USMCA Transition Expected to Be Messy; Uniform Regulations Will Affect Timing

The Canadian Parliament is moving the successor to NAFTA along, so that a March ratification vote is still looking likely, news from Canada says. While the U.S.-Mexico-Canada Agreement will be reviewed by the agriculture, natural resources and industry/science/technology committees, not just the trade committee, the other committees only have until Feb. 25 for that review, a report from ipolitics said.

While some say July 1 is the likely date of entry into force (see 2002130040) and others say it usually takes more than year to put uniform regulations together, Dan Ujczo, a close NAFTA watcher and trade attorney at Dickinson Wright in Ohio, said he thinks Sept. 1 is more likely than either of those outcomes. “What I think they’re going to do is certify as soon as Canada is done, and then sprint to the finish on uniform regs,” he said in a phone interview. “I’m a little concerned about uniform regs -- they have a lot of work to do, and they’re just started.”

In order for the countries to certify they're ready for a date of entry into force, they do not have to have the uniform regulations ready. But they do have to be released on the date of entry, which is the first day of the third month after that notification. “The reality is they’re going to fudge it,” he said. “We’re going to see the certification come whether anybody is ready or not.” Ujczo said officials from the Office of the U.S. Trade Representative were in Mexico City last week to talk about certification.

While Mexico has a lot to put together in terms of its new labor law enforcement, the U.S. also has a lot of work to do to implement new, complex auto rules of origin. “I really don’t expect them to have the auto rules to be completely done. They're going to say they’re done,” Ujczo said. He said there will be informed compliance, probably for the first six months, whereby if companies are not following the rules, there won't be a penalty. “That’s very common,” he said. “I think it’s going to be a frustrating time for U.S. CBP and Canadian customs and Mexican counterparts. There’s going to be some confusion the first six months to a year.”

Grant Aldonas, a former Commerce Department official and trade consultant, said on a Flexport webinar Feb. 19 that he thinks the transition will be a headache for importers and exporters. “It takes Customs a while to actually get their act together and regularize how they’re going to treat these things,” he said.

While there is a lengthy transition period for the auto rules of origin, Ujczo said he's warning his clients that they need to pay a lot more attention to their Mexican imports. He said that USTR's argument is that “Canada and Mexico had become the back door to the rest of the world.” He said that while many Mexican suppliers say their goods -- say brakes, or car upholstery fabric -- are at least half Mexican, they often don't have any proof.

“Without exception, the certificates of origin are always bad,” he said. “A lot of them are wrong on their face.“

What he means by that is that under NAFTA, there are several categories of how the good qualifies for NAFTA benefit. For instance -- wholly made in North America from American parts (Category A), or the good underwent a tariff change in Mexico and meets regional value requirements of 50% or 60% (Category B). He said that frequently something like brakes will mistakenly say Category A -- which is mostly for food, or maybe 100 percent cotton fabric made from U.S. cotton and woven in Mexico.

The fact that the certificate of origin will go away under USMCA is not a plus, Ujczo said, because companies have become complacent because CBP generally doesn't audit NAFTA certificates of origin, he said. “They never looked,” he said. “Nobody cared. Customs was so focused on dumping and countervailing duty and products coming directly from China.”

But, Ujczo said, he doesn't think that inattention will continue with USMCA, “because they’re on the lookout now for products from China coming through Mexico.” He expects tool and die shops in Mexico, Mexican companies making seating components, aluminum extruders and other tier 2 suppliers are going to have the toughest scrutiny in the auto sector.

He said clients sometimes tell him they're not in autos, so they don't have to worry. He said he says no, it's everything where a facility in Mexico is processing inputs from China. “They are undoing prior rulings they had on substantial transformation,” Ujczo said, and undoing long precedent on how cross-border processing is treated, saying that dipping U.S. metal in a zinc bath in Canada doesn't fall under Chapter 98 of alternation and modification anymore.

He said he expects textiles to be pretty safe, but electronics, long under scrutiny, will continue to be targeted. His firm is finding its creative solutions for avoiding Section 301 with further processing in Mexico are getting ruled against. “The only pattern we can find -- if it’s coming from China, they’re going to find a way to say it’s not substantial transformation,” he said.