United States-Mexico-Canada Agreement (USMCA): More cross-border “curveballs”

In closer examination, shippers will find that the new United States-Mexico-Canada Agreement (USMCA) isn’t strikingly different than its predecessor, the 25-year-old North American Free Trade Agreement (NAFTA). In fact, the proposed new deal is often derided as “NAFTA 2.0” or “NAFTA Lite.”

USMCA is actually based on the same rules and procedures and most of the same products. Analysts say that there are some great environmental and labor regulation improvements, and it incentivizes domestic production of cars and trucks. It’s also the first free trade agreement that has ever included intellectual property protections, which are very timely given the current trade wars that were triggered by the alleged theft of American intellectual property by China and other nations.

But before Logistic Management takes its annual deep dive into cross-border trucking and the trade language that dictates its movements, let’s first examine some statistics and facts that show the sheer size of the North American freight market as defined by trade among the United States, Mexico and Canada.

According to the U.S. Chamber of Commerce, which has pushed for more ease of free trade among the three nations for years, about $1.7 billion worth of goods and services flow between the United States and Mexico borders every day. That’s about 2% of the GDP of the United States. And, according to the United Nations’ International Trade Center, after China, Mexico and Canada are the two largest trading partners for U.S. manufacturers and shippers.

And in the course of this significant trade activity, every cross-border shipper has to comply with complex and vague paperwork to ensure timely clearance by Customs and other officials at both the northern and southern border. So, what will happen if the new trade agreement is ratified?

Well, nobody knows for sure what the unintended consequences may be from the proposed new deal; however, we’ve reached out to a number of analysts in the freight transportation market and asked them to make their best projections. Here’s what they had to say.

What in the fine print?

The first thing anybody notices when analyzing USMCA is that there’s a startling lack of clarity. While the political leaders of the three nations have signed it, it has yet to be ratified by a single nation at press time. Whether it passes as is in the Democratic-controlled House is also up in the air.

“The biggest curve ball will be the U.S. Congress,” says Beth Pride, president of BPE Global, a market analyst with more than 25 years of experience in global trade and international logistics. “As of now, USMCA doesn’t stand a chance of passing because a USMCA bill hasn’t been presented for a vote.”

The U.S. Chamber of Commerce is leading a coalition of 350 U.S. businesses and associations pushing the deal. This comes as the Chamber continues to urge the administration to lift the steel and aluminum tariffs on Canada and Mexico. “Doing so is essential to getting USMCA across the line, and it’s essential to reaping the benefits of a strengthened, modernized deal,” the Chamber said recently in a statement.

And while President Donald Trump has threatened to kill NAFTA if USMCA isn’t passed, he doesn’t have the authority to do so. The U.S. Congress would have to kill NAFTA, and that is highly unlikely.

According to Pride, if USMCA is ratified by the U.S. Congress “there is absolutely zero chance” it will get ratified by Canada or Mexico while the steel and aluminum tariffs are in place. Currently the United States has placed 25% tariffs on imported steel and 10% on aluminum. “The politics of USMCA makes it a delicate subject for all,” adds Pride.

As an example of how frustrating planning north-south freight traffic can be in this new environment, Chattanooga, Tenn.-based truckload giant U.S. Xpress announced earlier this year that it would divest its U.S.-Mexico cross-border investment. The company said that this move is part of its ongoing capital allocation and profit improvement efforts.

“We concluded that these operations required a comparatively high level of fixed investment per unit of revenue and created lane inefficiency in the U.S., because serving freight to and from the border did not maximize revenue per mile or meet our other network planning priorities,” stated U.S. Xpress president and CEO Eric Fuller in a statement.

However, assuming USMCA gets ratified, here’s what international shippers should know about the fine print. Starting in 2020, to qualify for zero tariffs, a car or truck must have 75% of its components manufactured in the United States, Mexico or Canada—a boost from the current 62.5% requirement.

In addition, and also starting in 2020, cars and trucks should have at least 30% of the work on the vehicle done by workers earning at least $16 an hour, which will gradually move to 40% for cars by 2023—meaning that it will cost more to make cars and trucks in the USMCA countries. This will increase the costs to automotive companies, and it’s more likely that they’ll just pass the cost increases on to the consumer—making new automobiles even more expensive than the $33,000 average cost was in 2018.

“There’s a ton of that fine print stuff in the country of origin rules for automobiles,” says Greg Orr, president of Joplin, Mo.-based CFI, a major north-south truckload carrier. CFI gets 33% of its approximately $530 million in revenue from traffic in and out of Mexico.

In another proposed change, Canada agreed to set new quotas for dairy imports and will still put tariffs on dairy products that exceed quotas. These new quotas will give the U.S. access to 3.6% of Canada’s dairy market and U.S. farmers would then be able to export 120 million eggs into Canada the first year.

According to Jan Brock, senior trade advisor for Pacific Customs Brokers Ltd., the dairy portion of cross-border traffic is expected to grow 1% per year for the next 10 years. The chicken and egg concession will allow 57,000 metric tons phased in over six years, and in the seventh year will increase 1% per year for the next 10 years.

Must-do list for cross-border shipments

Experts say that U.S. manufacturers conducting cross-border shipping need to do as much advance planning as possible when considering international freight needs. And the list is long, including Customs, bills of lading, country of origin documentation and seemingly hundreds of other exacting international requirements.

But most of all, experts and trucking officials say, it’s about relationships.

“For shippers, do as much homework on the front end as you can before you jump into the pond,” says CFI’s Orr. “It’s also important to find the right partners. The carrier needs to understand how to manage the business, and if the shipper partners with the right companies, that should eliminate a lot of work concerning the border paperwork and a lot of other little issues.”

In Canada, U.S. carriers are allowed to use their own trucks and drivers; but once across the border, U.S. carriers are allowed just one stop before returning back to the United States.

Still, while Canada is part of the same continent, shippers really do need to realize that Canada has different rules and regulations where cargo is concerned. Experts say shippers will want to partner with a company that has the experience and know-how to get goods safely—and quickly—through customs and to the destination.

Customs brokers earn their keep by being knowledgeable about all of the fine print for international shipping, and they can provide real-time tracking, keep you current on any regulatory adjustments and ensure documentation is complete.

For example, every shipment to Canada requires a bill of lading and a Canadian Commercial Invoice. You might also need to get a Certificate of Origin depending on what you’re shipping and whether it meets rules for duty-free customs clearance. These documents, when accurate, will help your shipment clear customs quickly.

A good broker will send all of the necessary documents ahead of the actual shipment to the Canada Border Services Agency (CBSA), which oversees goods flowing into and out of the country. The CBSA offers a program called Free and Secure Trade (FAST) for even faster border crossing.

These dedicated lanes are like EZ-Pass but for commercial shipping. Experts say that it often helps to hire a shipping company that’s already a member of the FAST program because it’s an easy way to keep time, money and sanity in check when shipping to Canada.

In and out of Mexico is even more complex. That’s because U.S.-based carriers aren’t allowed south of a 25-mile free trade zone at the border. Recently, because the Trump administration transferred some Customs officials from the work of inspecting trucks to immigration enforcement, the wait at Laredo-Nuevo Laredo crossing in Texas was backed up 12 miles—causing delays of up to 12 hours for freight to cross the border.

So, having a knowledgeable, Mexico-based partner is even more important for international shippers going south than it is going north to Canada. “Trucking is an industry built on relationships—and that’s exacerbated in Mexico,” adds Orr. “Relationships are even more important in that country, and there are a lot of things that can be done to ease the process. But relationships are the key.”

The future

The future of USMCA may be murky, but one bright spot, experts say, is the promise of modernizing technological improvements in the proposed agreement.

Rich McArdle, president of UPS Freight, says that one of the differences is that USMCA addresses e-commerce and digital concerns that were not around in the 1990s when NAFTA was conceived. “It’s a more modern Customs policy, which is so important. We view this as a positive.”

According to McArdle, it’s not the physical crossing of the border that’s the barrier, as much as it’s the paperwork and the Customs processing. “In this day and age, when data can be harnessed and transferred and evaluated long before goods ever get to the border—that’s very exciting,” he says. “We think it is going to take some costs and complexity out of the freight between the U.S., Mexico, and Canada, so we view this as a positive.”

Of course, safety and security of freight in international territory is an old concern that will remain whatever becomes of USMCA. “The most important thing is to have partners who are known, trusted and have the technology to track and trace trailers,” adds Orr. “There are actually a few Mexican trucking companies that we use that have more technology on their rolling equipment than U.S. carriers do.”