While the United States-Mexico-Canada Agreement makes relatively few significant changes to North American Free Trade Agreement rules, it does incorporate major changes in automotive industry provisions and new rules for imposing tariffs on small-package delivery services, according to a report from Rice University’s Baker Institute for Public Policy.
“The United States-Mexico-Canada Agreement: Tariffs, Customs and Rules of Origin,” authored by David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute, “analyzes what most see as the essence of a preferential trade agreement — tariffs, customs and rules of origin issues,” he wrote. The USMCA free trade agreement has been signed but not yet ratified by the three countries.
“The U.S. sought to depart from the regional content rules used in NAFTA and other U.S. free trade agreements reached over the past 20 years,” wrote Gantz, who is also the Samuel M. Fegtly Professor of Law at the University of Arizona’s James E. Rogers College of Law and director emeritus of its international trade and business law program. “Rather than NAFTA’s requirement that 62.5 percent of the net cost of the auto be made of North American content, the U.S. initially demanded to raise the threshold to 82.5 percent North American content, of which 50 percent must be from the United States (including steel and aluminum). Due to strong opposition from Mexico during bilateral negotiations in August and September 2018, the United States was forced to compromise. Still, by adding a $16 per hour wage requirement to the agreement … the United States indirectly assured that a higher percentage of total automotive content would be produced in the U.S. (or Canada), given higher wages in the U.S. compared to Mexico.”
The final changes would raise the percentage of regional value content for automobiles from 62.5 to 75 percent, Gantz said.
“These requirements are to be phased in over three years from the date the USMCA goes into effect,” he wrote. “In addition, 70 percent of the steel used in the manufacture of cars and small trucks must originate in USMCA countries. Most significantly for Mexico, 40 percent of the materials for cars and 45 percent of the content for light trucks must be produced by enterprises that pay workers at least $16 per hour.”
Effects on express shipments
When NAFTA was originally negotiated, online shopping barely existed. The minimum value of an imported shipment that is subject to duty collection and customs documentation – known as the de minimis threshold — for the United States was only $200.
But by 2017, the number of packages delivered by the U.S. Postal Service had increased from less than a billion in 1992 to 5.7 billion, with most of the spike generated by online sellers such as Amazon.
“Given the importance of internet-based shopping today, companies that ship goods from the U.S. to Canada and Mexico, including but not limited to the U.S. Postal Service and Amazon, have long objected to the very low thresholds for expedited customs services and duty exemptions imposed by Mexico and Canada,” Gantz wrote.
“Exemption from customs duties and value-added taxes (Mexico) or provincial and national sales taxes (Canada) for small, relatively low-value packages shipped from the United States would facilitate international sales by online retailers in the United States. U.S. law stipulates that shipments worth up to $800 may be imported into the U.S. with expedited processing and without facing customs duties. In significant contrast, these thresholds are currently C$20 (US$15) for packages exported to Canada and $50 for Mexico. These levels often mean that the administrative costs for completing the shipments exceed the value of the goods shipped.”
The USMCA requires Mexico to increase these thresholds to $117 for customs duties and $50 for value-added taxes, while Canada’s limits must increase to C$150 (US$112.50) for customs duties and C$40 (US$30) for national sales taxes, Gantz said. Industry spokespersons have expressed disappointment that the U.S. trade negotiators were “unable to secure more ambitious commitments from Canada and Mexico,” according to Gantz’s report. However, they also expressed concern regarding a provision in the USMCA that would permit the United States to decrease the de minimis level for express shipments from Mexico and Canada below $800, effectively in retaliation for their intransigence.
“This, according to the industry, would be the wrong response (presumably because U.S. imports from all countries, not just Canada and Mexico, benefit from the relatively high U.S. threshold),” Gantz wrote. “It seems likely given the relative unresponsiveness of Canada and Mexico to U.S. requests that there will be further negotiations among the USMCA parties on de minimis levels in the future.”
Changes in the treatment of textiles and clothing and in agricultural products, including the politically sensitive opening of Canada’s dairy market and rules related to geographical indications (such as feta cheese or Champagne), will both be addressed in a later report, Gantz said.