Goodbye NAFTA: replacement trade deal lowers e-commerce threshold

© Marc Bruxelle

After 14 months of terse wrangling, the brinkmanship over NAFTA has finally reached a resolution, one that is expected to boost cross-border e-commerce.

Canadian and US negotiators thrashed out a compromise at the eleventh hour that ushers in a new framework – goodbye NAFTA, hello USMCA (US-Mexico-Canada Agreement).

The breakthrough paves the way for a new accord to replace the 24-year-old NAFTA regime before December 1, when Mexico’s outgoing president leaves office.

After the US reached agreement with Mexico last month, there was massive pressure on Canada. The Trump administration had signalled it was prepared to move ahead with a bilateral regime with Mexico, leaving Canada out of the picture, but US interest groups and members of Congress (which has to ratify any deal) voiced strong opposition.

The final round of talks produced movement on the critical elements: notably, auto production, access to Canada’s dairy market and the prospect of a ‘sunset clause’, which Ottawa had fiercely contested, although some observers see little change of substance.

Arguably a bigger change lies in Canada’s concession to raise the duty threshold for imports under the de minimis regime.

USMCA establishes tighter rules of origin for auto production. New cars sold in the US market must have 75% North American content, up from 62.5% under NAFTA, and 40% of a car has to be produced by workers whose pay averages more than US$16 per hour. This is in line with the US-Mexico agreement announced last month.

The agreement does not entirely eliminate the threat of 25% tariffs on cars made in Canada, but these will not kick in below a volume of 2.6 million cars a year, way above the number shipped from Canada to the US. According to one observer, even a 30% boost of Canadian car exports to the US would leave room to spare.

In lieu of a ‘sunset clause’, which would end the agreement after five years unless the partners agreed to renew it, negotiators settled on a 16-year term with the chance for a review and renewal after six years.

Industries with cross-border supply chains breathed a collective sigh of relief at the end of the stand-off.

“Manufacturers are extremely encouraged that our call for a trilateral agreement between the United States, Canada and Mexico has been answered,” the US National Association of Manufacturers said. “We welcome the administration’s efforts to modernise this agreement and to create more opportunities for American manufacturing workers.”

The NAFTA region has a trade volume of over $1 trillion a year. Despite the terse negotiations, trade within the region climbed 6.3% in June to $106bn.

Some observers regard the USMCA deal as a positive sign for the US administration’s stance in trade discussions with other parties, especially Japan and China. They argue that the changes from the NAFTA framework are cosmetic rather than structural, which would suggest that the US administration might be happy to settle for minor changes in the terms of trade with these countries while claiming victory.

One group that can claim victory from USMCA is the US e-commerce sector, which sees much improved opportunities to sell to Canadian consumers. Under the new regime, Canada is going to raise the de minimis level for cross-border duties from C$20 (US$15.62) a day to $150. Mexico agreed to raise its threshold from US$50 to $100.

“A jump to C$150 is huge,” said Mo Datoo, director of strategy and planning at Canadian logistics provider eShipper. “I think we will see a spike in shipments from the US.”

Imtiaz Kermali, the firm’s vice-president of sales and business development, regards US e-commerce providers and Canadian consumers as winners from this deal. Canadian online merchants stand to benefit if they work with US-based suppliers, but they will face stronger competition from their rivals south of the border, he said.

The rise in e-commerce traffic from the US into Canada will give rise to opportunities for his company to assist US merchants looking for competitive ways to ship to Canadian consumers, he believes.

UPS welcomed the agreement but is still chewing on the details.

“We believe the new USMCA better reflects today’s digital economy and presents significant opportunities for our business and our customers,” a Canada-based spokesman said.

“The US-Mexico-Canada agreement will take time, cost and complexity out of trade, accelerate the release of goods through customs and support the participation of more small businesses in regional and global supply chains. We are reviewing the agreement to better understand the potential impact, including the proposed changes to de minimis.”