisions related to the environment have resulted in an increase in penalization. Just in the first year of its implementation, 1,500 shipments were seized for failing to comply with environmental law. With the right partners and a comprehensive understanding of the implications of their operations, companies can avoid these pitfalls and reap the benefits that are readily available.

The USMCA presents a major opportunity for North American businesses to improve their operations, innovate and expand. Since its inception, the agreement has played a positive role in improving trilateral relations as well as optimizing and facilitating trade between the countries. Businesses can significantly reduce costs, increase market access and adoption, and even protect their intellectual property by leveraging its provisions. However, there are challenges that must also be addressed and mitigated. Recent disputes should serve as fair warning for any business who wants to obtain benefits from the USMCA. Before defining a plan, businesses must take the necessary steps to analyze the implications of the USMCA to their operations. With a solid, well thought-out strategy, they can become better positioned to succeed in the North American market.

Photo by:   Alberto Villarreal

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