North American Free Trade Agreement (NAFTA) to United States–Mexico–Canada Agreement (USMCA) – The Basics
The transition from the North American Free Trade Agreement to the United States–Mexico–Canada Agreement marks a pivotal moment in North American trade relations. This article aims to demystify the basic principles and significant changes brought about by this shift, underscoring the implications for trade, industries, and the economy of the member countries. The United States–Mexico–Canada […]

by | Apr 9, 2024

The transition from the North American Free Trade Agreement to the United States–Mexico–Canada Agreement marks a pivotal moment in North American trade relations. This article aims to demystify the basic principles and significant changes brought about by this shift, underscoring the implications for trade, industries, and the economy of the member countries. The United States–Mexico–Canada Agreement, hailed as a modern trade agreement for the 21st century, introduces updated regulations designed to address contemporary trade challenges, promote fair competition, and stimulate economic growth across North America.

What is NAFTA and its purpose?

Entered into force in 1994, the North American Free Trade Agreement (NAFTA) was an agreement negotiated among the United States, Mexico and Canada. NAFTA eliminated most tariffs on products and services used among the three countries and focused on freeing up trade in the areas of automobile manufacturing, agriculture, and textiles. It also attempted to protect intellectual property rights and create dispute resolution mechanisms. Its goals included implementing labor and environmental safeguards.

Canada and the United States already had a Free Trade Agreement from 1988, but the addition of Mexico in the creation of NAFTA was completely novel.

The result was a huge increase in trade among the three countries, particularly in the first two decades. Some of the believed benefits specifically to member countries and Mexico from the implementation of NAFTA were an increase in Mexican farm exports to the United States and the creation of auto manufacturing jobs in Mexico. Others have commented conversely that NAFTA undermined jobs and manufacturing in the United States.

Flags of Mexico, Canada, and the United States, the countries involved in the North American Free Trade Agreement and the United States–Mexico–Canada Agreement
NAFTA eliminated most tariffs on products and services used among Canada, Mexico, and the United States

Why was NAFTA replaced by USMCA?

Partially as a result of criticism of NAFTA, in December 2019, a completed updated version of NAFTA known as the U.S.-Mexico-Canada Agreement (USMCA) was proposed. It entered into force on July 1, 2020.

What are the major differences between USMCA and NAFTA?*

With a number of major differences between the different agreements, it may seem daunting to understand what has changed between the North American Free Trade Agreement and the United States–Mexico–Canada Agreement
With a number of major differences between the different agreements, it may seem daunting to understand what has changed between the North American Free Trade Agreement and the United States–Mexico–Canada Agreement

Regional Value Content for Automotive Goods 

Among the changes from NAFTA to USMCA are the new Rules of Origin for Automotive Goods. Specifically, there are new rules of origin for motor vehicles requiring a specific amount of North American content in the final vehicle in order to qualify for duty-free treatment. The regional value content (RVC) requirements was raised to 75 % for passenger vehicles and light trucks, up from NAFTA’s 62.5 % requirement. In addition, to have the entire vehicle qualify for treatment, certain ‘core parts’ must now also meet the higher regional value content thresholds. 

Steel Requirements

There are also steel requirements established under the USMCA rules: at least 70 % of the vehicle producer’s steel and aluminum purchases must originate in North America.

Labor Requirements 

The USMCA contains a new labor value content (LVC) rule that now states that a certain percentage of qualifying vehicles must be produced by employees making an average of 16 dollars per hour. 

Chemical Reaction Rules

While the general chemical reaction rules under the United States–Mexico–Canada Agreement are essentially the same as the regulations under NAFTA, there may be specific revised rules of origin for certain chemicals.

Certificates of Origin

Under the North American Free Trade Agreement (NAFTA), a specific uniform Certificate of Origin (CBP Form 434) was required, and it could only be signed by the Exporter or Producer of the goods (not the Importer). Additionally, a wet signature was also a requirement under NAFTA and no electronic or digital signatures were allowed. In contrast, the United States Mexico Canada Agreement (USMCA) requires nine (9) data elements as well as a customs certification statement and can be completed by the Importer. Significantly, the data elements do not need to be in any specific format. An electronic or digital signature is also permitted under the USMCA.

Is USMCA a good thing? – Conclusion

Flags of Mexico, Canada, and the United States, the countries involved in the North American Free Trade Agreement and the United States–Mexico–Canada Agreement
The transition from NAFTA to USMCA represents a significant update to North American trade policy,

In conclusion, the transition from NAFTA to USMCA represents a significant update to North American trade policy, reflecting modern economic practices and addressing previous criticisms. The incorporation of higher regional value content for automotive goods, stringent labor requirements, and the inclusion of steel and aluminum purchases are pivotal differences designed to foster fairer trade and manufacturing principles among the three nations. Furthermore, the relaxation of the requirements for Certificates of Origin under USMCA, allowing for digital submission, exemplifies the adaptation to technological advancements in trade. These updates under USMCA not only aim to rebalance trade relationships but also project a positive impact on international trade by ensuring more equitable growth, sustainable development, and the protection of labor rights across North America.

*The listed are some of the main updates and not a comprehensive list of all the changes.

This article is for informational purposes only and does not constitute legal advice. An expert should always be consulted for specific transactions.

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