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USMCA Could Be Promising for Apparel and Footwear

Last year heralded the new USMCA trade agreement, shifting the U.S., Canada, and Mexico into a new relationship for continued global commerce.  The USCMA is championed to build on existing NAFTA rules with differences that promise to promote stronger trade and yet reflect a “do no harm” strategy for industries already benefiting from the NAFTA program.

As the U.S. moves toward the formal withdrawal of NAFTA by mid to late 2019, Congress is challenged to ratify the USMCA to avoid trade chaos amongst the three countries. The USMCA is more complicated than NAFTA and provides for sectors not previously included in NAFTA, such as e-commerce. While the political parties undertake the next steps towards approval, companies are well advised to consider now how to prepare for the USMCA and benefit from their offerings.

Here are five strategic steps to prepare for the USMCA’s impact on your firm:

1. Industry Assessment

Knowing how the USMCA impacts your company’s industry is crucial to developing a strategy on how to benefit from the free trade agreement (FTA). How will the new rules impact the textile and apparel industry? Which rules of origin, such as “yarn-forward,” will remain and which rules could be retracted?

The complexity of textile and apparel rules under the USMCA influence the use of de minimus, treatment of sets, short supply procedures and potentially the end of the Kissell amendment, a NAFTA exception on qualifying certain products as “American” for government contracts. Thoroughly reviewing how the USMCA impacts your industry is the first step toward understanding how to prepare for its implementation. While the final USMCA draft is not yet confirmed, companies can draw reasonable inferences about its trajectory from the existing document.

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2. Back to Basics on Classification

As with most FTAs, proper classification of products is the basis for confirming the correct rule of origin and qualifying process.  Current and ongoing NAFTA audits focus heavily on participants’ classification accuracy to ensure products already claimed as NAFTA-eligible hold up in audits. Misclassification of products can revoke NAFTA claims even if the correct classification does qualify them for NAFTA, forcing importers to pay back duties on previously declared imports that were duty-free. Building strong expertise in classification accuracy promotes a more accurate FTA claim and reduces the risk of non-compliance.

3. Be audit-ready

All claims made under any FTA are “conditional” and may be revoked if companies cannot support the eligibility of their duty-free claims. The USMCA appears to retain the verification process in place under NAFTA, which allows any of the three governments to audit an exporter or producer in the U.S., Canada or Mexico for the accuracy of their information used to support a duty-free claim. This ruling is a unique audit capability not found in any other FTA, so it’s essential for exporters and producers to understand their role in the process and maintain sufficient records for the required time frames to support a future audit. Record-keeping laws and regulations differ in each of these three countries, with the U.S. currently at five years, Canada at six, and Mexico at 10. Positioning your firm to audit and maintain records for the mandatory regulations is crucial to pass a future FTA audit successfully.

4. Invest in Automation

Like NAFTA, the USMCA rules are complex, though the potential savings for suitably qualified goods is substantial. FTA automation can reduce the burden of qualifying goods while improving the accuracy of records and related information necessary to support a duty-free claim. The USMCA is one of many new or updated FTAs across the world that requires strong expertise of these rules and regulations. Investing in automation is an important strategy to enable firms to benefit from FTAs available today.

5. Get a health check

Consider having an external audit of your existing FTA claims and processes to ensure the accuracy of your current program and understand where improvements may be necessary to ensure compliance and reduce the risk of false duty-free claims. Are your internal controls sufficiently managing your current claims? Is there transparency and continuity in your current transactions to ensure your firm would successfully pass an FTA audit? Understanding where you are today is crucial to building a sustainable process and reduce the risk of fines and penalties. Getting an FTA “health check” can provide insights into the strength and accuracy of your program and potentially identify new areas for taking advantage of FTAs.

The USMCA agreement brings new opportunities and challenges for many industries, but those with a heavy reliance on China manufacturing might have a better advantage. Ensuring your company is ready for this change is only the first step toward a competitive advantage in the global arena. Seek out solutions that automate all of your global trade compliance processes while affording you the benefits of free trade cost savings to be competitive in today’s market.

Suzanne M. Richer is Director of Amber Road’s Trade Advisory Practice and is a licensed customs broker and Certified Classification Specialist. Ms. Richer has extensive experience in advising corporations on Focused Assessments, C-TPAT cargo security applications and validations, and the Importer Self-Assessment (ISA) program. She has conducted over 3,000 hours of training, and has authored 12 books on international trade.