The ‘New NAFTA’: Now is the Time to Prepare for the USMCA

Part 1: The Energy Sector
If the turbulence of 2018 caused business executives grief, the year ahead is unlikely to provide much relief.  Foremost is the United States-Mexico-Canada Agreement (USMCA). If most political pundits are correct, the three governments will likely be able to ratify the USMCA in time to be in full force by the beginning of 2020, if not earlier.

In 2018, the US imposition of “Section 232” tariffs on many steel and aluminum imports wreaked havoc around the globe. They are likely to continue throughout next year as will the “Section 301” tariffs on over $200 billion worth of imports from China. In addition, in late 2018, Commerce Secretary Ross announced a possible new “Section 232” investigation on automotive imports, a decision he must make by February 2019.

2018 was also the year that US Trade Representative Robert Lighthizer announced the Administration’s intent to start talks on new trade pacts with the EU, England, and Japan. Those negotiations, once Congress approves the plan, will inject their own uncertainty in the overall international trade environment throughout 2019.

Clearly 2019 will be a busy year. And, unfortunately, there is no crystal ball to help guide us through Trump’s 2019 Trade Agenda.

But we do know this. On September 30, 2018, negotiating teams finally reached agreement on the USMCA. Government leaders in all three countries will now act to debate and approve the negotiated provisions. And this will launch a critical period of rule implementation by all three countries.

This period should not be viewed as a “lull.” To the contrary, it represents an important time during which companies can develop their programs and compliance efforts for taking full advantage of the USMCA.

Equally important is the opportunity this period presents to develop a forward looking strategy of international trade competitiveness.

“The Devil is going to be in the details”

– Catherine L. Mann, Global Chief Economist at Citi, on the USMCA
October 1, 2018

The USMCA will have real world financial consequences for many companies. And many company executives are already starting to plan for the changes ahead.

We can help. Our team comprises many former top professionals from the Administration who had hands-on experience drafting and implementing rules and regulations under the NAFTA. They know what to watch, how best to interpret the new rules and how the rules can make the difference for an industry’s immediate and longer term production goals.

In the weeks ahead and on these pages, the Arent Fox team will be offering their insights on those devils and those details.

Our goal is to help readers understand how sound legal advice now can best position a company to take fullest advantage of the USMCA well before January 2020.

For example one of the primary objectives for the three countries during this implementation period will be the completion of the Uniform Regulations. These regulations must be in place before the USMCA comes into force and so 2019 is the year of the Agreement’s rulemaking. The final set may come quickly. And that means that company executives must stay on top of developments – be informed, understand the risk calculation and prepare sound strategy based on sound understanding.

Like its NAFTA predecessor, the regulations must be implemented consistently by all three countries, hence the term “uniform” regulations. Why? Because these will dictate the how, when and what of the hundreds of new requirements under the USMCA. In other words, the Uniform Regulations will provide the guidelines for much of the critical fine print relating to qualifying for and claiming USMCA duty-free treatment.

Virtually every chapter and every aspect of the USMCA uniform regulations will present opportunities for companies to affect the manner in which the Agreement is implemented and the manner in which the company can best utilize the provisions of the Agreement.

Below we start with the energy industry and a few thoughts from our colleague, Terry Polino.

Terry Polino, Partner, Arent Fox LLP

Prior to entering private practice, Terry served as senior attorney in the General Counsel's Office at the US Department of the Treasury where she concentrated on customs and international trade matters. She began her career in the Office of Regulations and Rulings of the US Customs Service (CBP's predecessor agency) and also served as an attorney-advisor in the Office of the Chief Counsel, US Customs Service.

Given her work with energy executives, I asked Terry for her insights into the 1994 NAFTA Uniform Regulations and what she will be watching in the USMCA rules.

Below are a few related to the energy industry Terry offers to our readers.

  1. Use of the “Average” Inventory Method was vital in the NAFTA, especially the manner in which the “average” inventory method was implemented. How will the USMCA rules treat this approach?
  2. The manner in which fungible goods subject to the average inventory method would then be determined “originating” or “non-originating.” Terry reminds us that, in the NAFTA rules, US and Canada ended up with different allocation methods.
  3. Possible “guidelines” for use in verifications. For example, in the petroleum industry, NAFTA rules provided that “diluent” used to dilute bitumen will be disregarded as long as it does not exceed 40% in volume of the product. How will this be treated and verified in the USMCA implementing rules?
  4. Also in the energy field, a NAFTA rule involving natural gas changed the origin to allow the re-gasification of liquefied natural gas to meet the tariff shift rule. Terry is watching whether the new rules could establish a presumption that, absent information to the contrary, all natural gas imported from Canada should be considered originating.

These are but a few examples of why the USMCA uniform regulations in 2019 will be important to fully understand. They will be complex and potentially far reaching. Terry advises clients on proposed trade policy actions and assisting those needing to participate in the rule drafting processes including the preparation and submission of comments and hearing statements. She is well known for her deep understanding in developing proposals to change the rules of origin for both NAFTA and CAFTA for certain products of concern to specific clients.

The energy industry is not the only sector Terry has served. She works closely with business executives in a number of fields, including the medical device and the textile industry.

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