Four Key Areas USMCA Impacts Supply Chains

Have you changed your supply chain strategy based on United States-Mexico-Canada trade Agreement (USMCA) that went into effect July 1st 2020?

The new U.S.-Mexico-Canada Agreement (USMCA) replaced the North American Free Trade Agreement, or NAFTA and went into effect on July 1, 2020. APICS Milwaukee serves supply chain professionals with the information needed to remain competitive in our ever-changing world. SupplyChainDive recently shared four key areas USMCA will impact supply chains summarized below.

1. Rules of origin introduce new level of complexity.

Changes to ROO requirements under the USMCA will impact shippers, particularly those in high-tech machinery or auto manufacturing, whose products contain hundreds of globally-sourced components.

"If you look at the USMCA auto rules and compare them to the NAFTA rules, the level of complexity that's been introduced by USMCA is significant," Gould said. "When in the past we had to track one or two factors in order to qualify a car for NAFTA, under the USMCA it's more like five or six different factors that we have to track all the way back through the supply chain. So it's one thing to know where an engine was built, but it's another thing to know where the steel was mined."

As the coronavirus outbreak stabilizes in some regions and spikes in others, procurement managers are working to build resilience in their operations through diversifying and regionalizing their supply chains. Doing so often involves onboarding additional suppliers and shifting geographies when a disruption (such as a factory shutdown due to a coronavirus outbreak) occurs. To do this effectively, investing in visibility tools that allow supply chain managers to quickly qualify, onboard and monitor suppliers remotely will be key throughout the pandemic and in the months ahead.

2. USMCA factors into reshoring decisions.

U.S. companies working through new rules of origin requirements under the USMCA will have to make decisions about whether nearshoring more operations to Canada or Mexico, or absorbing tariff costs from overseas suppliers is the better financial and/or logistical option.

For example, auto manufacturers must now certify that 75% of their steel and aluminum comes from Canada, Mexico or the U.S. to qualify for duty-free trade under the USMCA, up from 62.5% under NAFTA. In addition, there is a Labor Value Content (LVC) requirement, stipulating that a certain percentage of a finished vehicle is made by workers earning a minimum of $16 per hour.

Despite the initial hurdles that may come with the agreement’s implementation, nearshoring to Mexico remains top-of-mind for a lot of shippers looking to diversify amid ongoing trade tensions with China.

3. Reducing barriers for cross-border shipments.

Businesses sending goods to the Canadian and Mexican markets stand to benefit from changes to de minimis rates and customs paperwork.Under the USMCA, Canada will raise de minimis levels from 20 Canadian dollars ($15.29) to 40 Canadian dollars ($30.59) and provide duty-free shipments for items valued up to 150 Canadian dollars ($194.66). Mexico’s de minimis values will remain at $50 and provide duty free shipments up to the equivalent level of $117.

The new rates are designed to provide better access to the Canadian and Mexican market for American small and medium-sized enterprises (SMEs). These businesses "often lack resources to pay customs duties and taxes, and bear the increased compliance costs that low, trade-restrictive de minimis levels place on lower-value shipments, which SMEs often have due to their smaller trade volumes," according to a fact sheet from the Office of the U.S. Trade Representative.

Under NAFTA, and now the USMCA, shippers seeking to import products tariff-free from Canada or Mexico must fill out a certificate of origin.

4. The Sunset Clause brings added uncertainty.

Unlike NAFTA, which once enacted was intended to remain valid indefinitely or until a new agreement replaced it, the USMCA is designed to expire. The trade deal will come to an end 16 years from the date it entered into force on July 1, 2036, per its Sunset Clause.

In order for the deal to continue, six years from the USMCA’s entry into force, in 2026, the member countries must submit any changes or recommendations for the deal to a "joint review." If all parties can agree on the submitted proposals and confirm in writing that they wish to renew the deal, it will be extended for another 16 years. Joint reviews take place every six years that the deal remains in place.

If one of the member states does not agree to remain in the USMCA during a given review, then the joint review process will take place annually until the 16 year term has expired. "Companies will need to think carefully of how they may need to restructure their supply chains keeping the sunset clause in mind." Tim Yu. Supply chain risk intelligence analyst, Resilience360.

Earlier this year, Wisconsin Manufacturers & Commerce (WMC) President and CEO Kurt Bauer shared, “This (USMCA) trade deal will grow Wisconsin’s economy, provide greater opportunity for Wisconsin manufacturers and farmers, and help expand the Badger State’s reach throughout North America.”

WMC went on to state that Wisconsin’s economy relies on trade, and the USMCA will ensure the state’s economic relationship with Mexico and Canada continues to grow. Key Facts About USMCA’s Impact on Wisconsin:

  • Wisconsin exports nearly $11 billion to Canada and Mexico, and the state has a trade surplus with both countries

  • More than 231,000 Wisconsin jobs are tied to trade with Canada and Mexico

  • More than 44,000 manufacturing jobs are tied to trade with Canada and Mexico

  • One out of every four manufacturers in Wisconsin rely on North American trade

  • About half of Wisconsin’s $3.5 billion in agriculture exports – especially dairy – are exported to Canada and Mexico

APICS Milwaukee is the premier professional association for supply chain management, helping over 160 Milwaukee area companies represented by our members, with educational and networking opportunities.   

We look forward to helping you have the tools to effectively manage your supply chain. Want to learn more? Join us in July for a Supply Chain Workshop and starting in September we will be offering APICS globally recognized supply chain certification instructor-led courses for CPIM, CSCP and CLTD. Join us on August 20th to learn more about THE VALUE OF APICS MEMBERSHIP AND EDUCATION: INFORMATIONAL WEBINAR!

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