The agreement to replace NAFTA, the Canada-United States-Mexico Trade Agreement (CUSMA) came into force on July 1, 2020 and Canadian importers and exporters should be aware of how the new agreement will affect their business. This bulletin highlights some of the major differences between NAFTA and CUSMA.
Rules of Origin
A notable change under CUSMA is in the rules that apply to the origin of goods. While most rules of origin will remain the same under CUSMA, there have been significant changes in the automotive sector, pharmaceuticals and health care products, information technology products, cosmetics and chemicals. In many cases, the rules have become stricter, and products that used to qualify for preferential treatment under NAFTA may not qualify under CUSMA.
Particularly, the rules applicable to automotive vehicles and products are more burdensome than existed under NAFTA. Every company that has been exporting or importing its products under NAFTA is well advised to review whether and how they may be affected by any changes to the rules under CUSMA.
Further, the rules that traders must follow to establish the origin of a good are different under CUSMA. CUSMA moves away from a formal certification of origin and gives traders more options. However, importers that relay on origin certification by their suppliers should review their contracts with those suppliers to ensure they can claim against the supplier for any additional duty and other costs associated with improper certification.
CUSMA's Digital Trade chapter provides a slew of new protections for the digital economy, including eliminating customs duties on digital products distributed electronically, protection for cross-border data transfers, minimizing limits on where data can be stored and processed, limiting government's ability to require disclosure of proprietary computer source code and algorithms, and limiting the civil liability of internet platforms for third-party content that such platforms host or process.
While CUSMA does contain a chapter addressing government procurement, Canada is not a party to it. Therefore, once CUSMA comes into force, suppliers in Canada, the U.S. and Mexico will no longer have one trade agreement that provides a common "rule set" for government procurement in North America. Rather, there will be one agreement governing procurement between Canada and the U.S. (the World Trade Organization Agreement on Government Procurement – WTO-AGP), another between the U.S. and Mexico (CUSMA), and, when it comes into force, a third agreement between Canada and Mexico (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – CPTPP). As a result, it is important for suppliers to be aware of and understand which rules govern the procurement they are bidding on.
U.S. Section 232 Tariffs on Steel and Aluminum Goods
A number of side letters accompany CUSMA. Canada and the U.S. concluded a side letter to CUSMA that provides Canada with two narrow protections from tariffs imposed by the U.S.:
- Section 232 Tariffs – Future Measures: One side letter requires the U.S. to delay the imposition of any tariffs or import restrictions under Section 232 of the Trade Expansion Act on Canadian goods for 60 days, during which time the two countries must attempt to negotiate an appropriate alternative.
- Section 232 Tariffs – Autos and Auto Parts: The second side letter, provides that if the U.S. chooses to impose tariffs under Section 232 of the Trade Expansion Act on Canadian automobile exports, Canada will have guaranteed, duty-free access for a specified quantity of automobiles and their parts.
Although one of the goals of CUSMA is to reduce regulatory burdens, it is important to understand that these side letters are limited in scope. For instance, the side letters have not prevented the recent Canada-U.S. trade dispute regarding imports of aluminum to the U.S. This dispute originated in March 2018, prior to the conclusion of CUSMA because the U.S. claimed that the volume of aluminum imported into the U.S. from foreign countries, including Canada, raised Section 232 national security concerns.
Canada and the U.S. subsequently came to an agreement in May 2019 under which the U.S. exempted Canadian imports from the Section 232 tariffs on the condition that import levels would not rise meaningfully beyond historic levels. In August 2020, the U.S. determined that imports from Canada have risen meaningfully and in turn imposed 10 per cent tariffs on Canadian aluminum. While the U.S. has since conditionally retracted such tariffs, the threat remains if the actual volume shipments from Canada exceeds 105 per cent of the expected volume for any month. As a result, Canada will not, at this time, impose the retaliatory tariffs it had announced on August 18, 2020. However, Canada states that it remains ready to impose such retaliatory tariffs, pursuant to the May 2019 agreement, if necessary.
Although CUSMA has been hailed as both an improved NAFTA and not much different than NAFTA, neither is quite true. There are provisions that have changed significantly, and those changes will require a re-think of corporate strategy. In other areas, it will be business as usual. Canadian companies need to understand what changes affect them and what they need to do to adapt to the new trade environment. Knowing the rules can help increase revenues but also avoid costly mistakes.
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.