The United States-Mexico-Canada Agreement (USMCA), which aims to establish a comprehensive free trade zone in North America, is facing challenges in implementation. Only about 50% of the goods imported from Mexico and 38% from Canada comply with USMCA terms, raising questions about the effectiveness and enforcement of the agreement. The US Trade Representative (USTR) has remained silent on this issue and redirected inquiries to US Customs and Border Protection (CBP), which claims to be "fully equipped to implement" the latest executive actions on tariffs.
The complexity of USMCA compliance is creating confusion among businesses and officials. Visiting production centers in person is deemed essential to ensure that goods meet the stringent USMCA requirements. These requirements include paying workers $16 an hour and adhering to extensive intellectual property rules. Despite these stipulations, until recently, many Canadian and Mexican goods, such as computers, phones, and petroleum, were not subject to any US tariffs. This leniency has contributed to the current compliance gap.
President Donald Trump has indicated that tariffs might "go up as time goes by," adding to the uncertainty surrounding trade regulations. Dan Gardner, president of Trade Facilitators, Inc., shared his experience of traveling to Chihuahua, Mexico, to assist a client in sourcing more inputs locally to meet regional value content requirements. Gardner expressed frustration with the current situation, stating, "This doesn’t make any sense to me."
The ordinary duty rate for some products has been minimal or nonexistent, making it unnecessary for companies to declare USMCA compliance. However, experts warn that this lack of urgency could change rapidly. With 25% tariffs on all steel and aluminum imports set to take effect on March 12, businesses are scrambling to adapt. Additionally, Trump has threatened a 250% tariff on Canadian dairy products and a "tremendously high" tariff on Canadian lumber.
The intricate rules of the USMCA also require that textiles used for apparel from Canada and Mexico must "contain sewing thread, pocketing fabric, narrow elastic bands, and coated fabric" made in North America to qualify for duty-free entry into the US. This specification adds another layer of complexity for manufacturers aiming to comply.
Despite the looming deadlines, there remains considerable ambiguity about which products will incur tariffs and their respective amounts. The lack of clarity is causing apprehension among industry stakeholders who have little time to adjust before Trump's policy officially takes effect on April 2. Dan Gardner described the situation as "so vague."
Amidst these challenges, many goods could still bypass tariffs if at least 60% of their material value originates from North America. This provision offers some relief to businesses navigating the intricate web of trade regulations. However, companies must remain vigilant and proactive in ensuring compliance with USMCA standards.
