What is CUSMA? Scoping the impact of the new NAFTA

September 22, 2021 BDO CANADA

Cargo boat sailing in the sea

The Canada-United States-Mexico Agreement (CUSMA) is a free trade agreement that brings together Canada, the U.S., and Mexico into one regional trade bloc. CUSMA relieves tariffs on qualifying goods, thus lowering trade barriers and cutting costs for North American importers and exporters.

CUSMA replaces the North American Free Trade Agreement (NAFTA) as the region's trade treaty, which has been in place for 20+ years. This new agreement goes by a different name in each of the three countries that signed it. While known as CUSMA in Canada, it is called the United States-Mexico-Canada Agreement, or USMCA, south of the border. In Mexico, people call it T-MEC, reflecting the Spanish name of the treaty.

Many think of CUSMA as NAFTA 2.0—and with good reason. CUSMA and NAFTA are very similar agreements in terms of general concepts. CUSMA continues the work of NAFTA and was negotiated using NAFTA as a baseline. That said, the two agreements do differ in significant ways. It is not for nothing that CUSMA runs to 1500 pages—more than double NAFTA's page count of 741.

In force and expiry date

CUSMA came into force on July 1, 2020, three years after negotiations began. The talks between the three party countries featured trade disputes and new tariffs employed as negotiating tactics. CUSMA will expire in 2036 unless it is extended before then. The parties have agreed to review the treaty every six years to ensure its continued relevance in the ever-evolving trade environment.

CUSMA rules of origin

The transition from NAFTA to CUSMA underlines once again that import-export strategy comes down to details. Most importantly that, the source country alone does not determine whether a manufacturing input qualifies under CUSMA. Instead, each good must qualify under its specific CUSMA rule of origin.

The new trade agreement introduces both new and revised rules of origin that impact manufacturers and their supply chains—especially the auto sector. What are the primary provisions impacting the automotive sector? Two similar-sounding but different rules: regional value content and labour value content.

Automotive sector

Regional value content

Trade treaties often set minimum regional content thresholds for vehicles or their components to qualify as ‘made in' the region—and therefore exempt from duty when crossing the border. Treaties express these thresholds as percentages of the total vehicle that must be produced in treaty countries.

Under NAFTA, that regional value content requirement was 62.5%. CUSMA raised it to 75%. This means that 75% of the inputs used to manufacture an automobile or other automobile components must be manufactured either in Canada, U.S., or Mexico.

The new treaty also added a requirement that automobiles be manufactured using at least 70% of North American steel and aluminum.

Labour value content

CUSMA requires that at least 40% of a vehicle's value is produced by workers who make at least US$16 per hour.

Impact

Vehicle manufacturers need to review their supply chains immediately. Some suppliers will be able to provide materials that meet the new 75% threshold; others may not.

While the new requirements will be phased in gradually over three to five years, the stakes are high. Manufacturers that fail to comply will see their inputs lose duty-free status and add costs to operations.

Other sectors

Automotive is not the only industry that saw changes or additions to its rules of origin. It is imperative that all importers and exporters review the new agreement and the sections that apply to their specific industry to ensure duty-free entry entitlement.

How to build CUSMA into procurement decisions

As businesses review their supply chains, they may notice some of their suppliers can no longer qualify their goods as duty-free under the new agreement.

However, while trade treaties are a key factor to consider when reviewing the procurement decision tree, they are just one of several. Considering the total cost of potential items, quality, and logistics, the non-CUSMA items may still present the best option. Businesses will need to decide whether to prioritize sourcing from the U.S. and Mexico over offshore suppliers that will cost them duties.

And some businesses may take the opposite approach. With their legacy input no longer exempt from duties, they may explore procurement routes in other countries worldwide. As a result, the new sourcing model may not qualify as duty-free.

Then again, Canada has diversified its trade agreements in recent years. As a result, importers and exporters should remember the duty-free opportunities offered by newer treaties. Chief among them: the Comprehensive Economic and Trade Agreement, or CETA, which covers the European Union; the Canada-UK Trade Continuity Agreement, crafted on the heels of Brexit; and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the CPTPP, primarily with important trading partners in Asia.

COVID and CUSMA

In the short term, importers and exporters may prefer to procure and ships items closer to home for a different reason: COVID.

CUSMA came into force during the heart of the COVID pandemic. As a result, importers and exporters could be forgiven for overlooking CUSMA's impact on their supply chains. They were worried less about the duties they would pay on goods—and more about landing those goods in the first place. With that in mind, the U.S. and Mexico present a convenient source and destination while the global economy recovers from the disruption of COVID.

The concern has even caused some businesses to reassess tried-and-true supply chain strategies such as just-in-time manufacturing—for the long term. Whatever the future holds, all businesses that import or export will need to layer CUSMA into their sourcing decisions.

Is CUSMA paperwork simpler than NAFTA forms?

When negotiators representing Canada, the U.S., and Mexico created CUSMA, they wanted to streamline the certification process for verifying the qualification of a good. The result? The new agreement doesn't require companies to complete a formal CUSMA certificate of origin.

The change from NAFTA's certificate process is welcome, but companies still need to attest to the country of origin for their goods. They still need to analyze their supply chains. They still need to ensure they comply with the details of the treaty.

Adapting to CUSMA

CUSMA was born into a world of trade far different from its predecessor. When NAFTA came into force in the 1990s, importers and exporters had options—but not like today. The business world has shrunk, and supply chains have grown longer and more complex. Now CUSMA is one of many trade agreements Canada has signed with partners worldwide, and it diversifies opportunities for Canadian companies.

Yet, the North American trade bloc cannot be overlooked. Proximity still counts, as do shared language and business culture in the case of the U.S. More than 450 million people live in the U.S. and Mexico, and the businesses they lead support robust economies. Canadian importers and exporters will continue to enjoy this access.

To adapt to CUSMA, manufacturers and other Canadian businesses will need to stay flexible in the short term. Transitioning to CUSMA will shake up processes and supply chain strategies. Many of CUSMA's changes depend on the tiniest of details. Making the most of this transition challenges business leaders to respond in kind, focusing on the specifics of their supply chain.

CUSMA has rewritten the rules for Canadian importers and exporters. Our team of trade consultants in Canada and around the world can help you adapt. To learn how, reach out to Charmaine Goddeeris, Senior Manager, Customs and International Trade.

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