US-Mexico-Canada Trade Agreement (USMCA) Rules of Origin and The Impact on Domestic Manufacturers
On September 30, 2018, the United States-Mexico-Canada Agreement (USMCA) was established as the successor to the 25-year-old North American Free Trade Agreement (NAFTA). The agreement between the United States, Mexico and Canada (the “Parties”), entered into force on July 1, 2020, is a continuation of structured free market trade among the member nations designed to reduce costs and increase predictability for cross-border transactions. While the USMCA resembles NAFTA in many respects, the updated USMCA country of origin rules for traded goods will certainly influence regional commerce and may prompt certain businesses to evaluate their operations and adapt their supply chains.
Has the USMCA Changed the Originating Status of Certain Products Under NAFTA?
A key pillar of NAFTA was exemption from tariffs and quotas for qualifying products traded among members. Following the June 3, 2020 release of the final USMCA implementing regulations from the Office of the U.S. Trade Representative (USTR), NAFTA-eligible products became subject to USMCA scrutiny in the form of new rules, interpretations and customs administration. As a result, businesses can no longer safely assume goods that qualified as “originating” under NAFTA will enjoy the same status under the USMCA. On the other hand, it is possible that products previously ineligible under NAFTA may now qualify as originating goods under the USMCA due, in part, to 1) changes in the product-specific and process-specific rules of origin; 2) increase in the de minimis content threshold for non-originating materials; or 3) changes to the regional value calculation (RVC) used to determine how much of a good’s domestic materials and processing may be considered for USMCA “originating” country status.
Based on these wide-ranging rule changes, it is important for businesses to reevaluate their product exports under the new USMCA country of origin rules. An updated product analysis is essential to determine qualification for originating status, to recertify goods under the new USMCA Certificate of Origin rules and to make operational adjustments that may allow for preferential tariff treatment on regional trade.
What is an Originating Good Under the USMCA?
NAFTA Certificates of Origin are no longer recognized to certify the originating status of a good. Therefore, in order to claim preferential tariff treatment, importers, exporters and manufacturers must prepare new USMCA Certificates of Origin certifying eligibility under the new USMCA Rules of Origin, Article 4.2. Under the USMCA, a good will qualify as “originating” if it satisfies one of the following criteria:
(a) The good is wholly obtained or produced entirely in the territory of one or more of the Parties, as defined in Article 4.3 (Wholly Obtained or Produced Goods);
(b) The good is produced entirely in the territory of one or more of the Parties using non-originating materials provided the good satisfies all applicable requirements of Annex 4-B (Product-Specific Rules of Origin);
(c) The good is produced entirely in the territory of one or more of the Parties exclusively from originating materials; or
(d) Except for a good provided for in Chapter 61 (Apparel and Clothing Accessories) or 63 (Other Made Up Textile Articles; Sets; Worn Clothing and Textile Articles; Rags) of the Harmonized System:
(i) the good is produced entirely in the territory of one or more of the Parties;
(ii) one or more of the non-originating materials provided for as parts under the Harmonized System used in the production of the good cannot satisfy the requirements set out in Annex 4-B (Product-Specific Rules of Origin) because both the good and its materials are classified in the same subheading or same heading that is not further subdivided into subheadings or, the good was imported into the territory of a Party in an unassembled or a disassembled form but was classified as an assembled good pursuant to rule 2(a) of the General Rules of Interpretation of the Harmonized System; and
(iii) the regional value content of the good, determined in accordance with Article 4.5 (Regional Value Content), is not less than 60 percent if the net cost method is used;
and the good satisfies all other applicable requirements of Chapter 4.
How Do I Determine if A Product Meets the USMCA Rules of Origin Criteria?
Navigating the USMCA uniform regulations and the highly technical product/process-specific rules to determine the country of origin for a good requires a thorough analysis of the good’s raw materials and production process.
Many of the goods manufactured in the United States today utilize raw materials imported from non-USMCA countries (i.e. non-originating materials). New rules in the USMCA have altered the treatment of these non-originating materials and their impact on the originating status of a good designated for export among the member nations. Among the most noticeable changes in the USMCA are the:
• USMCA Annex 4-B Product-Specific Rules of Origin: USMCA Annex 4-B provides general and specific rules of origin, along with definitions and related provisions for various categories of goods. Annex 4-B also provides product-specific tariff shift rules (i.e. a qualifying change in tariff classification that triggers originating good status), and process-specific exemptions such as the Chemical Reaction Rule, Purification Rule, and Mixtures and Blends Rule. USMCA incorporates various updates and significant revisions to the general rules of origin principles previously found in NAFTA.
• Increased De Minimis Thresholds for Non-Originating Content: The USMCA increases to 10% (from 7% under NAFTA) the de minimis threshold, meaning that a good will qualify as originating if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classification set out in Annex 4-B is not more than 10% of the transaction value or total cost of the good, provided it satisfies all other applicable origin requirements. In addition, a good that is otherwise subject to the regional value content requirement shall not be required to satisfy the requirement if the value of all non-originating materials used in the production of the good is not more than 10% of the transaction value of the good or the total cost of the good provided it satisfies all other applicable origin requirements.
• Regional value content (RVC) requirements: The USMCA provides that if a non-originating material is used in the production of a good, the following may be counted as originating content for the purpose of determining whether the good meets a RVC requirement:
(a) the value of processing of the non-originating materials undertaken in the territory of one or more of the Parties; and
(b) the value of any originating materials used in the production of the non-originating material undertaken in the territory of one or more of the Parties.
These new rules are challenging importers, exporters and manufacturers to certify USMCA eligibility and protect any preferential tariff treatment they may have previously enjoyed under NAFTA. However, the advent of the USMCA also presents opportunities for businesses to reevaluate previously ineligible goods, and to adapt their supply chains to achieve favorable duty and tariff treatment.