USMCA and Canada’s supply chains

From the December 2018 print edition

When the Office of the United States Trade Representative announced in the late hours of September 30 that the US, Mexico and Canada had reached a handshake deal on a new free trade agreement (to replace the North American Free Trade Agreement, “NAFTA”) Canadians across a multitude of industries and sectors breathed a collective sigh of relief.

Image: Angelica Yiacoupis

The uncertainty that overshadowed the trade environment and the overall climate of Canadian-American relations for 13 months had been replaced with cautious optimism that things would go back to normal. What exactly “normal” means depends greatly on one’s industry and role within the trade process. The new United States-Mexico-Canada Agreement or USMCA, the new moniker for free trade in North America, will create new provisions and processes that will affect supply chains, the individuals who manage them, and the businesses they serve.

Before diving into the details, it’s worthwhile noting that the current text of the agreement is not final and that modifications to the text are likely, though there’s a low probability of major changes to key provisions in the agreement. However, Canadian media reports tensions between Canada and the U.S. around text modifications related to wine sales and dairy access.

It’s also important to note the USMCA is not a sealed deal. It requires ratification by all three parties and will undergo substantial debate and scrutiny in the respective legislative bodies. As such, the agreement is unlikely to come into effect before the later part of 2019 or possibly in 2020.

Procurement
One of the key gains sought by Ottawa over the course of the NAFTA negotiations was greater access to government procurement contracts. The Canadian negotiating team had proposed making access to state-level contracts accessible to Canadian companies. The US, however, at one point, suggested a dollar-for-dollar procurement mechanism that would have put Canadian firms at a disadvantage relative to the provisions within NAFTA.

In the end, the two countries reached a compromise whereby no dollar-for-dollar mechanism was set out, but neither was a procurement arrangement between Canada and the US. The procurement chapter within the USMCA was limited to trade between the U.S. and Mexico. The WTO Agreement on Government Procurement governs the procurement rules between the US and Canada. This could make the procurement process more complicated for companies that do business across all of North America’s borders as it is unclear how the use of subcontractors in Mexico, for example, might impact the procurement review process. There’s also no guarantee the US won’t impose some form of Buy America provisions in the future.

Regulatory harmonization
One of the key objectives for industry groups, particularly those that deal with products that are governed by stringent regulatory policies, was to reduce the level of red tape required to make goods accessible in another country. In fact, the Canada-United States Regulatory Cooperation Council or RCC, an organization made up of government representatives and business interests from both sides of the border, has been actively studying mechanisms to reduce regulatory disparities since 2011.

To this end, the USMCA’s chapter on regulatory cooperation puts forward a series of policies and rules aimed at streamlining the regulatory approval process and reducing regulatory burden. This includes a requirement for each country to produce annual lists of proposed regulatory policies, but also an obligation to create an environment that reduces burden and complexity, which will serve as a boon to smaller businesses that typically have neither the capacity nor the wherewithal to navigate the complexities of the regulatory environment.

Canadian businesses in the chemicals, pharmaceutical and cosmetics industries will be the beneficiaries of regulatory harmonization in the long term, as they’ll be able to bring product to market in a far simpler and more seamless manner.

Automotive rules of origin
No issue permeated the NAFTA negotiations as that of automotive rules of origin. These are the rules that govern the percentage of automobile content that must originate from within North America. The US initially proposed to increase the regional value content from 62.5 per cent to 85 per cent, 50 per cent of which would come from within the US. That was deemed a non-starter by Canada and Mexico, but also by industry representatives who noted it would force costly reconfigurations of highly integrated continental supply chains.

In the end the regional value content was settled at 75 per cent, which was far more agreeable to all involved. However, there are a number of additional rules governing the North American content requirements for specific materials used in automotive production, including the establishment of three content classes, each with its own requirements. In addition, quotas were placed on the volume of Canadian and Mexican finished vehicles and auto parts that can be imported into the U.S.; however, those quotas are far above the current trade volumes. A USMCA qualified vehicle must contain 70 per cent North American originating steel and aluminum content respectively. Lastly, the USMCA requires that 40 per cent of each vehicle must be produced using an average wage of $16 an hour. As a result, logistics managers in Canada’s auto sector could see volume increases as manufacturers looks to shift more production to Canada where wages are higher.

De Minimis
Retailers in Canada will, to some extent, be affected by the changing de minims (Latin for “about minimal things”) landscape. The threshold by which goods can enter Canada without duties was increased from $20 to $150. However, the new de minimis level applies only to express shipments (not those through Canada Post) and taxes are still applied on goods valued above $40. This provides American e-commerce retailers with greater access to the Canadian market and, in turn, greater pressure on any fulfillment centres they have located in Canada.

Certification
Under NAFTA, businesses were required to provide a NAFTA certificate that provided the information required to certify the product being traded met the requirements for preferential duty rates. Under the USMCA that certification is less formal in nature, allowing importers to use transactional documents such as invoices to certify goods. However, the degree to which this will simplify the trade process is questionable. Other trade agreements without a specified certificate have caused the arbitrary development of a multitude of certification formats deemed acceptable by one party but not another. The USMCA will maintain the traditional risks for non-compliance—which can result in significant penalties and retroactive payments—and this could encourage the unfortunate development of several certification formats.

In all, the USMCA offers some small gains with respect to market access, predominantly for the US, as well as improvements in streamlining how goods are moved across borders. The degree to which this will impact the logistics industry remains to be seen. With any luck, the USMCA will help increase the total volume of trade; the only question is, in which direction.

Sydney Martin is director of Livingston International Inc.