The USMCA is a free trade agreement between the US, Mexico, and Canada that eliminates tariffs on most imported and exported goods. The agreement, which was ratified in 2020, is also unofficially known as NAFTA 2.0, given that it revises the original NAFTA agreement that took effect in 1995.
Many chapters were added to the USMCA regarding legal and digital matters that directly impacts Nearshore.
“The digital aspect is of interest to us, because it could provide a boost to US business,” says Miguel Hernandez, COO of ParallelStaff, a San Francisco-headquartered Staff Augmentation and IT Managed Services company. “For example, the new agreement prohibits Canada and Mexico from forcing US companies to store their data on in-country servers. It also ensures that US companies cannot be sued in Canada and Mexico for much of the content appearing on their platform.”
“It’s hard for an end-user to understand which parts of their website or app are developed in a Nearshore environment” — Miguel Hernandez
Under the USMCA, qualifying products are exempt from tariffs and quotas when traded from and to Mexico and Canada. To claim this preferential duty rate, one must determine if goods qualify under the USMCA Rules of Origin.
The exporter, producer, or the importer may now complete, sign, and electronically submit a Certification of Origin form. That said, there may be no practical need for a Certificate of Origin for software development per se, because Nearshore software development usually takes place outside the US, in secured personal computers or laptops.
“It is then uploaded into the company’s servers and/or repositories,” says Hernandez. “You don’t often ship software. You transfer it electronically.”
The Importance of Compliance
“The importance of compliance with the USMCA is that companies can benefit from the new regulations in Chapter 19, Digital Trade, Chapter 23, Labor, and Chapter 27, Anti Corruption,” says Hernandez. “As well, some areas have been updated, such as Chapter 14, Investment, and Chapter 31, Dispute Settlement.”
There are other chapters in the USMCA that are directly applicable to Nearshore, such as: Chapter 19.15, Cybersecurity; Chapter 19.16, Source Code; and Chapter 19.12 – which states that no party can demand the strict use of software development facilities within the party’s territory.
“In terms of software, it’s hard for an end-user to understand which parts of their website or app are developed in a Nearshore environment,” says Hernandez. “Companies are continuously deriving benefits from cheaper rates when developing or maintaining software systems using Mexican developers.”
US companies should be cognizant of the fact that the TN-Visa requirements have remained unchanged. As a result, Nearshore operators retain the advantage of having outsourced talent working inside a territory, without losing previous or future investments.
In Support of Automation
The trade agreement was updated to reflect the reality of a global economy driven by automation, with the USMCA functioning as a critical agent for economic integration, in both services and manufacturing. Nonetheless, manufacturing layoffs in the US have resulted in some finger pointing at the USMCA, despite the fact that under five percent of US worker layoffs can be attributed to rising imports from Mexico.
“In reality, these job losses may have to do less with the USMCA and more to do with automation,” says Hernandez. “The fact is, with this preferential tariff treatment the US is producing more cars now than before.”
“The pandemic has told us that we need to reinvent ourselves to remain competitive, and that includes using more telecommunication infrastructure and software” — Miguel Hernandez
It is also important to note that some Nearshore companies function with the full protection of US law. ParallelStaff, for example, is an American company that is fully compliant with all legal USMCA terms and conditions.
“We contribute to a free market with very competitive rates, and we also go the extra mile by surpassing by a distance the minimum wage that the USMCA indicates for manufacturers,” says Hernandez. “This is great news for our clients because it ultimately means we tackle two main problems among our Nearshore software developers: a high turnover rate, and a high willingness to migrate to the US or Canada.”
The USMCA’s Broad Reach
The USMCA shows greater relevance for manufacturers than service providers. However, there could be a mid-term shift that redefines the terms and conditions of the agreement, particularly for e-commerce. Some urgency has been added due to the fact that the pandemic has indicated the crucial importance of remote work.
“The pandemic has told us that we need to reinvent ourselves to remain competitive, and that includes using more telecommunication infrastructure and software,” says Hernandez. “In particular, Nearshore companies found the sweet spot in having their developers working remotely.”
The incredible success of platforms like Zoom has proven that, with the correct software and infrastructure, digital solutions can make all the difference. The USMCA has taken much into account to cope with the challenge of digital transformation, at least in the North American context, but more action is required for service industries to fully benefit.
“None of the parties involved should be willing to get rid of the USMCA” — Miguel Hernandez
“We still rely on lawyers and professionals to fill in the gaps,” says Hernandez. “Nonetheless, new, simplified mechanisms do exist. For example, some documentation is now easily sent with a digital signature that is accepted by either the importer or the producer.”
The current Mexican government, led by the populist Andrés Manuel López Obrador, in attempting to streamline some processes, may be contravening provisions in the USMCA. However, the agreement will likely assume precedence.
“It does ease my mind to know that we have democratic institutions, and legal mechanisms, in Mexico to counteract political or individual interests,” says Hernandez. “None of the parties involved should be willing to get rid of the USMCA, as the economic cost for their countries and the region would be enormous.”