The USMCA: repositioning your company for global growth

U.S. companies with current business and operations in Canada and Mexico made the decision to do so based on the advantages that the North American Free Trade Agreement (NAFTA) offered. Many have made significant investments associated with those decisions based on the trade environment created by those rules. Modifications made and enforced by the U.S.-Mexico-Canada Agreement (USMCA) will inevitably affect the business value of those decisions.

What’s changing

Increased vehicle production in the U.S. and Canada. 30% of vehicle production must be done by workers earning an average production wage of at least $16 per hour. In 2023, the production percentage rises to 40%.

More auto parts from member nations. Automakers can qualify for zero tariffs if at least 75% of their vehicles’ components are manufactured in the U.S., Canada or Mexico (up from 62.5% under NAFTA).

Higher percentage of metal from member nations. 70% of the steel and aluminum used in vehicles will have to come from the U.S., Canada or Mexico. For steel, countries will have seven years to comply with this requirement; for aluminum, ten years. Melted and poured requirement will only apply to steel, not to aluminum.

Interagency labor committee to monitor Mexico. Mexican compliance with labor provisions would be monitored by independent panelists, not by embassy attaches or inspectors. Mexico will allow panels composed of experts and a third party to review labor standards.

Pharmaceutical exclusivity period remains five years. A 10-year exclusivity period for biologic drugs, shielding companies from cheaper generic competitors, was removed. 5-year exclusivity period remains.

Increased access to Canadian dairy markets. Canada will ease restrictions on its dairy market and allow American farmers to export about $560 million worth of dairy products (everything from milk powder to ice cream), eggs and turkeys.

What you can do now

Companies should start implementing internal actions to be sure they are in compliance with the USMCA. These actions can be as simple as a health assessment to make updates on current procedures, practices and operations, or as complicated as a full revamp of a supply chain. In any case, companies should consider:

• Labor and employment. Companies must identify and start implementing organizational changes to comply with the new USMCA rules for collective bargaining agreements, unions, minimum salaries, and employment benefits.
• More value content is required especially in the auto industry. Companies need to redesign their supply chain, origin of raw materials, and manufacturing process to continue benefiting from the preferential tariffs.
• Rules of origin and customs. Companies should schedule internal audits to verify level of compliance, identify red flags and implement action items.
• Contractual support for import-export operations. If the exporters or producers fail to comply with customs regulations, the importer can be subject to tax assessments in its jurisdiction. It is important to confirm there is a proper contractual support for all operations.
• Realigning suppliers. Facilities and the broader supply chains of businesses across North America could see increased cost and disruption to operations if these changes are not addressed properly. Vendors and suppliers might also see also potential operation disruptions with catastrophic results. Consider realigning suppliers to ensure that they meet new provisions and avoid a negative domino effect.

We’re here to help

We believe an uncertain trade environment can be fertile ground for a resourceful company. If you have questions on USMCA, contact us. Our trade advisors welcome a discussion to help identify the right strategy to protect and grow your business for the near and long term.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.