What Is the USMCA and its Impact?

In 2016, a multi-year process to update the North American Free Trade Agreement (NAFTA) began and after multiple rounds of negotiations and revisions, a final trade deal was ratified by each nation’s legislature in early 2020. It entered into force on July 1^st, 2020.

Fundamentally, the USMCA is a new free trade agreement between the United States, Mexico, and Canada with the goal of modernizing the trade policies affecting the North American trade bloc.

While it is still early days since the implementation of USMCA, this article – based on a more detailed Descartes research report – highlights key North American industries impacted by the new trade agreement, namely Automotive, Agriculture and Chemical

The original North American Free Trade Agreement (NAFTA) entered into force in 1994. Since that time, the entire landscape of the global economy has changed and some felt that the terms of the original agreement lagged behind the changes and needed to be updated.

What changed from NAFTA to USMCA? The essential changes between the USMCA and NAFTA address imbalances in key industries across the three countries. Some of the most impactful changes already affecting key industries include:

• A requirement on automakers to have 75% of their auto parts manufactured in one of the three countries.
  
• Increased labor law requirements for Mexican workers
  
• Expanded U.S. and Canadian dairy markets.
  
• Improved Intellectual Property Laws.

The majority of the USMCA is simply a modernized NAFTA, and many companies and industries will remain unaffected by the updates.

Several of the important changes that companies should keep an eye on are:

• Protections Against Section 232 Tariffs: the USMCA specifies that the United States will not impose any Section 232 tariffs on Mexican or Canadian exports for at least 60 days after the global application of such a measure.
  
• Increased De Minimis Shipment Value: the three countries have all agreed to raise their de minimis shipment value levels, making it easier and less expensive for small- and medium-sized businesses to take part in cross-border trade.
  
• Digital Trade: the USMCA establishes rules for digital trade and digital technologies. Absent from NAFTA, these new rules include protections against forced disclosure of proprietary computer source codes and algorithms, consumer privacy protections, and promotion of open access to government-generated public data.
  
• Environmental Standards: new requirements on the three countries include commitments to enforcing environmental law, increased protections of coastal and marine environments, and conservation efforts.

Prior to the upheaval that was 2020, it was already a challenge for businesses to keep pace with shifts in trade trends.

From duty and tariff changes to economic fluctuations, changes in demand, among others, the volume and value of commodities can shift and impact a business’s bottom line.

In addition, over the last few decades, globalization prompted businesses to be more connected, meaning global imports and exports flow more quickly and any changes can have a rapid and far-reaching impact.

It is critical for businesses with international supply chains to be aware of trade policy shifts. Top companies understand how to react to these developments while insulating themselves from some of the more negative effects of change. To do this, these businesses employ up-to-date global trade data to identify changes, as well as global trade and supply chain intelligence to source new suppliers, markets, customers and products to help keep their supply chains resilient to disruptions.