For more than 26 years, the North American Free Trade Agreement (“NAFTA”) has governed the trade relationships between Mexico, the United States and Canada. However, on July 1, 2020, the Canada-United States-Mexico Agreement (“CUSMA”) will officially enter into force and completely replace NAFTA.
Although the CUSMA retains some important portions of NAFTA, many changes require businesses to review the way they address their cross border trade activities. This publication serves as an overview of certain practical considerations with respect to the transition as businesses should not assume that past practices under NAFTA will allow them to be compliant under the CUSMA.
On September 30, 2018, after more than a year of contentious negotiations, Mexico, the United States and Canada announced the completion of negotiations toward the CUSMA (known in the U.S. as the “USMCA”), a new trilateral trade agreement between the three countries to replace NAFTA, under which merchandise trade among the three countries has tripled to nearly USD $1.1 trillion (as of 2017), since its entry into force. Although the countries signed the CUSMA on November 30, 2018, each of them had to ratify the agreement, implement it into its internal legislation and notify the other nations of its completion of such implementation.
On December 10, 2019, Canada, the United States and Mexico agreed, by way of protocol, to amend certain elements of the CUSMA. These further amendments were renegotiated to secure support in the U.S. Congress. More specifically, additional changes were made in the areas of state-to-state dispute settlement, labour, environment, intellectual property and rules of origin. Following the United States' notification in April 2020, there were no remaining outstanding matters, allowing the CUSMA to come into force on July 1, 2020.
As mentioned above, there are significant changes in the CUSMA that have the potential to alter the North American trade and investment landscape. As a result of these changes, clients have been understandably seeking guidance on how to prepare for the entry into force of the CUSMA. Certain practical considerations to keep in mind are detailed below.
Certification of origin
Under the CUSMA, preferential tariff treatment may be granted on the import of goods based, among other criteria, on the origin of the goods in question. In practice, the supplier will often provide the importer with a certificate attesting of the origin of the goods being imported. These certificates were previously referred to as “NAFTA Certificates of Origin” and were required on a formal certificate of origin.
To ensure that an importer continues to benefit from a preferential tariff treatment under the CUSMA, it is essential that it obtains a new CUSMA certification of origin from its foreign supplier, as the NAFTA certificates previously obtained will serve no purpose under the new trade agreement. While there is no prescribed format for a CUSMA certification of origin (informal documentation can be used), the CUSMA requires the certification of origin to contain a minimum of data elements, including (i) the identity of the certifier, importer, exporter and producer, as the case may be, (ii) a description of the goods imported and their HS tariff classification, (iii) the applicable origin criterion, and (iv) the blanket period if the certification covers multiple shipments of identical goods. The Canada Border Services Agency provides an appropriate template on its website.
Moreover, the new rules of origin under the CUSMA will have to be carefully reviewed to ensure that a CUSMA certification of origin can be validly issued to the importer. Rules of origin are the criteria used to determine the national source of a product and whether such product is entitled to preferential tariff treatment. Although the rules of origin and methods used under CUSMA are usually similar to the ones under NAFTA, certain industries are subject to stiffened rules of origin, including industries relating to automotive industry, chemicals, steel-intensive products, glass, optical fibre and textiles, remanufactured materials, and apparel. However, under the CUSMA, the de minimis threshold used to determine whether a good may still be eligible for preferential tariff treatment has been increased from 7% to 10% when compared to NAFTA.
NAFTA advance rulings will no longer be valid to claim preferential tariff treatment under the CUSMA. Therefore, importers should determine whether obtaining a new CUSMA advance ruling is required for future imports.
Cross-border shipment “de minimis” levels
Under the CUSMA, to facilitate greater cross-border trade, Canada has agreed to raise its de minimis level from C$20 to C$40 for the collection of sales taxes on cross-border shipments. Canada will also provide for customs duty-free shipments up to C$150. While the increase of these thresholds applies to the importation of cross border shipments using private commercial couriers, it does not apply to imports made using Canada Post, for which the applicable thresholds remain at C$20. The corresponding United States threshold is US$800 for both taxes and duty.
Importers of cross-border shipments should therefore review the values of the goods they import into Canada to ensure that they are taking advantage of the increased de minimis levels.
The well-known NAFTA Chapter 11 investor-state dispute resolution process, which allowed foreign investors to sue host governments for alleged discriminatory treatment, will be gradually phased out between the United States and Canada under Chapter 14 of the CUSMA. The process remains in place for certain sectors, such as energy, between the United States and Mexico. It is noteworthy that Canada and Mexico also have an investor-state dispute resolution mechanism under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
Until June 30, 2023, investors from the United States or Canada may still initiate an arbitration process with respect to a legacy investment, being an investment (as defined under NAFTA) established or acquired between January 1, 1994, and June 30, 2020 and in existence on July 1, 2020, in the territory of the other country. This leaves foreign investors with a limited window for deciding whether to take advantage of the NAFTA dispute mechanism while it is still available.
From July 1, 2023, foreign investors from the United States or Canada will have limited recourse with respect to alleged discriminatory treatment of their investments by the other country. While seeking redress in the local courts and tribunals of the other country may be an option, it could be too costly or impractical for some foreign investors.
- If they have not done so already, businesses should immediately consult with counsel with respect to how they may be impacted by the changeover from NAFTA to CUSMA. The new compliance requirements and the elimination of the investor-state dispute mechanism are especially significant changes that require expert advice to navigate.
- Businesses should never assume that the practices and protocols they have developed under NAFTA will allow them to be compliant under the CUSMA as of July 1, 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.