Canada’s new trade agreement with the United States and Mexico, also known as the Canada-United States-Mexico Agreement (CUSMA) or USMCA, will take effect on July 1 and replace NAFTA.
Companies have already had to deal with plenty of supply management disruption as a result of COVID-19 and these new regulations will only add to their elements to consider.
To explain some of the changes, Tracy McLean, NFP’s senior vice-president of global logistics insurance, sat down for a Q&A to discuss how companies will be impacted.
NFP: What effect will CUSMA have on Canadian companies as it relates to supply chains?
TM: Agree or disagree, we now have an architecture in place to move trade forward with the finalization of the CUSMA or USMCA agreement. The good news is supply chain management has been preserved in Canada and allows exporters to expand. The new agreement reflects progress in digital trade in today’s environment. All countries involved recognized the limits on data localization requirements and agreed to not extract duties on items sold digitally.
The minimum tax- and tariff-free thresholds for express shipments to Canada has increased. We now have a standard agreement on regulatory co-operation subject to dispute settlement, which goes beyond the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Comprehensive Economic and Trade Agreement (CETA). Government procurement will continue to be bound by the WTO agreement commitments and the 2010 Canada-U. Agreement on Government Procurement.
CUSMA addresses issues of corruption, which will allow small- and medium-sized enterprises (SMEs) to enter new markets faster.
What categories/areas have been addressed with the implementation of CUSMA?
TM: There are numerous areas addressed in the new trade agreement. They include:
- Facilitating trade in goods
- US national security measures
- Dispute settlement
- Indigenous Peoples
- Trade and gender
- Government procurement
- Intellectual property
- Review process and ongoing modernization
What impact will the new deal have on small- and medium-sized enterprises, otherwise known as SMEs?
TM: Small- and medium-sized enterprises will see a new chapter as the agreement establishes a framework for discussions among the three governments to increase transparency of all programs. These progressive elements promote SMEs owned by under-represented groups, such as women, Indigenous peoples, youth and minorities, start-ups, agricultural and rural businesses. The agreement provides private sector representation within a formal transparent SME committee that will meet annually to formulate joint solutions to small and medium sized companies.
How should risk managers approach CUSMA as it’s implemented on July 1?
TM: Risk managers need to know their market and learn about the trade agreements, tariffs and sanctions that apply to their products or services. It’s important to understand it’s not one regional market, but multiple regional markets. Do your research and focus on entering one region first to learn and understand the practices in the US before expanding into other states. Building your American strategy requires a plan to address all opportunities and challenges.
What’s the biggest change companies will see as a result of CUSMA?
TM: Since NAFTA was introduced, the North American regional market value has tripled in size to US$25 trillion annually. CUSMA/USMCA offers more insight to address dispute resolution mechanisms. The real impact of this agreement lies in the future as it’s a deal that recognizes new commercial realities and establishes frameworks for continued discussions to lead to progress on all sides.
What difficulties could arise for companies’ supply chains with this agreement coming into effect?
TM: Companies need to bring their systems into compliance. They are already dealing with a substantial disruption caused by COVID-19, which has complicated their supply chains and led to cash flow issues. Some companies in the automotive supply chain on both sides of the border are currently re-tooling to urgently manufacture medical supplies as opposed to their normal business activities. They’re not focused on preparation for the implementation of CUSMA and will need to analyze and potentially revise their current supply chain suppliers for parts and raw materials in order to comply.
How will the dairy industry be impacted by CUSMA?
TM: The US will have more access to Canada’s dairy industry, similar to what was negotiated in CETA and CPTPP. Canada’s dairy sector has asked for delays so the export restrictions on products like skim milk and baby formula don’t begin until next year. Delays can be worthwhile financially as they need more time to adopt before the implementation of the agreement. The industry has prepared a list of recommendations including mitigation measures, such as compensation for farmers should the new deal create further hardships.
You mentioned earlier about the automotive industry. Will the rule changes have a positive or negative effect?
TM: The revised automotive rules of origin require higher levels of North American content in order to incentivize production and sourcing in North America. This builds on the ideas to strengthen the North American production platform — reducing the red tape and increasing the use of North American parts, steel and aluminum.
The agreement has the potential to generate increased automotive production and help part producers.
What types of Canadian local materials are now being sourced as a result of CUSMA?
TM: New market access in the form of tariff rate quotas for refined sugar and sugar containing products, as well as certain dairy products are some of the local materials now being sourced. Obligations for agricultural biotechnology that will increase innovation, transparency and predictability are also being created.
Are there other areas of this new deal people should be aware of?
TM: The state-to-state dispute settlement process of NAFTA will be improved to ensure arbitral panels are formed to hear disputes and ensure transparency.
CUSMA also includes a comprehensive environment chapter, which is subject to dispute settlement and aims to level the playing field. This will ensure parties don’t lower their levels of environmental protection to attract trade or investment and introduces new commitments to address global climate challenges.
What will change in terms of market access?
TM: CUSMA will maintain the tariff-free market access from NAFTA and include new chapters to address modern-day trade challenges and opportunities. The agreement provides key outcomes for Canadian businesses, workers and communities in areas such as labour, environment, automotive, trade, dispute resolution, culture, energy, agriculture and agri-food. It also includes language on gender and Indigenous rights.
CUSMA maintains the vast majority of North American trade will continue duty-free. A new chapter on custom administration and trade facilitation will both standardize and modernize customs procedures throughout North America to facilitate the free flow of goods. There are important improvements to disciplines on technical barriers to trade to make it easier for Canadian businesses to export goods.
Canada agreed to have de minimis thresholds for express courier import shipments of C$150 for duties and C$40 for taxes at the point of entry or time of importation.
Are there provisions in place to make sure this agreement continues to stay current?
TM: CUSMA includes a requirement for a formal review at least every six years. This will help to ensure the agreement remains relevant.