Trade Compliance

GHY discusses changes to international trade regulations and explores cutting-edge compliance strategies.

Saved by the Bell: U.S. Canada Reach Last-Minute NAFTA Deal

Posted October 01, 2018

After more than year of intensive and often fractious negotiations, the United States, Canada and Mexico reached a tentative deal to substantially overhaul NAFTA just hours before a midnight deadline was set to expire.

“Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA),” said a joint statement from U.S. Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystia Freeland.

“USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region,” the document claimed.

Highlights of the United States-Mexico-Canada Agreement

The agreement reached on late Sunday night includes changes to numerous provisions in NAFTA, such as the following:

  • The Canadian de minimus threshold (the value below which goods can be shipped into the country before duties and taxes are assessed) will be raised to $40 for GST and HST purposes and $20 to $150 before duties can be applied.
  • Canada has agreed to provide U.S. dairy farmers access to about 3.5 % of its approximately $16 billion annual domestic dairy market and the hotly contested domestic pricing policy (so-called Class 6 and 7) covering certain milk ingredients will be eliminated within six months of the deal coming into force.
  • The Rules of Origin on foreign automobiles imported into the U.S. will require a regional value content of 75%, up from 62.5% under NAFTA. This will be transitioned into the new deal over 5 years. Additionally, 70% of autos must be made up of steel and aluminum produced in North America and furthermore, a percentage of any vehicle qualifying for duty-free treatment must be manufactured in a factory where the average wage is at least $16 an hour.
  • U.S. drug companies will now be able to sell pharmaceuticals in Canada for a period of 10 years before facing generic competition – an increase from the 8 years of “market protection” for drug patents that is currently afforded.
  • The deal preserves the dispute-resolution provisions of Chapter 19 that the U.S. had wanted to kill, which allows for independent panels to resolve disputes involving companies and governments. However, the controversial Chapter 11 dispute resolution process that gives investors an extrajudicial way of fighting government decisions has been eliminated entirely for Canada and mostly for Mexico, except for some key industries such as energy and telecommunications.
  • Regarding threatened Section 232 tariffs on Canada’s auto exports, the U.S. has reportedly “reached an accommodation” on the issue that would provide a partial exemption by excluding an annual quota of 2.6 million passenger vehicles or light truck, valued up to $32.4 billion USD. The deal, however, apparently failed to resolve the issue of the Section 232 tariffs on Canada’s steel and aluminum exports.

NAFTA Isn’t Gone Yet

It is important to note that NAFTA in its present form will remain in place with all its current rules remaining intact until the deal is eventually ratified by the legislatures of all three countries. The agreement is expected to clear that hurdle in Mexico and Canada with little opposition, but U.S. officials say they don’t expect the pact to face a congressional vote until next year, when the House may be under control of Democrats reluctant to support any of Trump’s initiatives.

In view of the above uncertainty, it is strongly recommended that importers carry on with any existing plans they have to renew blanket NAFTA certificates of origin for 2019.

Looking Ahead

Over the coming days, GHY consultants will be reviewing the full text of the tentative deal in-depth to determine how changes in the new USMCA could affect individual clients and will also be providing a more comprehensive review of the agreement’s most significant changes. In the meantime, should you have any questions about this important new development, please do not hesistate to contact us.

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