Navigating the Challenges of Cross-Border Trade

cross-borderU.S. companies that conduct significant volumes of cross-border manufacturing and trade with Mexico have had to contend with a variety of challenges since 2019, including tariff threats, the impact of COVID-19 on the supply chain and the subsequent challenges of restarting idled manufacturing, and the forthcoming implementation of the new United States-Mexico-Canada Agreement (USMCA).

Most Americans don’t realize how reliant the U.S. economy is on Mexico. In fact, Mexico exported $358B worth of goods to the U.S. last year, surpassing China as the nation’s largest trading partner. With many U.S. businesses reliant on a supply chain that straddles the U.S./Mexico border, restarting U.S. manufacturing is more dependent on Mexico than most people realize.

Restarting such a large and intertwined trading relationship as exists between the U.S. and Mexico would be challenging under the best of circumstances. Doing so in the midst of the COVID-19 pandemic and with the looming implementation of USMCA adds even greater complexity.

So, how does the USMCA differ from the original North American Free Trade Agreement (NAFTA) and what changes can U.S. shippers expect? What are the key challenges faced by U.S.-based manufacturers with a presence in Mexico?

The new United States-Mexico-Canada Agreement (USMCA), which goes into effect on July 1, 2020, is intended to support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America.

The USMCA includes a number of enhancements as compared to the original NAFTA, across a variety of issues, including Intellectual Property protections and enforcement, trade secrets, digital trade, financial services, currency practices, labor, environmental obligations, and of course, cross-border shipping regulations.

Specifically, the USMCA includes the following changes regarding de minimis shipment value levels:

  • Creates a new informal shipment level of USD$2,500/C$3,300, so that express shipments under that amount benefit from reduced paperwork.
  • Canada will raise its de minimis level from C$20 to C$40 for taxes, essentially eliminating duties and taxes for almost all orders below C$40.
  • Canada will provide duty free shipments up to C$150, however taxes are still payable where applicable.
  • Sets the de minimis level for Mexico up to US$50 exempt from duties and taxes.
  • Raises the de minimis level to USD$117 duty-free for express shipments.

Benefits to U.S. Shippers

Increasing de minimis values makes it easier for small- and medium-sized enterprises (SMEs) to take part in cross-border trade. These SMEs often lack the resources to pay customs duties and taxes, and under NAFTA, were required to bear the compliance costs that low de minimis levels place on lower-value, lower-volume shipments. In addition, businesses new to the Canadian and Mexican markets will benefit from lower costs to reach consumers. U.S. express delivery carriers are also positioned to benefit from lower costs and improved efficiency.

Challenges for U.S. Manufacturers

The USMCA includes new rules governing the origin of the automobile parts and components. Under NAFTA, the required portion was 62.5%. The USMCA increases this requirement to 75% of the automobile’s value, requiring some measure of supply chain redesign to be in compliance with the new guidelines.

In addition, USMCA requires that 40-45% of the automobiles manufactured in North America must be made in a factory that pays a minimum of $16 per hour. This requirement will be phased in over five years but represents a cost challenge to manufacturers.

Restarting Normal Trade

These changes and challenges are occurring against the backdrop of COVID-19-related closures of the maquiladoras that comprise the Mexican manufacturing base. While both the U.S. and Mexican governments issued guidance to keep “critical infrastructure” such as manufacturing up and running, there was little synchronization between the two nations to define what qualified as “critical.” Further, due to the localized and regionalized nature of the Mexican government, a patchwork of policies emerged which differed from state to state.

To date, Mexico has been slower than the U.S. to reopen its factories, leading to critical shortages of parts and components and slowing the restart of U.S. manufacturing lines reliant on those parts. American companies are now playing catch-up, for example, General Motors recently reported plans to roughly double output at factories for high-profit pickup trucks, due to the backup of parts needed from Mexico.

As a result, automotive trade groups have called for delayed implementation of USMCA, due to COVID-19-related costs and delays and the difficulties in adapting to new, complex country-of-origin rules. Manufacturers can expect notices from the United States Trade Representative (USTR) and U.S. Customs and Border Protection (CBP) over the next 2-3 weeks regarding finalized rules of origin, Harmonized Tariff Schedule changes (GN 11), and final implementing instructions.

Mexico and Canada remain critical U.S. trading partners; this won’t change anytime soon. However, navigating the changes and challenges posed by recent events requires steady, ongoing partnership, not only between the three North American nations, but also between the manufacturers, shippers, logistics service providers, and motor carriers whose daily efforts are responsible for hundreds of billions of dollars in annual trade.

cross-borderAs GlobalTranz’s Regional Manager, Mexico, David Henry is responsible for managing all cross-border transportation and logistics services on behalf of GlobalTranz’s customers. David and his team, based in Monterrey, Mexico, provide strategic guidance to GlobalTranz’s customers in order to aid them in navigating the ever-changing complexities of the cross-border supply chain. With more than thirteen years of experience managing US/Mexico shipping for a wide variety of shippers, including OEM automotive suppliers, David is a sought-after thought leader, often appearing at a variety of industry conferences and in the media.

Prior to joining GlobalTranz, David developed and managed XPOs Cross-Border Brokerage operations and managed Global OEM Accounts at Air Temp de Mexico, a direct automotive supplier to GM, Ford, Volkswagen, Nissan and PSA Group. David earned a Bachelors degree in Business, Business Administration and Management from Universidad Marista de Merida.

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