The agreement to replace NAFTA, the Canada-United States-Mexico Trade Agreement ("CUSMA") will come into force on July 1, 2020, less than two months from now, and Canadian importers and exporters should be aware of how the new agreement will affect their business. This bulletin highlights the major differences between NAFTA and CUSMA. We will examine the changes in more detail in separate bulletins to follow.
Rules of Origin
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. Every company that has been exporting or importing its products under the NAFTA is well advised to review whether and how they may be affected by any changes to the rules under CUSMA.
The NAFTA Certificate of Origin has been replaced with a broader range of options to certify the origin of goods. There is no longer a requirement for a formal Certificate of Origin. Rather, all that is required is that a minimum set of data elements be provided, as prescribed by the CUSMA, and those data elements may be contained in any document. While the move away from the formal certification will give trader's more options, importers who rely 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.
Market Access for Dairy Products, Chicken and Eggs
Canada's recent trade agreement with the European Union (CETA), which increased import access of dairy products, chicken and eggs, was seen by Canadian farmers of these supply-managed products as a significant setback. CUSMA continues that trend of increased access to the Canadian market. Canada's supply management system obviates the need for government subsidies to dairy, chicken and egg farmers by establishing domestic production quotas that are tied to Canadian demand. Restricting domestic supply to support farm prices is only effective if imports of competing products are, themselves, limited. Under CUSMA, Canada has agreed to allow significantly more imports from the U.S. of a variety of dairy products, chicken and eggs. In addition, Canada has agreed to limit its exports of skim milk, milk protein concentrates, and infant formulae.
Textile and Apparel Quotas
CUSMA continues the NAFTA rules for Tariff Preference Limits ("TPL"), which permit a specific quantity of non-qualifying textile and apparel goods to benefit from preferential treatment under looser rules of origin. That said, some of the specific quantities of goods eligible for TPL treatment have changed, increasing and decreasing depending on the product involved.
U.S. Section 232 Tariffs on Steel and Aluminum Goods
The notion that Canadian produced steel and aluminum could threaten U.S. national security came as a nasty surprise to Canadians. Yet, in May 2018, the U.S. imposed crippling tariffs on imports of Canadian steel and aluminum on the grounds they threatened U.S. national security. One year later, after Canada imposed retaliatory tariffs on U.S. goods, the two countries came to an agreement and both sets of tariffs were lifted. That experience left the Canadian government wary of new U.S. national security tariffs on Canadian exports. CUSMA addresses that concern to some extent, providing that if the U.S. chooses to impose national security tariffs on Canadian automobile exports, Canada will have guaranteed, duty-free access for a specified quantity of automobiles and their parts.
Dispute Settlement and Investor Protection
CUSMA preserves the dispute settlement process of binational panels in anti-dumping and countervailing duty disputes, makes some changes to the state-to-state dispute settlement mechanism to prevent one of the countries from blocking the establishment of dispute panels, and eliminates the investor protection mechanism currently found in NAFTA Chapter 11. Under CUSMA, a Canadian investor seeking to challenge a U.S. measure that hurts its U.S. investment will have to challenge that measure in U.S. courts rather than in a binding arbitration provided for in NAFTA's Chapter 11. A Canadian seeking to challenge a Mexico investment measure will be able to use the process provided in the Comprehensive and Progressive Transpacific Partnership Agreement.
Intellectual Property and Digital Trade
CUSMA contains significant new protection for intellectual property rights, including copyright and related rights, trademarks, geographical indications, industrial designs, patents, data protection for pharmaceutical and agricultural chemical products, trade secrets and IP rights enforcement. Each Party must provide authority for law enforcement officials to stop suspected counterfeit or pirated goods at every phase of the supply chain, and criminalise unauthorized camcording of movies and satellite and cable signal theft. The Agreement also provides new protection against trade secret theft.
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.
The de minimis provisions of CUSMA relate to the value of goods that can be imported into one of the other parties without attracting duties or taxes. This is a significant issue for Canadian retailers who must compete with goods sold directly to consumers through e-commerce. While a toaster sold to a Canadian through a foreign e-commerce platform will likely enter Canada duty and tax free, when a Canadian retailer imports the same toaster in bulk, it must pay duty and taxes. Thus, the same toaster from the same factory in China will have a higher duty and tax cost when imported by a Canadian retailer than when imported by a Canadian consumer. Canada has traditionally kept its de minimis amounts low to protect its retail sector. Under CUSMA, Canada will raise its de minimis threshold from $20 to $40 for taxes and up to $150 for customs duty.
Although the CUSMA has been hailed as an improved NAFTA or not much different than the 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.