United States-Mexico-Canada Agreement (USMCA): Impacts on sourcing and production investment decisions

What are the implications of USMCA for companies?

Downplaying is understandable. Most products – there are tens of thousands - will experience minimal to no change vs. terms used to qualify for the North American Free Trade Agreement (NAFTA), with significant exceptions in the auto industry, followed by agriculture, textiles, apparel and chemicals. Yet a technical reading of the USMCA impact can be misleading. If ratified by legislatures in the US and Canada, as we continue to expect although US political uncertainties are rising, the USMCA is likely to accelerate sourcing and production investment decisions that have been idling. Mexico has already ratified the agreement.

As the costs add up for waiting out a resolution to US-China tariffs, more businesses are likely to probe where and whether meeting USMCA terms can move the needle on their costs of goods in North America. US two-way trade with Canada totaled $617.2 billion 2018 and $611.5 billion with Mexico, US government figures show. Some will find opportunities that tilt toward sourcing or producing in North America or the US, others won’t. At a minimum, many more are equipped to do so after a year spent exploring the world of duty drawbacks, bonded warehouses, exemption processes and import substitutes to mitigate tariffs on China imports.

US, Mexican and Canadian suppliers able to verify and validate the source (origin) of their input products for USMCA terms will likely see advantages as businesses look for components that add to the tally of local content in their end-products. For example, to qualify for USMCA preferences, 75% of a car must be region-made, up from 62.5% under NAFTA. There are other, more stringent content requirements that are unique to auto, as well as a three-year, phase-in transition period to make changes to their supply chains, but for this example, consider how procurement professionals will approach meeting the higher origin content rules. Businesses in Mexico that are also able to address concerns about capacity and readiness to substitute inputs manufactured in Asia are also likely beneficiaries.

What can your business do to prepare for USMCA?

Suppliers: Be prepared to verify and validate the source of your product(s). Manufacturers are reliant 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 FTA (2012). 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.

Manufacturers and importers: 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 transition will involve updating purchase agreements that currently reference NAFTA as a part of holding vendors responsible.