North American trade in the time of COVID-19

The COVID-19 pandemic has significantly disrupted international trade and supply chains across the world. In this insight, we look at specific measures affecting North America trade.

1. USMCA entry into force

Despite the pandemic, the United States-Mexico-Canada Agreement (USMCA or the Agreement), the successor to the North American Free Trade Agreement (NAFTA), has now been ratified and signed into law in all three countries and will enter into force on July 1, 2020. While the COVID-19 pandemic continues to embroil trade flows, the overall timeline for the USMCA’s implementation was only delayed by approximately one month. Canada submitted its entry into force notification on April 2, 2020, while Mexico submitted its notification on April 4, 2020. The US trailed behind its counterparts, providing its notification on April 24, 2020, almost three months after the US Congress ratified the Agreement.

While the Agreement is now set to enter into force, COVID-19’s global disruption of manufacturing operations and supply lines has created uncertainty as to whether businesses are prepared to meet its obligations. Chief among these is the auto industry, which is subject to a much higher rule of origin standard that requires more regional labour and content values into the production of autos and auto parts compared to NAFTA. Already, many automakers and industry representatives are requesting the parties to exercise discretion in enforcing regulatory requirements to allow for a longer transition period to implement the production and supply changes necessary for compliance. The United States Trade Representative (USTR) has begun soliciting requests from vehicle producers to start working on alternative staging regimes that allow for a longer period to comply with the Agreement’s rule of origin requirements. These alternative regimes, which are provided for under the Agreement, may vary depending on the Agreement of all parties.

On June 3, 2020, the United States Trade Representative released an initial version of the uniform regulations, crucial for common understanding of customs procedures, such as determinations of rules of origin. Previously, the US Customs and Border Protection (CBP) has issued interim implementation instructions, the Canada Border Services Agency (CBSA)  has set up a dedicated USMCA website, and the Mexican Ministry of the Economy has similarly set developed online seminars focused on implementation guidance.

The new USMCA terminates the underlying NAFTA framework, but leaves the 1989 Canada-US Free Trade Agreement “suspended.” Certain provisions of the NAFTA, such as investment protections, will remain in force for a limited amount of time.

2. COVID-19, essential and non-essential businesses and supply chain disruption

Since the start of the pandemic, supply chains have been strained and disrupted. Labour shortages due to COVID-19-related illness, shelter in place orders, and related business closures have forced vast swaths of the global population to suspend work or move online. The importance of cross border supply chains has been underlined by various agreements and declarations including a 42 WTO Member Statement on COVID-19 and the multilateral trading regime, a Joint Ministerial Statement on commitment to supply chain connectivity, and a Ministerial Coordination Group statement on maintaining essential global links.

Data on supply chain disruptions first surfaced in January and February, where China reported a 17.2% decline in exports. Outlooks on global trade frequently predict significantly lower levels of trade, due in part to supply chain disruption, but also decreases and changes in demand as countries, business, and daily life adapts to COVID-19. To date, most North American border crossings and ports continue to operate smoothly and have only been minimally impacted by COVID-19. Here, we focus our review on the key trade-related impacts of the pandemic for North America.

Canada

• On March 18, 2020, Canada and the US agreed to close temporarily the land ports of entry along the Canada-US border to non-essential travel, to limit the spread of the 2019 Novel Coronavirus (COVID-19). This announcement followed the implementation of Canada’s initial air travel ban. The border closure was recently extended to June 21, 2020. For a full analysis of this measure, see Dentons’ client alert on this issue here.
• Several Canadian provinces have enacted business closure orders for non-essential or non-priority businesses under emergency and public health-related legislation. This includes the following provinces: British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Newfoundland & Labrador. These measures are fluid and change frequently, and several provinces have commenced re-opening plans. Business closures have resulted in certain domestic and international supply chain disruptions.
• Further, the Canadian National Strategy for Critical Infrastructure has issued its guidance on essential federal services and functions. This includes work in the following sectors: health, water, food, information and communication technologies, energy and utilities, transportation, manufacturing, finance, safety, government, along with certain miscellaneous services.

United States

• President Trump issued a proclamation formally declaring a national emergency on March 13, 2020. Despite this proclamation, all orders concerning whether to shut down or restrict operations are being made at the state and local levels. Dentons maintains a comprehensive 50-state tracker addressing various shutdown procedures that can be accessed here.
• The US Cybersecurity and Infrastructure Security Agency has identified numerous sectors as comprising “critical infrastructure” during COVID-19. Those are sectors encompass chemical, commercial facilities, communications, critical manufacturing, dams, defense industrial base, emergency services, energy, financial services, food and agriculture, government facilities, healthcare and public health, information technology, nuclear reactors, materials, and waste, transportation systems, and water and wastewater systems. More detailed guidance on identified critical infrastructure and their operations can be found here.
• Travel into the United States is restricted for foreign nationals who have travelled to any of the following countries 14 days before their entry: China, Iran, European Schengen area, United Kingdom, and the Republic of Ireland. Current travel restrictions are updated here.
• The US has currently restricted travel across the US-Mexico and US-Canada border to essential travel only.

Mexico

• On March 30, 2020, the Mexican Government issued an Order declaring the disease caused by COVID-19 as a Sanitary Emergency (Sanitary Emergency Declaration) which was originally to be in force until April 30, 2020, and was extended until May 30, 2020, and later June 15, 2020 for non-essential activities. This is subject to a possible regional extension in Mexico moving forward.
• As a consequence of the Sanitary Emergency Declaration, on March 31, 2020, the Ministry of Health published in the Federal Register (DOF) an Order establishing Extraordinary Actions to Confront the COVID-19 (Extraordinary Measures Order) declaring that only certain economic activities considered essential to face the COVID-19 were allowed to continue operating.
• Under the Extraordinary Measures Order, among the sectors that are considered essential are health, food, transportation (passengers and cargo related to the COVID-19), pharmaceutical telecommunications, agro-industry, finance, supply of essential goods, ports and rail services.
• The scope of the essential activities definition has affected many relevant industries in Mexico, in particular, the manufacturing sector, which includes a number of Mexican subsidiaries of US or Canadian companies that manufacture and supply inputs to the North American market, in particular to the United States. Almost 80% or more of these manufacturing plants known as “Maquilas” have been shut down in strategic areas, such as the automotive and electronic sectors.
• The return to work activities are comprised of 3 stages:
  • Stage 1- began on May 18 and included municipalities that do not have cases of COVID19, nor neighborhood with contagious municipalities – in those municipalities all work activities opened;
  • Stage 2 – took place between May 18 and 31 and is applicable for companies deemed as essential activities, which must adopt the protocols included in the Guidelines for the return of activities. Please note that the Guidelines do not differentiate between those considered essential from March 30 and the last included. In addition, all “non-essential” companies must adopt said protocols according to the reopening dates of activities by the “traffic light system”; and
  • Stage 3 – began on June 1 through a weekly health alert “traffic light” system by regions, which will determine the level of alert and what type of activities are authorized to be carried out in the economic, labor, school and social activities.

3. Import and export restrictions on essential goods

Despite numerous calls for open trade from the G20 and the WTO Director-General, specifically in relation to essential goods such as personal protective equipment, as well as cooperation agreements many states have adopted export controls in response to the COVID crisis. To date, various countries have reported export controls on personal protective equipment to the WTO. While integrally linked through extensive supply chains, North American states have each responded differently in relation to trade controls.

Canada

• Throughout the COVID-19 pandemic, Canada has committed to maintaining an open position on trade and supply chains. On March 25, Canada, Australia, Brunei , Chile, Myanmar, New Zealand and Singapore, a majority of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) states, issued a joint ministerial statement affirming their commitment to ensuring supply chain connectivity amidst the COVID-19 situation.
• Canada’s international commitment was followed by several domestic measures, which include waiving tariffs and sales taxes on all goods imported by or on behalf of public health agencies, hospitals, testing sites, and first response organizations as well as deferring all customs duties until June 30, 2020. Similarly, trade facilitation measures on PPE has been put in place, alongside with relaxing certain regulatory requirements for goods in Canada. The CBSA has also released a listing of applicable tariff classifications for medical supplies.
• On April 7, 2020, Prime Minister Justin Trudeau, announced a plan to mobilize the Canadian industry to fight COVID-19. Notably, this included building supply chains for essential goods, including made-in-Canada protective gear and medical equipment, to respond to the higher demand due to the outbreak. The Government of Canada, through Public Works and Government Services Canada (PWGSC), has set up a specific webpage seeking suppliers’ support to provide critical goods and services. For more on Canada’s specific response to procure essential goods and services, see our insight here.

United States

• On April 7, 2020, the US Federal Emergency Management Agency (FEMA) and the Department of Homeland Security placed a temporary final rule into effect that extends control over the supply chain of PPE. The rule requires a potential exporter to obtain explicit approval from FEMA before PPE may be exported from the United States, effective until August 10, 2020.
• Despite the COVID-19 pandemic, the US has moved forward on several fronts to advance its trade policy objectives. For example, the US recently announced the beginning of negotiations with the United Kingdom on a potential free trade agreement.
• The President has, on several occasions, implemented orders under the Defense Production Act to direct the manufacture of PPE.
• The US Trade Representative has implemented a special procedure to allow parties importing Chinese-origin products helpful to fighting the COVID-19 pandemic to apply for relief from the Section 301 tariffs that are otherwise imposed. The request process allows submission to be made until at least June 25.
• The Food and Drug Administration (FDA), as well as the US CBP, have taken measures to help speed the process of importing PPE and other medical devices into the United States. The FDA guidance allows for certain PPE products to clear US Customs with limited entry documentation.

Mexico

• On March 27, 2020, the Ministry of Health issued and additional order conferring to the additional government powers to facilitate the supply of essential goods to combat the COVID-19 including (i) measures to require all types of goods and services, national or international, including medical equipment, diagnostic agents, surgical material and hygienic products, as well as all types of goods and devices that are necessary to confront the emergency, without the requirement of public tenders and the compliance of other bureaucratic procedures such as a sanitary license, import permits or sanitary authorizations.
• No export controls have been issued as a result of the COVID-19 emergency. 

Dentons’ international trade team stands ready to answer all questions related to the COVID-19 situation.

Dentons’ COVID-19 hub provides a range of timely information, updates and practical guidance on this fast-moving situation, drawing on the full scope of our global legal, policy and innovation capabilities.

This post was originally posted as a Dentons Insight on dentons.com