On July 1, 2020, the United States–Mexico–Canada Agreement (USMCA) entered into force, replacing the North American Free Trade Agreement (NAFTA). The change to USMCA was accompanied by the publication on June 30, 2020, of the final USMCA Implementation Instructions.
A variety of changes will take effect with the USMCA, including changes to some rules of origin, new certification rules, and other enhancements to modernize the regional trade agreement. However, the recently published final Implementing Instructions identify one additional change that had not been confirmed prior to the announcement: the removal of the NAFTA preference override. This change requires companies to evaluate their country of origin marking of products imported from Mexico and Canada and may require a change in the country of origin marking of the imported good.
Background Supporting the NAFTA Preference Override
The USMCA has uncoupled duty preference claims under the agreement from country of origin marking, leading to situations in which the country of origin of products imported into the U.S. from Mexico and Canada may be inconsistent with their ability to qualify for USMCA. In other words, under the USMCA, companies may import products from Mexico and Canada making valid USMCA duty preference claims but may otherwise have to mark the products with a non-USMCA country of origin.
Under NAFTA, a two-part test required imported products to (1) qualify under the NAFTA rules of origin under General Note 12 to the Harmonized Tariff Schedule of the United States (HTSUS), and (2) satisfy the applicable NAFTA Marking Rule (19 C.F.R. Part 102) to be marked as a product of a NAFTA country. In some cases, the NAFTA marking rules were more stringent than qualification under General Note 12. In those cases, importers could apply the “NAFTA preference override” (19 C.F.R. §102.19) to establish a Mexican or Canadian country of origin marking when products underwent more than minor processing in those countries. The NAFTA preference override was designed to reconcile the potentially conflicting origin determinations of the NAFTA rules of origin and the NAFTA Marking Rules.
Impact of the Elimination of the NAFTA Preference Override in the USMCA
Under the USMCA, however, qualification for preferential treatment is no longer a two-part test. Instead, to qualify for USMCA preferential treatment, a product need only satisfy the USMCA rule of origin (HTSUS General Note 11). In its final Implementing Instructions, the U.S. Bureau of Customs and Border Protection (CBP) announced that USMCA qualification will no longer be dependent on a country of origin marking analysis under 19 C.F.R. Part 102, but instead a country of origin marking analysis must still be completed under those marking rules (not under a substantial transformation analysis) to separately determine the country of origin for marking the imported good. CBP also indicated that the NAFTA preference override will officially be eliminated under the USMCA.
This change under the USMCA has the potential to impact a wide array of industries wherever the USMCA rule of origin in HTSUS General Note 11 yields a different origin determination than the USMCA Marking Rules at 19 C.F.R. §102.20.
In light of these unanticipated changes, we recommend that U.S. companies review their Mexican and Canadian imports to confirm that the country of origin for marking purposes is consistent with the new USMCA requirements. While CBP has indicated there will be limited enforcement over the next six months as importers implement the changes under the USMCA, there remains an expectation that importers will work to bring all products into compliance as soon as possible.