US President Donald Trump repeatedly called the North American Free Trade Agreement (NAFTA) the “worst trade deal ever made.” However, on 30 September, after more than a year of negotiations, he, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto have unveiled NAFTA 2.0 or, as the US prefers to call it, the United States-Mexico-Canada Agreement (USMCA).
The deal, which still needs to be signed and passed through Congress before it enters into force, likely in 2020, is something of a relief in the midst of America and China’s increasingly serious trade dispute.
While it’s true that imports of steel, aluminum, solar panels and washing machines still attract tariffs – even those from Canada and Mexico – USMCA does a least give companies some clarity about the future.
Michael Leightman, EY Global Trade Practice’s Trade Reform Initiative Leader, says: “At least there is now some certainty in terms of trade planning and alternatives to consider ¬– whether that is shifting production into the US or from other countries into Mexico and then on to the US market under the qualifications of the new trade agreement.”
Dalton Albrecht, EY Global Trade Leader in Canada, says: “USMCA will help stabilize things, but nobody really knows where these tariffs are going and to what extent you can make plans. There are certain general things we look at, though, such as can you get remissions of duty (refunds or advance duties relief) and what about alternative-sourcing planning? Can you change supply chains for different destinations for the goods?”
Leightman and Albrecht also advise that companies carefully consider the tariff classification and declaration of origin. Under USMCA there are rules of origin that stipulate what percentage of inputs imported from elsewhere are permitted for goods. For example, 75% of the key components in cars will have to come from the country of origin; i.e., US, Canada or Mexico under the deal.
Armando F. Beteta, leader of the EY Global Trade services at the Latin American Business Center, says: “The new rules included under the USMCA for the automotive industry are particularly important for Mexico. While the rules of origin for this industry are clearly more strict and new requirements have been added (i.e. 70% of aluminum and steel should be from North America and a high wage labor value content). There are also interesting incentives linked to the agreement via side letters that, for example, will waive for a high number of Mexican autos/autoparts any potential punitive tariffs, if these are imposed by the US under Section 232 in the near future.”
Leightman says: ”We are seeing an increase in jurisdictional enforcement where customs are looking closer in each country at the qualifications, the documentation, the information submitted to ensure that companies are complying with the rules. In a broader context, across the globe we are also seeing an increase in inspections and requests for data and information on declarations, so we recommend that regulatory and compliance divisions are involved proactively and not reactively.”
He adds: “Companies need to ensure they are using the lowest duty values legally permissible from a customs declaration perspective and that they are looking to see if they can reduce the value of intangibles included in the duty value.
“There are a number of strategies that companies might use in the duty deferral area, such as bonded warehouses or free trade zones. Then there is the drawback potential where you can reclaim some of the costs of duty and trade flow costs. So there are a variety of different options to at least reduce impact if you are not able to find alternative sourcing for certain products,” says Leightman.
In a poll of 600 tax executives by EY almost a quarter of companies, 24%, were looking at duty drawbacks and/or the use of free trade zones to mitigate the effects of tariffs.