Author: Michael Salerno, Vice President International Banking
In January 2020, the United States-Mexico-Canada Agreement (USMCA), a trade agreement which will replace the North American Free Trade Agreement (NAFTA), received bi-partisan support and was signed in the U.S., leaving Canada as the last country to ratify the deal. Once Canada signs the USMCA, it will enter into force in all three countries about 60 days later. It's currently projected that the deal will enter into force in summer 2020 at the earliest, but more likely early 2021. Once entered into force, the deal will expire after 16 years. The three nations will review the agreement after six years to see if they would like to continue the deal after the initial 16 years has passed. This is different from NAFTA, which had no expiration date.
NAFTA, which was signed in 1993, helped triple the United States’ trade with Mexico and Canada. The USMCA maintains the focus of increasing trade between the three nations and includes changes to the automobile industry and agriculture, as well as provisions for labor reform in Mexico. It also features key changes in regards to the internet, cyber theft and theft of trade secrets.
If your company trades with Canada or Mexico, it’s important to understand how the 2,082-page agreement will impact your business.
The USMCA is designed to advance U.S. agricultural interests. Canada and Mexico are the first and third largest export destinations for U.S. agricultural products, supporting more than 325,000 American jobs.
Under the USMCA, all food and agricultural products will remain at zero tariffs. The agreement also creates new opportunity for the U.S. to export dairy, poultry, eggs and wheat into Canada. In exchange, the U.S. will provide new access to Canada for dairy, peanuts and some sugar products.
One of the goals of the new agreement is to source fewer parts for automobiles outside of North America. NAFTA required automakers to produce 62.5% of a vehicle’s content in North America to qualify for zero tariffs. The new agreement raises that threshold to 75%. In addition, the new agreement requires 70 percent of a vehicle’s steel and aluminum originate in North America.
Another significant change impacting the auto industry is the mandate that 40-50% of the parts for tariff-free vehicles must come from “high-wage factories” to qualify for zero tariffs under the new agreement. To be considered a high-wage factory, production workers must make a minimum of $16 an hour, which is triple the average wage in a Mexican factory currently. However, the hope is that this mandate will raise wages for production workers in Mexico or automakers will increase the amount of supplies they purchase from the U.S. or Canada.
The USMCA contains a new high-standard chapter on intellectual property (IP) protection. The agreement expands IP rights, extending the protection of copyrights from 50 to 70 years. It also includes new criminal penalties for cyber theft and theft of trade secrets. Additionally, the agreement ensures consumer protections for privacy, while limiting their governments’ abilities to demand disclosure of proprietary source code.
Another key aspect of the USMCA is the provision forbidding the three nations from currency manipulation. All parties should maintain a market-determined exchange rate, refrain from competitive devaluation and strengthen underlying economic fundamentals, all of which provide conditions for exchange rate stability. The USMCA also establishes a Macroeconomic Committee, which will meet to monitor implementation.
In summary, if your business does trade with Canada or Mexico, the new agreement may open up additional opportunities into the two countries. If you have questions about how the USMCA will impact your business, we recommend reviewing with your customs broker or U.S. Commercial Service Officer.
About the Author
Michael Salerno joined the bank in 2002 and currently leads the Global Banking team, which includes business development, international payments, foreign exchange risk management and trade finance solutions for corporate and correspondent banking customers. International issues can present challenges for organizations, and Michael enjoys creating simple and transparent solutions that reduce the complexity of doing business internationally.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.