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USMCA FAQs

Under Annex 23-A of the USMCA workers in Mexico are encouraged to have a more active role in union matters that in the past were either conducted by union leaders or by a committee of designated workers. These rights are reiterated in the Mexican Federal Labor Law which came into effect in 2019 in alignment with the USMCA terms of labor. Additionally, new labor value content rules in the USMCA require changes to some automotive companies and suppliers.

Workers are expected to actively participate in key annual activities including voting for their leaders, approving the contents of the Collective Bargaining Agreement and approving subsequent negotiations. These newly established rights give workers a louder voice in Mexico, but also create risks for businesses, especially in the way they communicate new opportunities and protocols to employees. Relationships with union leadership will be of the utmost importance as well. The labor conciliation protocols have been a key focus as these new regulations are being implemented in Mexico.

Generally speaking, the USMCA shifts the burden of proof by stating that a panel shall presume a violation affects trade and investment unless otherwise demonstrated. Dispute settlement panels will investigate practices through on-site inspections and rules of evidence.

There are two new oversight bodies that will monitor the implementation of the Mexican Federal Labor Law:

  • Independent Mexico Labor Expert Board
  • Interagency Labor Committee for Monitoring & Enforcement

Read more about Annex 23-A in our blog.

Benjamin Bocanegra

Alvaro García

The labor value content creates opportunities and challenges for North America. The LVC requires that 40% of the value of automobiles and 45% of the value of light trucks are made by workers earning a wage of $16 US dollars per hour.

Passenger Vehicles

Light Trucks

Costs

2020

2021

2022

2023

2020

Materials & Manufacturing

More than 15%

More than 18%

More than 21%

More than 25%

More than 30%

Research & Development; Information Technologies

Up to 10% can be applied as LVC

Assembly Costs

Granted credit equivalent up to 5%*

Total LVC

30%

33%

36%

40%

45%

Sources in Spanish: (1) (2) (3) (4)

In the case of Assembly Costs, an organization has to comply with the condition that the automobile producer demonstrate that they have a motor assembly plant, transmissions (more than 100 million units) and lithium battery (more than 25,000 units).

*Example: An passenger vehicle assembly plant in Mexico should ensure that at least 25% comes from establishments where $16 US dollars / hour wage is paid to workers directly involved in the production, as long as they are taking maximum advantage of the 10% R&D and the 5% Assembly Costs and comply with the mentioned conditions.

The LVC is part of the automotive rule of origin that states that at least this percentage of labor value comes from operations where the wage is paid, being in North America. It therefore allows the United States and Canada to concentrate much of that value while for Mexico it would allow the analysis to contribute to this value in areas such as R&D. The LVC has a transition period for compliance. For passenger vehicles and light trucks it is a 3 year transition with a scheduled, gradual increase.

Alvaro García

Benjamin Bocanegra

The USMCA and especially the new Mexican Federal Labor Law require that unions equally permit the freedom of association of the workforce.

  • Unions must strengthen their internal practices of democracy, and
  • Workers must participate more actively in the decision related to their collective contract

Companies should establish solid relationships with the union in Mexico that the majority of the workers support and said relationships should be concentrated on the respect of the freedom of the workers to choose their representatives.

Challenges and opportunities for risk mitigation may include:

  • Employer branding and social media storytelling to promote positive market exposure
  • Management of the communication of the freedom of association to employees
  • Emotional compensation and wage analysis
  • Union relationships and negotiations

Prodensa´s Employer of Choice™ program provides the best practices for the USMCA transition with a focus on compliance in Mexico and employee satisfaction that promotes the retention of top talent.

Alvaro García

Benjamin Bocanegra

The USMCA includes two mechanisms to enforce the labor rights obligations of the agreement:

  • Chapter 23 – adds protection to workers from violence, and bans forced labor
  • Chapter 31 – adds a dispute resolution mechanism to cases on freedom of association as well as penalization procedures

Within the USMCA, the public can submit complaints in addition to employees, trade union, worker rights and other civil society organizations. Panels are responsible for carrying out independent investigations, including on-site verifications, resolutions, and the application of remedies or trade penalties. Sanctions could ultimately be placed on exported goods made at the facility under review, and last until the dispute has been resolved. These procedures, although mostly speculative at the moment, could easily amount to months of delays while the panel renders a verdict.

It is imperative that your organization in Mexico complies with the Mexican Federal Labor Law that came into force in 2019 as a precursor to the USMCA terms of labor. It is recommended to make an internal diagnostic analysis, or an auto-evaluation. This allows you to identify opportunity areas or in the case of non-compliance, take preventative measures to avoid being subject to complaints or labor claims in front of the USMCA dispute panel.

Benjamin Bocanegra

Alvaro García

At this moment during the implementation of the USMCA in Mexico, it is important for companies to be a proactive voice. Now more than ever they need to be a part of the solution, advocating for positive outcomes for the business sector, which has increasingly felt its vulnerability under the current administration.

It is time to design new strategies, build new relationships and find new ways to relate positively and honestly with this administration.

  1. Map out your stakeholders, considering all possible allies and detractors.
  2. Reconsider your Social Responsibility programs and practices, and understand how to be aligned to the vision of the current administration.
  3. Speak out against policies that may affect investors and that are contrary to the USMCA and Mexican Law, and when elaborating future laws and regulations. Ensure these new regulatory practices do not become trade barriers.
  4. Request that the government respect the policy space and independence of regulatory bodies such as COFECE, IFT, CONAMER and sectoral regulations such as CRE in Mexico.
  5. Revise all horizontal chapters that may have an effect on your business, not only to see if you are in compliance with the USMCA, but also because there are many benefits that businesses can take advantage of that you may be currently unaware.

An Institutional Affairs strategy as part of a greater Business Continuity strategy provides responsiveness and agility. Give Mexico´s current complex social and political scenario, companies should not see themselves as mere economic entities but public, active members well embedded within the communities they serve.

Mónica Lugo

First, it is important that you do not assume compliance under the USMCA automatically because your products were compliant under NAFTA. It is important to make a dedicated review of the rules of origin applicable to your products in the new agreement. The criteria is as follows:

  1. Goods wholly sourced or produced in the USMCA region
  2. Goods produced entirely in the USMCA region exclusively from originating materials
  3. Goods meeting the applicable requirements of Annex 4-B (Product Specific Rule Origin with HTS Code) while produced in North America territory using non-originating materials, and
  4. Goods classified with the materials/parts which do not meet Annex 4-B rule of origin, but that contain 60% regional value content using the transaction method, or 50% regional value using the net cost method.

If your final product includes materials/parts that are made outside of the North American region, a product-specific rules of origin analysis is recommended.

*Minimum North America regional content value is required for the automotive industry, please refer to special rule of origin for automotive.

Xu Yu

The former document referred to as “certificate of origin” under NAFTA rules is no longer needed. As stated in Annex 5-A of the USMCA there is no official template for certificate of origin, however there is a set of information that may be contained within another document such as a commercial invoice, or any other trading document. Invoices from other countries other than members of the USMCA are not allowed. The files and signatures can be produced and transmitted electronically, and can be produced in any of the three official languages of the USMCA (English, Spanish, or French).

The information requested in order to cohere to regional origin is as follows:

  • Declaration of origin by producer or exporter. Importer will be able to declare origin in 3 years
  • Information of the certifying body
  • Exporter data
  • Producer data
  • HTS Code of the product and description
  • Origin criteria
  • Coverage period (up to 1 year)
  • Authorized signature and date

Previous NAFTA certificates are no longer valid as of July 1st, 2020 and importers can always claim benefits of USMCA of imported goods not properly classified under USMCA with a grace period of up to 1 year.

Jorge Ortega

If the goods intended to be imported do not comply with the USMCA regulations, the tariffs that will come into effect are the ones of the General Importing Regime of each sovereign country.   Normally these tariffs are aligned with the tariff agreements on the World Trade Organization (WTO).

For instance, if an auto part or passenger car does not classify under the NAFTA regulations, the tariff that will apply are the ones of WTO, that for auto parts or passenger cars are 2.50% import duty tariff, but for trucks its 25% .  Bear in mind that there are non-tariff regulations and restrictions that importers must consider.

On the other hand each country has defined sensitive sectors or restrictions to protect its own industries or national security grounds, depending on the country of origin.   For instance, steel raw materials coming from China to the United States are subject to a 25% import duty.  Mexico charges for the same material 15% general import duty (IGI), a measure taken to protect the Mexican industry from the trade war , and that gradually will fade out by 2024.

Jorge Ortega

The USMCA has entered into force and is now a reality, which leads to various implications, opportunities and challenges for the industry in Mexico. Above all, it brings legal certainty with its specific rules for the region.

Mexican companies have the possibility of taking advantage of the opportunities this new commercial agreement has to offer. IMMEX is a program that previous Mexican government implemented to promote export and foreign investments. Companies in this program can make temporary importations and have other fiscal advantages but must thoroughly comply with payments of international trade fees in addition to all the applicable regulations as any other industrial sector in Mexico. The compliance of IMMEX under the USMCA is the same; temporary imports and normalities must continue as usual. Import duty rate impact, origin determination & origin certification remain, but with applicable adjustments from the implementation of the USMCA.

It is important to keep in mind that your products do not automatically qualify for the USMCA country of origin requirements if your company operates under the IMMEX program in Mexico. Most IMMEX companies import parts or materials from outside of the North American region, so it’s critical to understand the specific rule of origin that applies to your products. Finally, it is equally important to also comply with the EHS and Labor requirements stated in the USMCA.

Standardized international trade databases amongst other manufacturing systems (MRP) are key to identifying materials and part numbers for importation, costs and country of origin for a correct determination of origin analysis of your finished goods. Additionally, it is important to make a formal request for a certification of origin from your suppliers which must be properly documented and kept compliant under the USMCA.

Manuel Ponce

In all practical terms, although NAFTA obligated those that pollute to pay, the USMCA levels the playing field and unites North America in a common responsibility. Additionally, it includes new provisions related to protection of coastal and marine environments, air quality and conservation.

Although there are relatively few technical changes to the USMCA related to Environmental Health and Safety regulation for manufacturers, the compliance and enforcement arms of the agreement were completely overhauled. Whereas before, country-specific organizations held responsibility for compliance and reporting of their country´s compliance, now a regional panel is built under the USMCA to attend complaints and ensure accountability.

This provides a new aspect of compliance- the burden of proof. Simply being compliant is not sufficient unless your stakeholders trust that you are compliant. Inspections, fines or cancellation of preferential tariff treatment is at risk, and your employees, industrial neighbors, and community players are important stakeholders that will hold you accountable.

David Antuñez

The new USMCA, under Article 4.B-6, created the requirement for OEM automakers to comply with sourcing 70% of their aluminum and steel from North America, including direct purchases, purchases through service centers, and through suppliers. The requirement is applied on a fleet-wide company/account-basis for OEM automakers.

Although not implemented currently, under the USMCA the US continues to have the right to impose tariffs to steel and aluminum imports under Section 232 on the grounds of national security, and both Mexico and Canada will have the right for a consultation period of 60 days before tariffs are applied. Light trucks are exempt from this measure.

Carlos Loyola

In order to provide flexibility to automotive companies to comply with the new rules of origin, the Alternative Staging Regime (Regimen de Transición Alternativo – RTA) was established. The alternative staging regime provides additional time and a different phase-in of the new requirements and rules of origin implementations for automotive companies. It provides an alternative to certain rules of origin requirements for passenger vehicles and light trucks, but does not replace any other rules of origin or any provisions of general applicability for these goods to claim preferential treatment under the USMCA.

Under the alternative staging regime, importers of certain passenger vehicles and light trucks will have an additional 2-5 years instead of 3 years to meet the requirements, and the vehicles will have different RVC (regional value content) and LVC (labor value content) thresholds.

Carlos Loyola

As the new USMCA became effective, there has been a good amount of information that has already been shared on the specific requirements for the automotive industry, both for the automotive OEM’s and its supply chain. These specific requirements are in line with the focus on this industry’s main contribution to the overall trade and economic activity, not only for Mexico, but to the three countries participating in this new trade agreement.

As many of our clients pertain to other industries, we continually analyze the applicable implications and requirements in the USMCA. There are additional industries or sectors that will have specific implications, or even their own chapter within the USMCA.

  • Electronic Industry, mostly flat screens and monitors
  • Chemical Industry
  • E-Commerce
  • Agriculture
  • Telecommunications
  • Textile

For non-automotive industries, I offer two main recommendations. First, take the time to thoroughly review the requirements of the USMCA and its corresponding Uniform Rules. This is a new trade agreement and there is a learning curve on the actual application of the new rules. Second, review your current supply chain. The USMCA has a focus on increasing regional content, and a localized supply chain will be advantageous in order to make the flow of materials more efficient among the members of the USMCA and comply with its requirements.

Carlos Alvarado

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