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Notwithstanding COVID-19, NAFTA to be replaced by CUSMA on July 1

Author(s): Riyaz Dattu

Apr 27, 2020

For further information on the changes below or other international trade matters, please contact any member of our International Trade and Investment Group.

In this International Trade Brief, we discuss the effective implementation date of the Agreement between the United States of America, the United Mexican States, and Canada (the Agreement), referred to as the CUSMA in Canada and the USMCA in the United States.

On July 1, 2020, the three NAFTA countries will supersede the 26-year-old North American Free Trade Agreement with a new agreement, known as the Agreement between the United States of America, the United Mexican States, and Canada (the Agreement), referred to as CUSMA in Canada and USMCA in the United States.

The effective date of the Agreement is dictated by the rules contained in the Protocol to replace NAFTA with the Agreement, which provides that once a country has completed the internal procedures required for the entry into force of the Agreement in its own country, it should notify the other two countries. When the last of the three countries provides its notice, the Agreement comes into force on the first day of the third month following that last notification.

Canada provided its notification on April 2, 2020, followed by Mexico on April 4, 2020. The United States notice on April 24, 2020, paves the way for the effective date of July 1, 2020. This date is 19 months after the signing of the Agreement on November 30, 2018, and just in excess of three years from the start of the negotiations on May 18, 2017.

The effective date of July 1, 2020, gives affected business in all three countries just slightly more than two months to ensure that they will be compliant with the new rules.

The challenge of this short implementation period is compounded by the ongoing COVID-19 pandemic that has businesses in all three countries either operating under extremely difficult conditions or shuttered due to government directives.  Some businesses, including the automotive companies, have halted production and instead are producing personal protection equipment for supply to hospitals and front-line works in the battle against the spread of COVID-19.

Furthermore, it is only within the last few days that the governments have started to issue guidance in some critical areas such as customs and rules of origin.

In recognition of their complexity, the automotive rules of origin will be relaxed in the context of the COVID-19 pandemic. While the uniform regulations will be published before July 1, 2020, as required by the U.S. implementing legislation, they will be finalized after the ongoing negotiations concerning these rules are completed. In addition, a further period of two years will be provided for a limited percentage (typically no greater than 10 %) of an automotive producer’s production, such that the implementation of the higher regional content requirement under the Agreement can be staged over a total of five years instead of three. To receive the benefit of this extended two-year period, petitions containing the alternate staging have to be filed by July 1 in draft form, to be followed by the final staging plan by August 1, 2020.

Our own experience from the time of the implementation of the Canada-United States Free Trade Agreement in 1989 and NAFTA in 1994, suggests that industry can only begin to properly implement the relevant rules when they are published by way of detailed regulations and government guidance is issued.  However, in the past, that period has usually been far longer than two months, and not under abnormal and drastic circumstances of an ongoing worldwide pandemic.  It will be a challenging few weeks ahead.

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