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The Customer Experience Implications of the New NAFTA Are Huge for E-commerce. You Can't Ignore It.

October 7, 2020
Alex Yancher

E-commerce brands make a promise to customers: if they pay, their product will arrive quickly, safely, & without additional fees to their doorstep. With the “New NAFTA,” that isn’t necessarily the case. Let the experts at Passport Shipping explain.

Table of Contents

If you’re in the business of selling any goods or products, this one’s for you.

The USMCA deal (aka the “New NAFTA”) is the newest trade agreement with new provisions between America, Canada, and Mexico. It went live, officially, on July 1, 2020.

What does the “New NAFTA” mean for e-commerce brands and their marketers?

Whether you: 

  • Ship goods directly to your customers, 
  • Have a manufacturer who mails you parts
  • Are a marketer who needs to understand precisely how and when your products get to where they need to go

Understanding the nuances to the USMCA and how to take advantage of those benefits is essential.

Tl';dr: The most significant impact on your business: if you're shipping packages under $150 CAD in value from the U.S.to Canada, you're probably overpaying for duties & taxes under the new regulations!

This goes beyond logistics. In fact: 

“Many SMEs in the U.S. are unaware of the significant benefits offered by the new trade legislation. While 42% of respondents said the USMCA would significantly or moderately impact their business once implemented, 23% didn’t know how it would impact their business, and 35% said there would be no impact on their business at all.” [Supply Chain Brain]

Passport is offering a free consultation to see how much you can save under the USMCA. They've done this for their current customers and saved brands like Native, Tommy John, and Bombas up to 20% on Canada shipping costs alone. Reach out to sales@passportshipping.com to see how they can help

This is important stuff to know, especially when many of the taxes and duty fees come down on your customer. Talk about a massive blow to customer experience, and right as they are supposed to get what they bought from you! 

Knowing what to expect under the new USMCA and how exactly to explain that to audiences will ensure a smooth transaction from start to finish. 

If ignored (or rather, not taken advantage of), companies could risk not hitting key business and sales goals.
Source: https://castusglobal.com/blog/what-usmca-means-for-small-businesses-digital-trade

Where did NAFTA begin?

President Clinton signed the original North American Free Trade Agreement (NAFTA) in 1993.

It opened trade borders between Mexico, Canada, and the United States at an unprecedented scale, virtually eliminating tariffs between the three countries. 

Agriculture, textiles, and automobiles (among other goods) traveled freely across borders and, at the time, it seemingly integrated the three economies more than it divided them. From the Council on Foreign Relations:

“NAFTA fundamentally reshaped North American economic relations, driving unprecedented integration between the developed economies of Canada and the United States and Mexico’s developing one. 

In the United States, NAFTA initially enjoyed bipartisan backing; it was negotiated by Republican President George H.W. Bush, passed by a Democrat-controlled Congress, and was implemented under Democratic President Bill Clinton. 

Regional trade tripled under the agreement, and cross-border investment among the three countries also grew significantly.”

NAFTA missed the mark in several ways.

NAFTA was signed one year before Amazon was founded. 

Twenty-one months later, Pierre Omidyar launched AuctionWeb, a site “dedicated to bringing together buyers and sellers in an honest and open marketplace.” That site would later become eBay.

NAFTA made no mention of digital goods.

It didn’t account for the exponential growth of e-commerce over the last decade, which, at the global scale, has increased 600% since 2010 and, in the first half of 2020 alone, grew over 30% from the same period the previous year.

Put lightly, this pre-Internet era free trade agreement was overdue for a refresh to reflect new realities and new commerce practices.

Twenty-five years later, on November 30, 2018, Canada, the USA, and Mexico signed the new United States-Mexico-Canada Agreement (USMCA), aka “the new NAFTA.” 

All three countries ratified the updated agreement in early 2020 and, despite lobbying to delay implementation due to COVID-19, went live on July 1st, 2020.

The new agreement, signed into law by President Trump, “simply updates the 25-year-old North American Free Trade Agreement, with new laws on intellectual property protection, the internet, investment, state-owned enterprises and currency” [New York Times].

Still, it also puts more of the manufacturing incentives back on home countries, rather than outsourcing.

What does this mean for the American workforce and, more specifically, e-commerce marketers who need to understand new shipping policies to create the best customer experience?

NAFTA was specifically designed to bolster the American Economy while creating freer market access across North America.

While many NAFTA policies remain or were updated to reflect the time, there are many marked differences between it and the U.S.-Mexico-Canada agreement. Let’s explore these differences, plus ways to take advantage of the new trade deals to expand e-commerce capability.

What is USMCA [i.e., The New NAFTA]?

The United States-Mexico-Canada Agreement (USMCA) seeks to create mutually beneficial, freer trade between the three markets. The renegotiation was spearheaded by President Donald Trump’s administration.  

Much of the agreement is a refresh to the original NAFTA regulations, but a number of new rules were made to reflect the playing field of modern-day commerce and trade.

It’s essential, too, for marketing teams at any company that sells goods online to understand the benefits available through the USMCA, especially if they’re shipping their goods beyond domestic borders. 

There’s no sense in selling a product that can’t arrive to a customer in a timely, efficient manner, so understanding both the upsides and the downsides to USMCA can help organizations streamline their shipping processes.

The pros and cons of the USMCA deal.

The USMCA consists of several compromises, rather than apparent advantages and disadvantages, and these compromises have created polarizing opinions from the various sides.

Still, USMCA presents a few wins for domestic workforces across each of the participating countries. 

1. An Automotive Industry Win.

The automotive industry, for example, had a significant update in relation to auto parts:

“For example, the 40% automobile content clause is expected to divert vehicle production from cheap labor in Mexico. This will, in turn, create more jobs for American workers in the automaker industry. Another projected benefit of the automobile wage minimum requirement is that it may force Mexico to pay local workers higher wages to avoid auto tariffs.” [ThomasNet]

2. A Dairy Farming Win.

Another USMCA win opens the dairy farming industries between Canada and the U.S.

Before this deal, Canada had notoriously high tariffs on imported dairy products. Their system is fairly complex as a means for bankruptcy protection, but the USMCA has afforded the U.S. a more significant share of the Canadian dairy market. 

“[This] means U.S. dairy farmers can probably send a lot more milk protein concentrate, skim milk powder and infant formula to Canada (and those products are relatively easy to transport and store),” according to the Washington Post.

That’s not to say that the USMCA doesn’t come with its share of faults, though. 

Particular industries and other areas of concern that NAFTA didn’t account for still go underrepresented in the modern-day agreement. 

According to the Peterson Institute of International Economics (PIIE), these are five cons to the Trump-era documentation:

  1. The USMCA introduces new trade protectionism that will constrain growth through auto trade and investment restrictions, government procurement contracts, and textiles.
  2. New rules of origin will hurt U.S. auto sector competitiveness: Because the USMCA would increase the cost of producing vehicles in the United States, foreign suppliers would have an incentive to export more cars to the U.S. market and pay the 2.5% import tariff.
  3. Pharmaceutical patent rules need to better balance consumer interests: Consumers want affordable prices; allowing competition from generic drug producers would reduce costs and monopoly profits of pharmaceutical patent holders. But those companies argue that reduced revenues would deprive them of resources for their research and development of new medicines.
  4. Improved environmental provisions still fail to address climate change. At the very least, the USMCA should promote investment and trade in renewable energy resources and other measures to encourage low-carbon emissions.
  5. Labor law improvements still need stronger enforcement of labor provisions to satisfy labor union leaders and strengthen their rights.

The PIIE also highlights proposed fixes to these areas of concern, which could help get you familiarized, mainly if your industry is unionized or directly affected by the USMCA.

However, one of the most significant changes has been an increase in the minimum duty-free threshold on shipments from the U.S. to Canada. Learn a little more about what that means below.

Change in De Minimis on duties for United States to Canada Shipments

Goods below the de minimis for each country can be imported free from duty and/or taxes. 

To facilitate more significant cross-border trade, the U.S. negotiated to have Mexico and Canada raise their de minimis shipment values levels. 

This is the first time in decades that Canada raised its de minimis.

“If you are not familiar with the concept of de minimis, it is the threshold at which imports into a country are exempt from taxes, duty, and some paperwork. De minimis thresholds are designed to make low-value cross-border transactions faster, easier, and more predictable. Higher de minimis thresholds are good for small businesses allowing them to export with far less friction as well as accept returns easily, making buyers happy,” according to eBay Main Street.

Change in De Minimis on Duties for U.S. to Canada shipments:

Think of it this way: Before July 1, 2020, the de minimis on goods was at or below $20 CAD (that’s $15 USD) wouldn’t be assessed for any duties, regardless of whether it was shipped postal or non-postal. 

That meant anything above the $20 mark was subject to duties and, frequently, an additional service fee of $9.95 handling fee for the inspection. 

Not great for anyone shipping to Canada, eh?

The USMCA changed that, though, so as of July 1, any non-Postal shipments have a duty relief of $150 CAD ($107 USD), though postal shipments have remained unchanged.

As for any taxes associated with those shipments, as of July 1, any shipments under $40 CAD / $29 USD are free from tax and duty relief for non-postal shipments, whereas postal shipments have again remained unchanged.

Source: https://dclcorp.com/blog/news/usmca-small-business/

What does this mean particularly for sellers in Canada who want to ensure they’re exempt from duties and taxes every time they ship their product?

Ways e-commerce and DTC brands can take advantage of this new program

There are three main ways e-commerce merchants and DTC brands can take advantage of this new program:

1. Finding the Right Shipping Partner.

Find an international shipping company, like Passport, that will ship via a private courier service and is a USPS partner. The right shipping mix to Canada typically involves a postal service where duties and tax are prepaid coupled with a private carrier delivered duty paid (DDP) service.

2. Use the Low Value Shipment Program.

Ensure that your international shipping carrier can ship via the Low Value Shipment Program so that you don’t need a Canadian business number and can ship via third party registration.

3. Update Your Terms & Conditions.

Add terms and conditions to your website that state the Canadian consumer is the Import of Record.

USMCA’s influence on e-commerce and digital trade.

Where NAFTA failed to include documentation around the Internet and e-commerce shipments (it was, after all, enacted before the web took off), the USMCA accounts for the new normal in digital, international trade from e-commerce sales in the addition of a Digital Trade chapter.

If you ship internationally (specifically between Canada, the U.S., and Mexico) or sell goods or products via the web, understanding the Digital Trade Chapter is important in knowing how and where to take advantage of USMCA documentation.

The new Digital Trade chapter will:

  • Prohibit customs duties and other discriminatory measures from being applied to digital products distributed electronically (e-books, videos, music, software, games, etc.).
  • Ensure that data can be transferred cross-border and that limits on where data can be stored and processed are minimized, thereby enhancing and protecting the global digital ecosystem.
  • Ensure that suppliers are not restricted in using electronic authentication or electronic signatures, thereby facilitating digital transactions.
  • Guarantee that enforceable consumer protections, including for privacy and unsolicited communications, apply to the digital marketplace.
  • Limit governments’ ability to require disclosure of proprietary computer source code and algorithms to better protect digital suppliers’ competitiveness.
  • Promote collaboration in tackling cybersecurity challenges while promoting industry best practices to keep networks and services secure.
  • Promote open access to government-generated public data to enhance innovative use in commercial applications and services.
  • Limit the civil liability of Internet platforms for third-party content that such platforms host or process, outside of the realm of intellectual property enforcement, thereby enhancing the economic viability of these engines of growth that depend on user interaction and user content.
Logistically speaking, this Digital Chapter was put in place to allow for freer data flow and prohibit data localization. 

This easier exchange of data will be monumental for relations between the three countries, especially as the COVID-19 pandemic has caused e-commerce sales to skyrocket. Companies are needing to adapt and create more intuitive digital sales platforms to sell goods:

“The agreement's advancements in areas such as trade facilitation and customs simplification, cross-border data flows, and reduced tariffs and barriers, for example, will benefit U.S. small and mid-sized businesses and multinational corporations that ship internationally.” [Inbound Logistics]

According to Castus Global, there’s a huge win for community management and customer service online, too, as some serious liability protections will protect user reviews and ratings. These protections allow businesses to communicate freely with their customer base in ways that were never protected by NAFTA, despite frequent conversations.

What has changed from NAFTA to USMCA?

Differences and similarities between USMCA and NAFTA.

In many ways, the USMCA simply updates former NAFTA practices around U.S. trade, but in other ways, it’s a complete revamp to reflect the new realities of trade and commerce, specifically online.

Besides loosened dairy restrictions and larger requirements around domestic automobile parts, there are more considerable restrictions around intellectual property, citing harsher punishments around pirating film work, or stealing cable signals.

Both agreements do little to account for environmental concerns, particularly around global warming and/or climate change.
Source: https://diff.wiki/index.php/Difference_Between_NAFTA_and_USMCA

Is NAFTA still in effect?

As of today, NAFTA is no longer in effect. However, it did remain in effect until the USMCA documentation was ratified by all three participating countries in March 2020 then implemented across the board, rendering it fully into effect on July 1, 2020.

Once USMCA went into full effect, NAFTA was fully replaced.

Is USMCA still in effect?

As of July 1, 2020, the USMCA was implemented across the United States, Canada, and Mexico, replacing NAFTA fully.

What does this mean for businesses, particularly those shipping from Canada? Passport has the answers and shipping specialists available to help you figure out your e-commerce plan.

In summary, this is what the USMCA aims to do for all involved parties:

 “The United States, Mexico, and Canada have reached an agreement to modernize the 25-year-old NAFTA into a 21st century, high-standard agreement.  The new United States-Mexico-Canada Agreement (USMCA) will support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America.” [USTR.gov]

The latest news on USMCA.

  1. USMCA makes an effort to speed up post-pandemic recovery [Houston Chronicle]
  2. In a rare moment of bipartisanship, Joe Biden agrees that Trump’s USMCA updates are ‘better than NAFTA’ [New York Post]
  3. Mexican president warms up to Trump in the wake of election day [Independent]
  4. Wisconsin senators have concern over dairy provisions named by USMCA [WEAU]
  5. Regulatory and policy changes in Mexico have dented investor confidence in the energy sector [NGI]
  6. Canada is retaliating against American aluminum tariffs [CBC]

Conclusion

Are you feeling a bit overwhelmed? Don’t worry. The onus isn’t all on you –– as the marketer –– to figure this out. 

This is a collaboration between you and your operations and shipping team. Moreover, y’all don’t have to do it alone. 

Passport is offering a free consultation to see how much you can save under the USMCA. They've done this for their current customers and saved brands like Native, Tommy John, and Bombas up to 20% on Canada shipping costs alone. 

In particular, Passport helped Native identify a few opportunities for improvement:

  • Dead tracking numbers
  • Quiet periods of tracking
  • High number of return to sender shipments
  • Limited data from carriers

These issues are expensive. First of all, the hard cost of support: consumers would email, and the Native team would have to research each shipping issue. Second, a bad consumer experience leads to missed revenue via higher-churn and less word-of-mouth. 

Additionally, in international shipping, return-to-sender shipments have the highest hard costs, as re-importing a product means losing revenue, a bad experience for the customer, and another shipping leg.

The Passport team solved this for them in three easy steps:

  1. Accurate timelines from your carrier
  2. Last-mile delivery partner and tracking number surface
  3. On-page support lets Passport handle shipping questions.

Think there isn’t enough time before the holidays? You’re wrong:

“Passport built us a custom Shopify app during the holiday rush, and helped us improve the experience for our international fans,” says Chris Wichert, Co-Founder of KOIO.

Reach out to sales@passportshipping.com to see how they can help you with your international shipping challenges.

CEO of Passport Global
about the author

Alex Yancher is the CEO of Passport Global, a modern-day international shipping company backed by top Silicon Valley investors such as Kleiner Perkins, Resolute Ventures and Social + Capital. Formerly, he was the co-founder and COO of Lynks, a Y Combinator backed international personal shopping service helping people around the world buy products from the U.S. and China. In three years, Lynks became the largest importer of single parcels into the Middle East. Before Lynks, Alex was a leader on the Business Operations team at Facebook.

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