Once uncertainty over ratification lifts, more businesses are likely to move on global sourcing and production decisions
Any slide into the ‘certain’ from the ‘uncertain’ column in this trade environment creates more of the support needed to make long-term bets, which will incentivize suppliers. There are other motivations for moving production back to North America that USMCA will serve to reinforce, such as US corporate income tax reform in 2017. And there are also a multitude of other free-trade trade arrangements (FTAs) for reduced duty or free duty entry, established or new, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which excludes the US but includes Mexico and Canada. FTAs have 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. The USMCA preferences will be weighed against location-based determinants like these as manufacturers and importers model supply chain scenarios.
Costs of importing from outside the region are adding up
Keep in mind that many imported products of Chinese origin are already subject to “normal” duties at an average rate of 4-6% at the time of importation to the US, and that the May hike to 25%, and planned increase to 30% for Lists 1-3, now on Oct. 15, will come on top of that. Similarly, 15 % tariffs on an additional $300 billion worth of products from China, many of which are subject to average normal duty rates upwards of 16%, go into effect on Sept 1 and Dec 15, effectively doubling their overall import cost. To take one slice of impacted activity, US sellers of backpacks, hiking boots and other types of gear have paid over $1.5 billion more in tariffs since September 2018, according to the Outdoor Industry Association.
Tougher customs enforcement ahead
Trade compliance audits tend to step up after a new trade agreement. There is reason to expect so with USMCA, as the agreement specifically creates opportunities for US border authorities to collaborate with Canadian and Mexican Customs. 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 trend is not likely to reverse. US Customs and Border Protection (CBP) expects to continue to experiment with advancing digital technologies, after a pilot test of blockchain to verify certificates of origin on imported goods to claim eligibility under NAFTA and Central American Free Trade Agreement (CAFTA).
Keep in mind that CPB also enforces US trade laws and regulations on behalf of other federal agencies. There is simply more information on products and more agencies with faster access to review and enforce compliance. 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.