The COVID-19 pandemic and increasing tensions with China have created further disruption in an already uncertain trade environment. Yet, the United States-Mexico-Canada Agreement (USMCA) is moving forward with implementation as planned on July 1. What can US executives do to keep up with trade policy impacts?
PwC’s CFO Survey showed that as of early May, 47% of CFOs intend to develop alternate or additional sources for their supply chain. Business leaders can look to the details of the USMCA text to help inform their decision-making regarding bringing supply chains closer to home.
Two stand-out points in the USMCA that could impact future trade priorities are: protecting the free flow of data across borders, and raising labor and environmental standards in key trading partner nations as a condition for preferential access to the US market. Most importantly, a major piece of trade uncertainty will have been favorably resolved. The threat of the US pulling out of NAFTA will have dissipated, replaced by the certainty of a continued free trade area for years to come in a large regional market.
USMCA’s many supporters believe these changes will benefit the American workforce by narrowing the labor cost arbitrage that moves jobs offshore, and creating longer-term upward growth in wages throughout the North American economies. But complex trade treaties always leave some parties feeling high and dry.
The USMCA preferences will be weighed against other free-trade trade arrangements (FTAs) as manufacturers and importers model supply chain scenarios. Some will find opportunities that tilt toward sourcing or producing in North America or the US, but others won’t. FTAs have a lot of variation between them in terms of coverage and ambition. When businesses look into these in detail, they’ll often find that there are already preferences that may suit. At a minimum, many more are equipped to do so after a year spent exploring the world of duty drawback, bonded warehouses, exemption processes and import substitutes to mitigate tariffs on China imports.
Be prepared to verify and validate the source of your product(s). Manufacturers rely on their suppliers to understand USMCA requirements and provide them accurate information. Depending on purchasing or sales teams who lack technical expertise to complete FTA origin certifications may not be adequate as the USMCA rules can differ from NAFTA, which in turn can differ from other trade agreements like the US-Korea pact. Eligibility verification procedures conducted by Customs authorities will be different than many suppliers are used to with NAFTA. Ultimately, meeting the rules is where the opportunities lie with USMCA and other agreements.
Survey your suppliers for certification under USMCA and other trade agreements. Explore your options for sourcing and understand the exposures in bill of material (BOM) costs. Indirect exposures (e.g., North American suppliers using parts from China) create additional complexity as they flow through the supply chain. Do the legwork to make sure that the content recipe you’re using is going to satisfy USMCA requirements and be eligible for benefits. Conversely, if receiving goods that qualify for NAFTA, make sure that the goods you’re currently receiving into Canada, the US or Mexico maintain their qualification. Also, pay attention to historical agreements: part of the USMCA transition will involve updating purchase agreements that currently reference NAFTA as a way of holding vendors responsible.
Approach trade as a cross-functional business issue, with an understanding of trade-offs and interdependencies. Don’t apply old trade impact analyses at a time in which costs of importing from outside the region are in a state of flux. Many imports—not just those from China—are subject to tariffs, including those whose applicable rates of assessment are not stable. Many are subject to increase, and additional ones are under consideration. Trade automation solutions and tariff impact assessment and modeling tools can help you make informed strategic sourcing decisions as you evaluate USMCA and other FTA opportunities.
Prepare for tougher enforcement ahead, as trade compliance audits tend to step up after a new trade agreement. There is reason to expect this with USMCA, as the agreement specifically creates opportunities for US border authorities to collaborate with their Canadian and Mexican counterparts. For example, authorities from each of the countries can audit companies within the region, meaning they can go on site and review how the product is qualifying.
Increased automation at the border has made trade data more visible to traders as well as governments. As a result, trade audits and sampling methods are improving. This puts a premium on providing accurate content data. For these reasons, what may not have been expected to cause much change can be the trigger for moves that have been building up over time