Fireside Chat: The USMCA Brings Economic Certainty and Confusion Over Compliance

July 1, 2020, marked the start of the new United States-Mexico-Canada Agreement (USMCA) trade policy. After more than a year of tough negotiations, the agreement was resolved in late 2018, and all three North American nations agreed to a trade policy that would ultimately benefit the entire region as it withstands fierce competition from other regional contenders, such as the European Union or the Trans-Pacific Partnership.

Our latest Plastics News Fireside Chat examined how the USMCA will impact the North American plastics and manufacturing industries with our panelists:

“There is a clear winner in the new USMCA—and it’s the entire region,” Dwight Morgan at M. Holland said. “We were facing the possible loss of the North American Trade Agreement (NAFTA) and the USMCA is a very important and stabilizing step for the region, particularly as other formidable regional blocs emerge around the world.”

Having a finalized trade agreement reduces uncertainty and allows businesses to make better long-term decisions on where to invest in their supply chains and operations. “What we’ve accomplished with the USMCA is a way to promote free and fair trade among our nations, which will position North America to be far more competitive,” Alejandro Rodriguez at Plante Moran said.

The pandemic has revealed weaknesses in extended global supply chains and prompted manufacturers to consider regionalization, or reshoring, as a way to mitigate risks and create closer, more nimble supply chains.

“The USMCA bonds countries with a significant amount of consumer capital, reasonable manufacturing costs and intellectual property protections,” Lou Longo at Plante Moran said. “With USMCA, we can now support manufacturing and a strong plastics industry, have export opportunity to other regions of the world, while increasing our manufacturing capabilities. That helps us compete with the rest of Latin America and Asia and will make U.S. manufacturing stronger.”

According to M. Holland, its North American automotive customers are feeling confident they will be able to compete better globally under the new USMCA. “When you look at the U.S., Mexico and Canada auto sectors, they are the second, sixth and twelfth top producers. We are well-positioned to be as large as Japan’s, Germany’s and India’s auto sectors combined, ranked third, fourth and fifth,” Eugenio Calderón at M. Holland said.

While North America is better positioned to compete globally, manufacturers need to better understand the new agreement to fully reap the advantages and avoid potential penalties. “I hate the term, ‘new NAFTA’,” Longo said. “If you spend time with the USMCA, you’ll see it’s fundamentally different. The only consistent thing is the countries involved.”

NAFTA was a framework meant to guide North American countries in free and fair trade. Meanwhile, the USMCA is a binding agreement with specific compliance requirements and methodology. “Too many suppliers, manufacturers and companies purchasing goods think that since they got by under NAFTA they will do the same with USMCA. But they misunderstand the agreement. It has teeth all the way along for compliance and penalties for noncompliance,” Longo continued.

According to panelists, two of the most significant changes the USMCA brings to manufacturers are the regional value content and labor value content for passenger vehicles. These new rules impact the North American automotive sector the most. They require manufacturers use 75% North American-originated materials in passenger vehicles, and 40% of the vehicle must be manufactured in facilities that pay at least $16-per-hour labor rates.

Panelists pointed out that under NAFTA, the regional value content requirement was only 62.5%. Manufacturers who had more than 25% of their vehicle parts coming from outside North America must now relocate a large amount of their manufacturing center or operations to the U.S., Mexico or Canada to be in compliance. Additionally, the $16-per-hour labor content rule now encourages auto manufacturers to move some labor from Mexico to Canada and the U.S. to help balance labor opportunities.

The differences between NAFTA and the USMCA don’t stop at the automotive sector. “The USMCA has a whole chapter that focuses on sustainability. It’s trying to catch up to 26 years of not having any rules or guidelines on sustainability, which is a big societal focus now,” Longo said. Longo also noted the agreement doesn’t specify goals or compliance requirements but includes a dispute resolution for the three countries, should any party create sustainability legislation that will impact the other nations. All nations would have a right of review and commentary opportunity under this new agreement.

The USMCA presents more regional business opportunities than NAFTA did. However, it also offers more risk if companies aren’t aware of how to be compliant. “It’s a bit chaotic right now. Companies are working hard to comply by January, given the USMCA participants have noted they won’t enforce the new rules until that point,” Rodriguez said.

M. Holland’s regulatory specialist, Christopher Thelen, recently wrote about some of the new compliance rules under the USMCA, and as he noted, the requirements are still a bit unclear. The panelists agreed that there is a universal lack of knowledge and education surrounding the new USMCA requirements and attempted to clarify. Below are a few of the compliance uncertainties panelists addressed:

“In certain industries, supply chain managers must now be chess players because supply chain and product design strategies must now weigh compliance among cost and other considerations,” Morgan said. That’s where a lot of opportunity lies for suppliers.

Morgan noted that as a distributor, M. Holland, has responsibilities under the USMCA. “Our regulatory team assists our customers and suppliers with compliance requirements. We fill out the forms, council and deal with all the complexity for them. Given that we conduct international trade, we have to ensure all the critical information is organized and shared in a way that helps our clients meet compliance requirements.”

The panelists agreed that’s where the biggest opportunity lies for suppliers and parts manufacturers. “The easier you make compliance for your customer, the more likely you are to become a preferred vendor.” Longo said.

To hear more of our panelists’ advice and views on the USMCA, listen to the recording here.