Written By Sabrina A. Bandali and Jessica Horwitz
After months of anticipation by the Canadian trading community, and just days before the agreement's entry into force on July 1, implementation details were published for the Canada-United States-Mexico Agreement (CUSMA, also known as the USMCA or T-MEC). Companies with North American supply chains will now need to consider this guidance to determine how to leverage the opportunities presented by the new Agreement.
We provided an overview of the Agreement's key new elements in previous blog posts: Introducing the U.S.-Mexico-Canada Agreement (USMCA) and NAFTA "2.1"—The Amended and Final Canada-United States-Mexico Agreement. As the 2,300+ pages of the Agreement and nearly 200 pages of Uniform Regulations suggest, the devil is very much in the details when it comes to free trade agreements. Canadian businesses that have claimed NAFTA tariff preference or provided NAFTA certificates of origin to customers in the past should conduct a comprehensive review of their operations and supply chains as soon as possible to confirm that they meet the rules of origin, and that they are satisfying the operational and compliance requirements to claim preferential tariff treatment under the new Agreement. Businesses should not assume that goods would still qualify under the CUSMA just because they qualified under the NAFTA. We provide a resource list at the end of this post of the various publications that provide additional guidance on how Canada will administer the trade pact.
Key Clarifications in the New Uniform Regulations
Chief among the recently published resources are the Uniform Regulations on the interpretation of rules of origin and origin procedures negotiated among the three CUSMA member states. The Uniform Regulations provide important details about the how customs authorities will interpret and administer the rules contained in the Agreement’s text. Key changes clarified in the Uniform Regulations include, among other things:
- support for electronic documentation in a variety of contexts; for example, where customs authorities have received an electronic certification of origin under the Agreement, they can no longer require paper origin documentation to release imported goods;
- details on recordkeeping requirements to evidence transit or transshipment and how records must be maintained to enable verification by customs authorities;
- procedures for origin verifications/audits, including rules for verifications of textile and apparel goods;
- procedures for customs advance rulings, including their review, appeals, and a commitment to publish advance rulings quarterly;
- calculation methodologies for regional value content (value-added) under the product-specific rules of origin, including rules for valuation, unacceptable uses of transaction value, reasonable allocation of costs, valuation of materials, treatment and inventory management of identical (fungible) inputs, non-allowable interest costs, and general accepted accounting principles;
- interpretation rules for textile and apparel rules of origin;
- rules for accumulation and permissible averaging and for treatment of recovered materials;
- illustrative examples of regional value content calculations for various products; and
- the unique definition by each of Canada, the United States and Mexico of what constitutes a "series of importations" that would disqualify an importer from benefitting from the certification of origin exemption for low-value shipments.
Special Notes for the Automotive Industry
The automotive industry is particularly affected by the change from NAFTA to CUSMA. The Uniform Regulations contain:
- product-specific rules of origin for certain automotive goods (Section 13);
- additional calculation rules for regional value content under the updated automotive rules of origin;
- specification of the US$16 average base hourly wage rate thresholds in CAD ($20.88) and MXN ($294.22), assuaging previous concerns over foreign exchange rate risk and unclear calculation methodology (Section 12 definitions);
- tables that specify which types of parts are classified as "core", "principal", or "complementary"; and
- details of the alternative staging regime (Section 19).
The CUSMA introduces certain steel and aluminum content requirements for originating automotive goods. The Uniform Regulations specify the types of steel and aluminum products that qualify for purposes of this threshold (Section 17 and "Table S" of the Uniform Regulations) and the permissible methods for calculating their value, including rules about time periods and aggregation across categories of vehicles. The Uniform Regulations clarify that the steel and aluminum content requirement applies only to purchases of (or self-produced) inputs by the vehicle producer for use in the production of passenger vehicles, light trucks or heavy trucks; the requirement does not apply to the production of other types of vehicles or for tools and equipment.
Although the Uniform Regulations address the calculation methodology for the new labour value content requirement for passenger vehicles (Section 18), they do not contain any illustrative calculation examples for this requirement, and how it will be applied in practice remains somewhat unclear.
The Uniform Regulations clarify that importers of vehicles and auto parts will receive additional time to respond to origin verification information requests concerning those goods until December 31, 2020.
The culmination of nearly three years of negotiation, renegotiation and procedural detailing, the CUSMA's entry into force—and the publication of its administrative procedures—are a relief for Canadian businesses desperate to regain equilibrium in their North American trading relationships. However, trade uncertainty remains, particularly the risk of resumed U.S. "section 232" national security tariffs against Canadian metal exports and the corresponding risk of Canadian retaliatory countermeasures against imports of the same categories of U.S. goods, or new actions in respect of other products.
Importers that claim duty benefits under a free trade agreement bear the burden of documenting and demonstrating to customs authorities that the goods qualify for preferential treatment. Failing to meet these compliance obligations may result in hefty duty reassessments or commercial disputes with trading partners. In deciding whether to claim preferential treatment under a free trade agreement, businesses must weigh the potential benefits against the risk and costs of compliance.
Government of Canada Publications and Other Resources
The following is a non-exhaustive list of recent Government of Canada instruments and publications that contain important information for importers and exporters on the Agreement implementation:
- Trilateral Uniform Regulations for Rules of Origin
- Trilateral Uniform Regulations for Origin Procedures
- Customs Notice 20-23 – Import prohibition on goods produced wholly or in part by forced labour
- Customs Notice 20-22 – The Canada-United States-Mexico Agreement’s (CUSMA) - Regulatory Amendments and New Regulations Made Pursuant to the Customs Act
- Customs Notice 20-20 – Amendments to the Departmental Consolidation of the Customs Tariff
- Customs Notice 20-18 – Implementation of the Canada-United States-Mexico Agreement (CUSMA) De Minimis Thresholds with Respect to Customs Duties and Taxes for Courier Imports
- Customs Notice 20-15 – Increase to the Low Value Shipment (LVS) Threshold and Simplification to the Proof of Origin Requirements for Goods Imported into Canada
- Customs Notice 20-14 – Implementation of the Canada-United States-Mexico Agreement (CUSMA)
- Customs Notice 20-13 – Canada-United States-Mexico Agreement (CUSMA): Amendment to the Definition of “Specially Defined Mixtures” in the Canadian Customs Tariff, Chapter 16, Supplementary Note 1 (regarding prepared meat products)
- Memorandum D11-4-34 – Uniform Regulations: Chapters five, six, and seven of the Canada-United States-Mexico Agreement
- Memorandum D10-18-7 – Importation of certain dairy products and the Import Control List (ICL)
- Memorandum D10-18-8 – Importation of certain poultry and egg products and the Import Control List (ICL)
Orders in Council
- Order Amending Order in Council P.C. 2020-215 of April 3, 2020 under the Canada – United States – Mexico Agreement Implementation Act (PC No. 2020-0497), specifying the date of entry into force of the agreement as July 1, 2020
- Regulations Amending Certain Department of Transport Regulations Concerning CUSMA (Miscellaneous Program), SOR/ 2020-0150 under the Aeronautics Act and the Motor Vehicle Safety Act (PC No. 2020-0495)
- Order Amending the Order Amending the Export Control List, SOR/ 2020-0148 under the Export and Import Permits Act (PC No. 2020-0493) to implement CUSMA tariff rate quotas
- Regulations Amending the Issuance of Certificates Regulations, SOR/ 2020-0147 under the Export and Import Permits Act (PC No. 2020-0492), to implement CUSMA tariff preference levels for textile/apparel goods
- Order Amending the Import Control List, SOR/ 2020-0146 under the Export and Import Permits Act (PC No. 2020-0491), to implement CUSMA tariff preference levels for textile/apparel goods.
- Order authorizing the entry into force of the Agreement on Environmental Cooperation among the Governments of Canada, the United States of America, and the United Mexican States (ECA) of December 18, 2018, (PC No. 2020-0502)
- Order authorizing the termination of the Exchange of Letters constituting an Agreement between the Government of Canada and the Government of the United States of America, (PC No. 2020-0501) concerning imports of broiler hatching eggs and chicks
- Global Affairs Notices to importers, including notices on Tariff Rate Quotas for Supply Managed Products (Dairy, Poultry, Eggs)
- Global Affairs Notices to exporters
Other New Regulations and Regulatory Amendments
- CUSMA Rules of Origin Regulations – will incorporate the Uniform Regulations for rules of origin.
- CUSMA Rules of Origin for Casual Goods Regulations – will incorporate the Uniform Regulations for rules of origin.
- CUSMA Verification of Origin Regulations – will incorporate the Agreement's updated procedures for customs authorities to verify originating status of goods for which tariff preference is claimed.
- Certification of Origin of Goods Exported to a Free Trade Partner Regulations, SOR/97-332 – amended to allow certificates of origin for U.S. customs purposes in English, French or Spanish.
- Exporters’ and Producers’ Records Regulations, SOR/97-71 – amended to update the advance ruling provisions of the Agreement.
- Free Trade Agreement Advance Rulings Regulations, SOR/97-72 – amended to update references from NAFTA to CUSMA and updated advance ruling rules.
- Refund of Duties Regulations, SOR/98-48 – amended to update references from NAFTA to CUSMA and specifying effective date for refund eligibility as July 1, 2020.
- Proof of Origin of Imported Goods Regulations, SOR/98-52 – numerous amendments including updated origin certification rules as well as increasing the "Low Value Shipment" threshold to $3,300.
- Accounting for Imported Goods and Payment of Duties Regulations, SOR/86-1062 – amended to increase the "Low Value Shipment" threshold for goods eligible for release of express courier shipments prior to accounting and payment of duties from C$2,500 to C$3,300.
- Fees in Respect of Mail Regulations, SOR/92-414 – amended to increase the "Low Value Shipment" threshold for goods eligible for release of express courier shipments prior to accounting and payment of duties from C$2,500 to C$3,300.
- Courier Imports Remission Order, SI/85-182 – amended to increase de minimis (duty/tax free) value of goods shipped to Canada via commercial courier to C$150 for duties, and C$40 for taxes. Note that the Postal Imports Remission Order, SI/85-181 will not be amended, meaning that the value limit for duty and tax free shipments sent by regular mail (Canada Post) will remain at C$20.
- Canadian International Trade Tribunal Procurement Inquiry Regulations, SOR/93-602 – amended to remove references to the NAFTA, as Canada's government-procurement market access commitments were eliminated in the Agreement. (Procurement matters between Canada and the United States will now be governed by the World Trade Organization Agreement on Government Procurement and with Mexico in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.)
- Canadian International Trade Tribunal Regulations, SOR/89-35 – amended to remove references to bilateral safeguard provisions repealed under the Agreement.
- Canada Grain Regulations, C.R.C., c. 889 – amended to implement Canada's commitments to the United States under the Agreement in relation to grain including grades recognition and removing the requirement to list U.S. origin on inspection certificates
- Import Control List, C.R.C., c. 604 and other various regulations under the Export and Import Permits Act – amended to implement various changes to market access commitments and tariff preference levels under the Agreement including for textile and apparel goods
- Food and Drug Regulations, C.R.C., c. 870 – amended to implement changes to allow low-risk drug products to be shipped directly to retailers, distributors or wholesalers and exempt them from certain testing requirements.
- Other various technical amendments will be made, or have already been made, to update references from NAFTA to CUSMA, including in the Marking of Imported Goods Regulations, Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations, Duties Relief Regulations, Goods Imported and Exported Refund and Drawback Regulations, Temporary Importation (Tariff Item No. 9993.00.00) Regulations, Investment Canada Regulations, Members of Panels (NAFTA) Regulations, Members of Committees and Special Committees (NAFTA) Regulations, Special Import Measures Regulations, the Designation of Countries (Standards Council of Canada) Order, certain General Import Permits, and so forth.
For advice and assistance in understanding what the new North American trade agreement, CUSMA, and the above changes mean for your business, please contact a member of the Bennett Jones International Trade and Investment group.