On July 1, the United States-Mexico-Canada Agreement (USMCA) is set to go into effect, replacing the North American Free Trade Agreement (NAFTA). In this article, international trade lawyers from the United States, Canada and Mexico discuss practical aspects of USMCA's implementation that affect all producers, exporters and importers of goods within the North American region, and what corporate counsel should know in order to discuss the USMCA with trade compliance personnel at their company. Failure to comply with the USMCA's requirements can have drastic ramifications for companies from both a financial perspective and, just as importantly, the company's reputation. Furthermore, the ability to participate in some customs facilitation programs can be impacted by a poor compliance record.

The key issues that corporate counsel should discuss with the company's trade compliance personnel include the use of the correct rules of origin, new methodology for certification of origin, tapping into government provided resources, needed modifications to internal compliance programs, and getting ready for audits and investigations.

The product-specific rules to qualify for preferential tariff treatment have changed. Like NAFTA, the USMCA offers preferential tariff treatment to products that are certified to "originate" within the territory of the United States, Mexico or Canada. The general principles for determining origin were largely carried over from NAFTA. What changed, in some cases, are the product-specific rules of origin (i.e., the criteria used to determine whether a product qualifies for preferential tariff treatment). Some of the revised rules are more stringent than the NAFTA rules, generally requiring a higher content of inputs from North America to qualify. For example, automobiles have a gradually increasing Regional Value Content requirement, from the current 62.5% under NAFTA to 75%, and a gradually increasing Labor Value Content requirement, which requires that 40% to 45% of the automobile is produced by workers earning at least US$16/hour, both of which increase annually until 2023. Furthermore, no less than 70% of the automobile producer's sourcing of steel and aluminum must be from within North America. Similarly, textile products will generally not qualify for preferential treatment if the yarn inputs are sourced from outside North America. For other products, such as chemicals, the rules of origin were liberalized, meaning it is now easier to qualify. Given the product-specific and technical nature of these rules, companies engaged in trade in North America must carefully review and assess the impact of any changes. The improper application of the rules of origin can result in not only denial of tariff free treatment, but also significant reassessments, interest and penalties payable if a preference claim is made without the appropriate level of due diligence.

There is a new method of certifying origin. Under NAFTA, companies used a prescribed form —the NAFTA Certificate of Origin—to certify that products qualify for preferential treatment (i.e., satisfy the applicable rules of origin). The USMCA abandons NAFTA Certificates of Origin (i.e., they will no longer be accepted by the customs authorities upon July 1) and instead allows companies to claim preferential tariff treatment on the basis of a certification of origin, which has no prescribed format but requires certain data elements set forth in the USMCA (e.g., a product description, the contact details for the parties to the transaction and the applicable origin criteria). Like NAFTA, this certification may apply to a single shipment or multiple shipments of identical goods within a 12-month period and must be in the importer's possession when the USMCA claim is made. Unlike NAFTA, which limited certification to the producer or exporter, a USMCA certification may be completed by an importer (in the case of Mexico, however, importers will not be able to issue such certification until approximately February 2024). While importer certifications may sound appealing, it should be kept in mind that an importer who certifies must be prepared to substantiate the claim (i.e., prove that the products covered by the certification "originate" in the USMCA territory). Practically, that means the importer would need to maintain all records necessary to demonstrate that the good is originating for at least five years from the date of importation of the good, meaning that it may be asked to provide purchasing and product records, such as costed bills of materials (BOMs), purchase and payment records for raw materials, production records etc., which are generally kept by the producer. False or incorrect certifications of origin can lead to penalties.

The Uniform Regulations provide helpful guidance on how to comply with the USMCA. The Customs administrations of the three countries are required to issue Uniform Regulations by July 1. To date, the three countries have issued regulations that cover the most practical of USMCA topics: origin procedures and rules of origin. Companies should review those regulations carefully to learn the proper way to qualify their products and certify origin under the USMCA. In addition, to facilitate the transition from NAFTA to the USMCA, U.S. Customs launched the "USMCA Center"—a virtual resource staffed with trade experts (including from the Canadian and Mexican customs authorities) that enables U.S. Customs to provide guidance to the private sector. On June 1, the Mexican Ministry of Economy also launched a USMCA diffusion plan consisting in virtual meetings every Wednesday until July 22 to provide guidance to foreign trade users.

Transitioning from NAFTA to the USMCA requires an action plan. As a threshold matter, companies should review their current NAFTA compliance policies and procedures to determine whether they will satisfy the USMCA's requirements, making any changes or improvements where necessary. As previously noted, some of the product-specific rules have changed, which means that modifications to sourcing may be required to ensure that products remain eligible. In addition, companies are advised to review their recordkeeping systems to ensure that they enable the quick production of origin-related records to the customs authorities. Specifically, for each product on which USMCA is claimed, the company that certifies origin must be able to generate documents including: (1) a costed BOM with corresponding tariff classification codes; (2) purchase and payment records for the finished product (and its inputs, if applicable); and (3) a rule of origin analysis. Deputizing employees to perform USMCA compliance functions, and properly training those employees on origin and recordkeeping requirements, is essential.

Expect customs authorities to strictly enforce the USMCA (although maybe not immediately). Ambassador Lighthizer, the U.S. Trade Representative, recently told Congress that the U.S. will enforce the USMCA as soon as it takes effect. He acknowledged the U.S. will have to use new enforcement tools to ensure that Mexico complies with its labor and environmental commitments. That said, U.S. Customs officials have stated the agency will grant importers a six-month grace period before issuing penalties for noncompliance with the USMCA's requirements (although that may apply only to auto-related requirements). As of the date of publication, however, U.S. Customs had not made a formal announcement, and the customs authorities in Mexico and Canada had provided no guidance on any leniency on compliance obligations. As such, companies should prepare for regular origin verifications by the customs authorities, which involve questionnaires and, in some cases, in-person visits by customs to verify the correctness and completeness of a certification.   

Richard Mojica, member of U.S.-based Miller & Chevalier's international practice, is a former attorney with U.S. Customs and Border Protection's (CBP's) Office of Regulations and Rulings and regularly advises national and international companies on the developing and implementing customs compliance programs.

Eduardo Sotelo Cauduro, partner of Mexico-based Sanchez Devanny's international trade and customs practice, has more than 15 years of experience advising domestic and international companies in many different industries in their international trade and customs operations.

Riyaz Dattu, Toronto-based partner at Osler in its international trade and investment law practice, advises on all aspects of economic sanctions, export and import controls, national security, anti-bribery laws, government procurement, customs laws, transfer pricing and trade remedies such as anti-dumping, countervailing and safeguard measures.