Authored by: Vijendra Kargudri
With globalization, global trading is an inevitable requirement of current markets and more so when the trading is with your immediate geographic neighbors! Trade agreements between such trading partners facilitate businesses to trade in a mutually beneficial manner.
The trade bloc comprising of the United States, Canada, and Mexico, signed the North American Free Trade Agreement (NAFTA) on January 1, 1994. The aim of this trade bloc was to facilitate trading amongst each other by reducing trade restriction, encouraging investment and easing market access.
Recently, on September 30, 2018, the governments of the US, Canada, and Mexico inked a trilateral free trade agreement, concluding more than 13 months of tremendous negotiations. These three countries entered into a new agreement called the United States-Mexico-Canada Agreement (USMCA), which replaces the preceding NAFTA.
Though these two agreements have many similar points, there are unique distinctions existing between the two. Enlisted below are the 5 major areas where changes are made in the two agreements:
1. Country of Origin & Labour Clause for Automobile Industry
NAFTA – 62.5% of automobiles components must be manufactured in Mexico, US, or Canada in order to qualify for zero tariffs.
USMCA – up to 75% of automobiles components must be manufactured in Mexico, US, or Canada in order to qualify for zero tariffs.
This change intends to strengthen manufacturing abilities as well as increase the automotive workforce of the three countries. Also, by 2023, around 40-45% of automobile parts must be made by workers earning at least $16 per hour. This will provide greater protections to workers from Mexico. The US will allow Mexico & Canada to export up to 2.6 million passenger vehicles to the US annually without any tariffs. For exports over that amount will be subject to tariffs.
2. More excess for US farmers into Dairy Market
NAFTA – 1% of US dairy products can be exported into Canada’s dairy market.
USMCA – up to 3.6% of US dairy products can be exported into Canada’s dairy market.
The change in dairy exports comes in the wake of Canada’s system opening its domestic quota for imports, which otherwise has been protective of its farmers from foreign competition. This allows more access from U.S. dairy farmers into Canada’s dairy market.
3. Revision enabled Sunset Clause
NAFTA – no automatic sunset clause or a predetermined ending date to the agreement.
USMCA – meant to last for 16 years, wherein after 6 years, the three countries will again get together to negotiate and fix any problems and discuss the possibility of an extension.
This is the unique difference between the two agreements w.r.t. the sunset clause.
4. Intellectual Property
NAFTA – pharmaceutical companies can maintain patents on biologics for an 8-year term and the term of copyright of 50 years after an author’s death
USMCA – pharmaceutical companies can maintain patents on biologics for a 10-year term and the term of copyright of 70 years after an author’s death
This change will result in the creation of generic biologics as a cheaper alternative to the original brand products and delayed by two years coming into Canada market.
5. Increased DE MINIMIS Shipment value level
To facilitate seamless & improved cross-border trade, the US has inked an agreement with Mexico & Canada to increase their de minimis shipment value levels. For the first time, Canada will raise its de minimis level from C$20 to C$40 for taxes and provide for duty-free shipments up to C$150. It will also allow a 90 days period for the importer to make payment of taxes, after entry.
Mexico will continue to provide a US$50 tax-free de minimis along with duty-free shipments up to the equivalent level of US$117.
With this agreement, the US shipment values up to these levels get to enter the Mexico & Canada shores with minimal formal entry procedures. This will make it easier for small & medium-sized enterprises (SMEs) from the US to be a part of the cross-border trade.
How can Krypt help businesses?
As a preferred SAP Partner, Krypt has partnered in the success of global businesses involved in cross-continental supply chains. By implementation of SAP GTS, TM, EWM & IBP, such businesses can benefit from Krypt for the following:
- Monitor & manage tariffs changes
- General clauses for service contracts
- Detention & Demurrage, Storage & Monitoring (DDSM) conditions and surcharges
- Bill of Lading (B/L) conditions and surcharges
- Product classification, customs duty calculation & online filing of export/import clearances
- SPL & Duty Drawbacks
- Integrate disparate processes across the supply chain and provide visibility for insightful decision making.
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