Trade representatives reached a deal just before the self-imposed midnight deadline on September 30, 2018, and the presidents of the United States, Mexico and Canada signed the US-Mexico-Canada Agreement — or USMCA — at the G20 Summit on November 30, 2018. The USMCA essentially replaces the North American Free Trade Agreement, commonly known as NAFTA, but many questions still remain.
Is the deal done? No. It requires ratification by all three countries, and the “old” NAFTA is still the “law of the land” until then. A sampling of the outlook from numerous pundits remains optimistic about USMCA. Approval in Canada and Mexico does not seem to be in question, and United States approval is considered likely but will include significant national discussion before Congress gives the thumbs up.
However, President Donald Trump has asked for approval within six months. Otherwise, he has indicated he will consider pulling out of NAFTA, which would mean no USMCA, no NAFTA, and the United States defaults to the old World Trade Organization backstop.
So this could be a wild ride in the coming months.
Are Arizona Leaders in Favor?
Yes. Despite the national and international noise, Arizona’s leadership (before and after election changes) — from Arizona Gov. Doug Ducey to the state’s congressional delegation on both sides of the aisle, to industry and economic development groups — has demonstrated a pretty consistent and strong pro-trade voice with Canada and Mexico.
The reason is simple: Arizona jobs depend on it.
In 2017, Arizona exported a total of roughly $9.7 million to Canada ($2.2 million) and Mexico ($7.5 million), and Canada is Arizona’s biggest “investor” (foreign direct investment). As a former businessman, Gov. Ducey has been fond of saying, “In business, you take care of your best customer and investor.”
Without a three-country deal, Arizona would stand to lose jobs and trade.
Who Is Happy? Unhappy?
USMCA expands new markets for United States producers — especially dairy in Canada. It requires Mexico to improve treatment for its workers and raise trucking standards to meet U.S. safety and environmental standards. Mexico’s new president has already declared preferential wages and lower taxes for investment along the border region to stimulate the border region.
China might not be thrilled with the developments due to pressure from increased North American content requirements for certain products, including automobiles, and new prohibitions on currency manipulation.
Is this just NAFTA 2.0?
No. NAFTA turned 25 years old on Jan. 1, 2019. The deal served its purpose but needed modernization. USMCA contains many provisions of the Trans-Pacific partnership, which the U.S. did not enter. USMCA has 34 chapters — 12 more than NAFTA — with new “country of origin rules,” new labor provisions, beefed up intellectual property protections and a sunset clause.
USMCA would be in effect for 16 years and reviewed every six years.
What Should Companies Do Now?
Any local business should, of course, start by reading the agreement, but Chapter 4 (Rules of Origin) will be important.
Businesses should look up the specific rule of origin that will apply to a particular product’s Harmonized Tariff Status classification once USMCA is effective.
Businesses should review Bills of Materials for their products to ensure they meet NAFTA rules of origin now and any higher standard under USMCA, and work with internal purchasing/procurement departments to prepare to satisfy once effective.
Businesses should check for “de minimus” tax rule compliance. Even if a good contains some non-North American parts or components, the good may still qualify if the value of those non-originating/foreign parts do not exceed the de minimis level as compared to the value of the finished good.
Businesses should stay up to date on the announcement of new USMCA certification requirements. NAFTA is the only FTA that requires a specified Certificate of Origin form; all others only require a business have in its possession a writing showing all the required elements for compliance. This could go away.
Should the United States/Arizona Care Whether USCMCA Is Good for Canada/Mexico?
Consider this: Multiple recent leading international economic studies have predicted that Mexico could become the world’s No. 5 largest economy by GDP by 2050 (from current 15th and moving it behind only the U.S., China, Japan and Germany).
Mexico has been rapidly developing numerous key industries; investing in advanced manufacturing, infrastructure and technology; and churning out cutting-edge engineers in every category at a dizzying pace. If Mexico becomes No. 5, that naturally could resolve or at least dramatically lessen so many of the historic “neighbor complaints” with the U.S. and its southern neighbor and create a U.S.-Mexico-Canada (all top 10) international “powerhouse” super-economic region in North America.
Canada and Mexico will always be our next-door neighbors, and former Arizona Gov. Raúl Héctor Castro once said, “God made us neighbors; let’s be good neighbors.”
[Worthy of Note: Canada is Arizona’s biggest foreign direct investment partner, and Mexico is its largest trading partner. More than 33 states have Mexico as their largest trading partner.]
Michael Patterson is a corporate and business law transactions attorney at Spencer Fane LLP in Phoenix. He has substantial international experience, having lived and worked in Latin America for 10 years. He is on the board or in a leadership council of nine leading international organizations in Arizona.
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