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What will change in the move from NAFTA to USMCA?


On Sept. 30, 2018, Canada agreed to a last-minute deal to replace the existing North American Free Trade Agreement (NAFTA). This new 21st century trade agreement, set for implementation in the year 2020, will bear the name United States-Mexico-Canada Agreement (USMCA) and will maintain tariff-free access to goods as in the original NAFTA. The USMCA still requires signature by all parties involved and ratification by each country's government. The finalization of USMCA is expected to take several months.

The newly agreed upon USMCA brings closure to key sticking points between all three parties during the negations such as:

  • Vehicle North American Content Requirements
  • Section 232 U.S. Import Tariffs on Canadian Manufactured Automobiles
  • Canadian Dairy and Agricultural Quotas
  • Chapter 19 Dispute Resolution
  • Sunset Clause
  • Intellectual Property
  • Online Shopping
  • Steel and Aluminum Industries

What has changed? What has remained the same? What does it mean to your business? We explore the impact of the USMCA below.

Vehicle North American Content Requirements

Under the current NAFTA, most vehicles require 62.5% content (materials) from either the U.S., Canada or Mexico to qualify for duty-free entry into one of the other party countries. This content threshold will rise to 75% and must contain at least 70% North American steel and aluminum content under the USMCA. There will also be a new labour content provision that requires 40% to 45% of auto parts manufacturers' activities be carried out by workers who make US$16 or more per hour. The rise in labour and material content requirements will be phased in over a three- to five-year period.

Potential or anticipated impact:

North American vehicle manufacturers will immediately be reviewing their supply chain to ensure that their suppliers will be able to provide them with materials that will allow them to meet the increased North American material content threshold of 75% so that their vehicles will continue to qualify for duty-free treatment under the USMCA. This is a win for Canada and the U.S., but more of an issue for Mexico.

Section 232 U.S. Import Tariffs on Canadian Manufactured Automobiles

The USMCA secures a commitment from the U.S that they will provide at least a 60-day exemption period on any future tariffs, including those on automobiles, under section 232 of the Trade Expansion Act of 1962. This would allow time for negotiation with the U.S. before any such additional tariffs are entered into force. The U.S. government will allow a quota of vehicles to enter duty free before the additional tariffs are applied if negotiations still result in the application of section 232 tariffs.

Potential or anticipated impact:

The vehicle quotas proposed far exceed any future foreseeable amounts that Canadian vehicle manufacturers are forecasting to export to the U.S. It appears that the threat of a negative impact of additional section 232 tariffs on future imports of Canadian manufactured vehicles is very slight now.

An Overview of the New NAFTA: USMCA

Canadian Dairy and Agricultural Quotas

Under the USMCA, U.S. dairy farmers will gain broader access to the Canadian market without severe tariff penalties. Canada has also agreed that it will limit their dairy exports globally so as not to compete with the U.S. in the global market.

The lesser publicized aspect of the concessions made by the Canadian dairy and agricultural industry under the new USMCA are the ones from the Canadian poultry industry. U.S. egg farmers will be allowed to export an additional 10 million dozen eggs the first year USMCA is implemented. Starting in year two, it will increase by 1% each year for the next 10 years.

Potential or anticipated impact:

More imports of U.S. dairy and eggs into the Canadian market will mean price and volume competition for the Canadian dairy and egg farmers. For Canadian consumers, this could mean they will be paying a lower price at the register for these types of products. Unfortunately, Canadian dairy and egg farmers could see a significant decrease in revenue in the coming years. The federal government plans to compensate dairy farmers, and will work with them in the future to determine how much compensation they will receive.

Chapter 19 Dispute Resolution

The mechanism for NAFTA parties to resolve disputes involving countervailing and anti-dumping will remain the same using binational panels.

Potential or anticipated impact:


Sunset Clause

When the current NAFTA agreement was finalized in 1994, it did not have an expiration date or "sunset clause". The U.S. had requested that any type of new trilateral agreement expire every five years during the recent NAFTA negotiations. However, it withdrew this request in the final moments of the negotiations. The USMCA will expire in 16 years with a provision that requires review of the deal every six years.

Potential or anticipated impact:


Intellectual property

Canada will extend the patent protection for prescription drugs, specifically biologics like Humira (used to treat Crohn's disease and arthritis), to 10 years from eight years under the USMCA. This will allow U.S. companies to sell their medications in Canada for an additional two years without fear that Canadian companies can manufacture and distribute cheaper generic versions.

Potential or anticipated impact:

Drug costs will rise for Canadian patients, drug plans, and businesses since U.S. pharmaceutical companies can sell their higher priced brand name versions into the Canadian market for an additional two years. Canadian manufacturers of generic brands will also lose two years' worth of revenue while they wait for U.S. patents to expire in order to gain a share of the Canadian market.

Online shopping

Under the USMCA, the de minimus threshold for online shopping imports will increase to C$150 from C$20 before attracting both Canadian duties and taxes. Import shipments below a new C$40 threshold will enter Canada duty and tax-free. Shipments above C$40 will attract GST/HST but be duty free. Shipments above C$150 will attract both GST/HST and duty.

Potential or anticipated impact:

Currently, GST/HST and duties apply to shipments whose value exceeded C$20. For the Canadian consumer, an increase to this de minimus threshold means they will be able to purchase more or higher priced online items and not pay additional duties and taxes.

It will be interesting to see if U.S. online retailers reduce their Canadian prices to C$149.99 from C$150 in order to attract more Canadian consumers.

There may also be an impact on Prime sales that are fulfilled in Canada as vendors may have to collect GST/HST on goods valued below C$40, whereas non-resident vendors may be able to sell into the Canadian market without attracting GST/HST. Canadian retailers that sell low-priced goods will likely be negatively affected.

Steel and Aluminum Industries

The USMCA does not bring immediate relief to U.S. importers of Canadian originating steel and aluminum or Canadian importers of U.S. originating steel and aluminum, which was a highly anticipated outcome at the conclusion of the negotiations. It is expected that over the coming weeks the U.S. and Canada will further discuss eliminating these tariffs or instituting a quota-type regime.

Potential or anticipated impact:

The U.S. section 232 tariffs and Canada's July 1 surtaxes will remain in place until further notice from either the U.S. or Canadian government. This means, if nothing changes, a Canadian importer of C$10 million of U.S. originating steel could be expecting a bill of an additional C$2.5 million of Canadian surtax.

The new USMCA will require Canadian businesses to take immediate action to determine the impact to their bottom line before it takes effect in 2020. The already challenging customs and trade landscape continues to change at a record pace. We can provide concise answers to questions your company has about these changes in order to mitigate duty exposure while remaining a compliant importer or exporter.

Please contact a member of our Customs and International Trade practice for assistance.

The information in this publication is current as of October 6, 2018.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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