Trade Tool Kit for a Successful Transition from NAFTA to CUSMA

On July 1, 2020, the Canada-United States-Mexico Agreement (CUSMA) will come into force, replacing the existing North American Free Trade Agreement (NAFTA), which has been in place since 1994. CUSMA represents much more than a renewal of the longstanding NAFTA and because there is no transition period from one agreement to the other, businesses should review their operations to ensure a seamless transition and/or plan to take advantage of new opportunities arising from CUSMA. This bulletin will provide some key tools for preparing for the implementation of CUSMA and an overview of some of the provisions that take effect on or after implementation.

INTRODUCTION

Following negotiations commenced in the summer of 2017, Canada, the United States and Mexico had agreed to CUSMA as of September 30, 2018, and formally signed CUSMA on November 30, 2018. The agreement was further amended on December 10, 2019. The agreement is variously referred to as CUSMA in Canada, United States-Mexico-Canada Agreement (USMCA) in the U.S. and Tratado entre México, Estados Unidos y Canadá (TMEC) in Mexico. CUSMA comes into force on the first day of the third month following the notification by all parties that each has completed the required internal procedures for the entry into force of CUSMA. Canada, the U.S. and Mexico gave their notices on April 3, 2020, April 4, 2020, and April 24, 2020, respectively. Accordingly, CUSMA will come into force on July 1, 2020. For our previous commentary on CUSMA, see our December 2018 Blakes Bulletin: The New Legal Landscape of North American Trade.

ONLY “ORIGINATING GOODS” BENEFIT FROM DUTY-FREE TRADE

Similar to NAFTA, detailed “rules of origin” determine whether any particular goods traded between the three CUSMA parties qualify for duty-free treatment. These rules are set out in uniform regulations that have been agreed to among the three parties prior to the implementation date. At the time of publication, the United States Trade Representative has published the detailed rules of origin and it is expected that Canada will publish identical Rules of Origin Regulations before July 1, 2020. While many of the NAFTA rules of origin have remained the same under CUSMA, all companies previously relying on NAFTA treatment for their exports or imports should review the CUSMA rules of origin to ensure the goods continue to qualify. One important change being made to the rules of origin is an increase in the permissible level of non-originating goods that can be ignored for CUSMA origin purposes, which is increasing to 10 per cent, from seven per cent under NAFTA. This means that if the materials that do not satisfy the rules of origin comprise up to 10 per cent of the value, cost or weight of the good, as applicable, the good may nevertheless be considered to qualify for duty-free treatment under CUSMA. Since there is no transition period from NAFTA to CUSMA, the review of the CUSMA originating status of goods should be done prior to July 1, 2020.

NEW RULES FOR CERTIFICATION OF ORIGIN

In addition to satisfying the “rules of origin,” in order for goods to qualify for duty-free treatment “proof of origin” must also be provided and available at the time of importation. Under NAFTA, proof of origin consisted of a “Certificate of Origin” issued by the exporter of the goods. CUSMA establishes a more flexible origin certification regime, designed to increase trader participation in certification and verification and to simplify the overall certification process. First, CUSMA will allow certification by importers, such that any of importer, exporter or producer may certify the imported good. Second, there will no longer be a prescribed format of an origin certificate for CUSMA purposes. Instead, certification may be provided in any document including in an invoice, as long as it contains minimum data elements. For greater certainty, NAFTA certificate of origin will not qualify as proper certification under CUSMA once CUSMA comes into force.

The minimum data elements of CUSMA certification are as follows:

1. Indicate whether the certifier is an importer, an exporter or a producer
2. General information about the certifier, exporter, producer and importer
3. Description and Harmonized System Tariff Classification of the good (to the six-digit level)
4. The origin criteria under which the good qualifies as originating
5. If the certification is for multiple shipments of identical goods, the period that the certification should last (up to 12 months)
6. Authorized signature and date, accompanied by the following statement:
   • I certify that the goods described in this document qualify as originating and the information contained in this document is true and accurate. I assume responsibility for providing such representations and agree to maintain and present upon request or to make available during a verification visit, documentation necessary to support this certification.

Other flexible certification measures in CUSMA include a requirement that a CUSMA party will not reject a certification for minor errors or discrepancies if the correctness of import document is not in doubt, and a grant of at least five working days to an importer to amend the certification of origin if it is illegible, defective or incomplete.

It is important to understand that while an importer will be permitted to certify origin of goods it is importing, the importer should not do so without supporting documentation to demonstrate that the goods actually do qualify under the rules of origin. This usually means having documentation from the exporter and, preferably, the producer of the goods, sufficient to withstand a verification of origin by the Canada Border Services Agency (CBSA) or the equivalent customs authority of the country of importation.

ADVANCE RULINGS TO SUPPORT CUSMA ORIGIN

Many companies obtained “advance rulings” from the customs authority of the importing country under NAFTA regarding qualification of goods for duty-free treatment. All NAFTA Advance Rulings issued by the CBSA will cease to have effect as of the implementation of CUSMA. Therefore, to the extent companies wish to have binding rulings on the status of their goods for CUSMA purposes, it is advisable to apply for CUSMA Advance Rulings, rather than rely on any such rulings issued under NAFTA. CUSMA permits an exporter, importer, producer or “any other person with a justifiable cause,” to request a written advance ruling. The nature of the advance rulings is also broadened to include issues such as: tariff classification; customs valuation criteria; whether a good is subject to a quota or tariff-rate quota; as well as origin.

MORE IMPORTS PERMITTED UNDER HIGHER DE MINIMIS THRESHOLD

Canada agreed to increase the de minimis threshold for imports into Canada that are exempt from duties and taxes. This change will benefit e-commerce businesses who sell low-value goods to Canadian customers. Currently, the de minimis threshold is C$20. CUSMA creates separate de minimis thresholds for waiving duties versus taxes and increases each threshold, to C$150 for duties and to C$40 for taxes. This means that a particular item sold at a price less than C$40 will be exempt from both duties and taxes upon importation into Canada, regardless of the originating status of the goods under CUSMA. Where the item is sold for a price greater than C$40 but less than C$150, only the customs duties will be waived but the Goods and Services Tax—and combined GST/HST or provincial sales tax in the case of personal importations—will still be applicable. The current threshold of C$20 continues to apply to imports of goods from all countries other than the U.S. and Mexico.

TRADE FACILITATION MEASURES

Canada applies more flexible release and accounting procedures for imports of low value shipments (LVS) in certain circumstances. Under CUSMA, Canada has agreed to increase the threshold for considering an importation to qualify as an LVS to C$3,300, up from C$2,500. This will apply in respect of commercial importations as well as express shipments. In addition, this threshold will also apply to greater flexibility in terms of the “proof of origin” rules otherwise applicable to goods in respect of which a CUSMA origin claim is being made.

CUSMA also imposes certain commitments and obligations on CUSMA parties in dealing with the importers. For example, CUSMA parties have committed to maintaining a single window system that enables traders to submit import documentary requirements electronically through a single portal, with limited exceptions. The CUSMA parties are also to endeavour to accept trade administration documents submitted electronically as legal equivalent to the paper version, and to allow for electronic authentication or electronic signatures. Further, CUSMA imposes an obligation to inform importers where there is a delay in the release of goods and provides that, unless a part of a consistent pattern of errors, a clerical or minor error in a customs transaction shall not be treated as a breach of customs laws, regulations or procedural requirements, and may be corrected without a penalty.

GOVERNMENT PROCUREMENT

The NAFTA parties have taken a different approach to procurement commitments in the new CUSMA. In lieu of including bilateral procurement commitments in CUSMA, the parties have agreed to rely on existing commitments under different trade agreements. Canada and the U.S. have agreed to maintain access to each other’s procurement markets in accordance with their existing commitments, pursuant to the World Trade Organization (WTO) Agreement on Government Procurement; Canada and Mexico have agreed to rely on their commitments on government procurement in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

A NEW LANDSCAPE OF DISPUTE RESOLUTION UNDER CUSMA

The state-to-state dispute settlement system under CUSMA is streamlined by removing the Free Trade Commission’s—comprising cabinet-level representatives of each CUSMA party or their designees—involvement in its processes. Previously under NAFTA, a party could block the formation of an arbitral panel either by not engaging in the meeting of the Free Trade Commission of Ministers or by vetoing updates to the roster of panelists. This procedural improvement will help to automatically establish a panel for dispute resolution upon a CUSMA party’s request and may assist in resolving trade disputes like the tariff wars in 2018–2019 between Canada and the U.S. over steel and aluminum. Almost all obligations under CUSMA are subject to this general state-to-state dispute settlement system.

CUSMA preserves various specific dispute resolution mechanisms, such as the binational panels to resolve anti-dumping and countervailing duty matters, the dispute settlement for the financial services sector with subject-matter expert arbitrators and technical consultations to discuss adverse sanitary and phytosanitary measures. Additionally, it introduces a new specific dispute resolution mechanism for environmental matters and a new facility-specific rapid response labour mechanism.

Finally, Canada will no longer be a party to the investor-state dispute settlement mechanisms within CUSMA, and U.S. investors will no longer have recourse to investment protections as they did under NAFTA’s Chapter 11. Mexican investors in Canada—and vice versa—will still have recourse under the CPTPP. For more information, see our June 2020 Blakes Bulletin: Enter CUSMA: Protecting Cross-Border Investment in North America Post-NAFTA.

NEW AND EMERGING POLICY ISSUES AFFECTING TRADE

CUSMA also contains various other policy measures in the areas of environmental safeguards, labour standards, the promotion of the North American market and added protection for various interest groups. While the impact of these rules to businesses and industry is as yet unclear, it would be prudent to take note of these measures as they reflect the CUSMA partners’ areas of focus with respect to issues affecting trade and their policy intentions around such issues.

Environmental Safeguards

CUSMA includes a new chapter on environmental matters, which generally affirms CUSMA parties’ obligation to enforce their environmental laws and to implement various multilateral environmental agreements. In particular, CUSMA parties are prohibited from waiving or otherwise derogating from, or offering to waive or otherwise derogate from, their environmental laws in a manner that weakens or reduces the protection afforded in those laws in order to encourage trade or investment between the CUSMA parties, or to fail to effectively enforce their environmental laws through a sustained or recurring course of action or inaction, in a manner affecting trade or investment between the CUSMA parties. Further, for purposes of dispute settlement, a failure is presumed to be in a manner affecting trade or investment between the CUSMA parties, unless otherwise demonstrated. These safeguards may impact Canada’s enforcement of its environmental laws and/or its obligations under multilateral environmental agreements.

Labour Standards

CUSMA provides for fundamental principles and rights at work, including freedom of association and collective bargaining rights, acceptable minimum wages and occupation health and safety standards. CUSMA also establishes obligations for the parties to address discrimination and violence against workers, protect the rights of migrant workers and prohibit the importation of goods made from forced labour. As well, for the first time in a trade agreement, CUSMA clarifies that obligations related to non-discrimination cover discrimination based on sex, including sexual harassment, pregnancy, sexual orientation and gender identity or gender-based wage discrimination. Similar to the environmental safeguards, CUSMA parties are not to waive, derogate from, offer to waive or derogate from, or to fail to adopt, maintain or enforce through a sustained or recurring course of action or inaction the labour standards in a manner that affects trade or investment between the CUSMA parties, and, for purposes of dispute settlement, any breach of the foregoing is presumed to be in a manner affecting trade and investment between the CUSMA parties. For more information, see our June 2020 Blakes Bulletin: CUSMA: Labour Rights and Provisions After NAFTA.

Focus on North American Market

CUSMA includes a new chapter on formalized co-operation and economic integration to help advance North American competitiveness. For the first time in a free trade agreement, CUSMA also sets standards for transparency, public reporting and consultations on exchange rates and other macroeconomic policies. Specifically, the CUSMA parties are to maintain market-determined exchange rates and refrain from competitive devaluation or other tactics that manipulate exchange rates.

Unusually, CUSMA also requires Canada to give the U.S. 90 days’ notice before it commences negotiations for a trade agreement with a “non-market country,” upon which the U.S. has the right to terminate CUSMA. The provision is widely seen as a signal of the U.S.’s growing trade war with China, and a measure to prevent Canada from becoming a “back door” for Chinese imports.

Added Protection for Vulnerable Groups

CUSMA adds various protective measures for groups that traditionally had less presence or bargaining power in international trade matters, including the Canadian cultural industry, indigenous peoples, women and small and medium-sized businesses. The need to encourage corporate social responsibility standards is mentioned in various chapters of CUSMA in this connection.

A limited selection of matters will continue to be governed by NAFTA after CUSMA comes into force, including any final determination of anti-dumping or countervailing duties made prior to July 1, 2020, and any claims for preferential tariff treatment made under NAFTA. Any “legacy investment,” such as an investment established or acquired while NAFTA was in force and remains after CUSMA enters into force, may be dealt with under the Investor-State Dispute Settlement mechanism for three years. Any issues under consideration or other work under development by a body under NAFTA may also be continued under any equivalent body under CUSMA.

COMMENTS

The implementation of CUSMA will bring finality to a period of uncertainty for businesses in North America since the start of the NAFTA renegotiations in August 2017. While CUSMA will make some significant changes to the trade relationship between Canada, the U.S. and Mexico, many of the key NAFTA provisions remain intact in CUSMA. Because there is no transitional period from one agreement to the next, businesses will need to prioritize planning and preparing for CUSMA’s implementation. It is hoped that the various customs authorities will provide some level of leniency to businesses while they strive to apply new rules with little opportunity for preparation. In this connection, CUSMA is a technically complex agreement and contains many details that should be reviewed by those companies doing business in North America.

For further information, please contact:

Toronto
Greg Kanargelidis                  416-863-4306
Amy Lee                                   416-863-4241
Skye Sepp                                416-863-3887              
 
Montréal
Patrick Lapierre                      514-982-4105
Philippe Dubois                      514-982-4290
 
Vancouver
Roy Millen                                604-631-4220
Brady Gordon                         604-631-5255
 
or any other member of our International Trade group.

Please visit our Navigating CUSMA: Key Changes for Businesses hub to learn more about how CUSMA may impact your business.