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Finally, the then-leaders of the three countries in question-U.S. President George Bush, Canadian Prime Minister Brian Mulroney and Mexican President Salinas de Gortari-signed the NAFTA treaty. This brand-spanking new free trade agreement went into effect January 1, 1994, replacing the former Canadian Free Trade Agreement between the U.S. and Canada with one encompassing the three North American countries.
The NAFTA agreement was destined to have significant impact on the three countries involved because trading between these nations represents a major portion of the international trade for each.
When NAFTA took effect there was no small measure of confusion among exporters and importers in each country as to exactly how products would qualify for the benefits of NAFTA and how to comply with the regulations in the agreement. Many mistakenly thought customs borders between each country would be magically eliminated and all products would move freely back and forth within North America. This misperception gained credibility in light of changes that occurred within the European Common Market around the same time.
The new European Union, created from the old common market did, in fact, effectively eliminate customs borders in the E.U., allowing both foreign and domestic goods to move freely once they entered any of the E.U. countries.
In the case of NAFTA, however, only products meeting very stringent rules of origin would qualify for the benefits provided in the treaty. These benefits primarily consist of a reduced or free rate of duty.
The elimination of customs borders between NAFTA countries is only one misperception that grew out of the treaty's implementation. The first is that all items that qualify would immediately receive duty-free status. The NAFTA agreement actually provides for a phase-in period of 15 years, with full implementaion not coming until 2008. There are provisions for acceleration of this timetable, some of which have already taken place.
The other misperception is that NAFTA is a mandatory program and that goods can't enter any NAFTA country without a NAFTA certificate of origin.
The fact is the NAFTA program is strictly voluntary. Companies can elect not to participate by not qualifying or determining if their goods meet the rules of origin and by not providing NAFTA certificates of origin to their clients. However, the benefit of qualifying goods as meeting the specific rules of origin is that it provides a commercial advantage to the seller.
This advantage comes primarily in the form of reduced or free rates of duty, making products more attractive and competitive to the buyer in the NAFTA marketplace.
It's the responsibility of the exporter to only supply NAFTA certificates of origin when they have determined the goods being exported meet specific criteria and that they can document this fact.
Goods that don't meet these rules of origin can enter a NAFTA country, but will pay the prevailing rate of duty based on the import countries' tariff.
If you sell a material or component, determining whether your product qualifies can affect the status of your client's finished product. This is why you may, in some cases, be requested to supply NAFTA certification to a domestic client who incorporates your product into a finished item that may be sold to Canada or Mexico.
Although NAFTA has been in effect for more than seven years, many companies haven't taken the necessary steps to be in compliance with the specific rules of origin of NAFTA. They've been issuing certificates of origin without maintaining the required files to support their statements and, in some cases, they're not properly determining how and if their goods qualify.
To determine if a good qualifies for preferential treatment under the provisions of NAFTA, the exporter, who may or may not be the producer of the good, must take the necessary steps to qualify each item to be certified. This involves gathering and maintaining the documentation necessary to support any certification provided. This supporting documentation must be maintained for a period of five years from the issuance of the certificate of origin.
Under NAFTA rules, a good may qualify as an originating good--thus being eligible for the benefits of NAFTA-under one of six possible criteria:
"A" Wholly obtained or produced entirely in one or more of the NAFTA countries.
"B" Goods containing non originating materials and meeting the annex 401 origin rules.
"C" Goods produced in one of the NAFTA countries wholly of originating materials.
"D" Unassembled goods and goods classified with their parts meeting rules in respect to regional value content.
"E" Certain automatic data processing goods that are listed in annex 308.1origin rules.
"F" Certain agricultural goods meeting the criteria in annex 703.2, sections A and B origin rules.
The importance of compliance has always existed. Penalties for not being able to support statements made on a NAFTA certificate of origin go far beyond the importer having to pay additional duties. When a "good" is entered under the benefits of NAFTA and is later determined not to qualify, the penalties can include significant fines, denial of the benefits of NAFTA and in severe cases, criminal prosecution.
It's even more critical to understand and comply with the rules of origin these days, not only because of increased enforcement, but also due to the future expansion of NAFTA. President Bush has recently announced that it is his desire to expand the program to include all of these areas (excluding Cuba) in a new free trade agreement by 2005. This desire echoes the sentiments expressed by many of the other leaders of North, Central, South American and Caribbean countries.
This new agreement would transform NAFTA into an Americas and Caribbean Free Trade Agreement, much as the original as Canadian free trade agreement was transformed into NAFTA.
The importance of this new agreement, based on the increased number of countries involved, would be vastly increased for U.S. exporters and importers.
It's not likely that all Central/South American and Caribbean countries would become part of such an agreement at once. However, countries such as Chile, Brazil, Argentina and several Caribbean nations have long wanted to participate in a free trade agreement with the U.S. It's clear the Bush presidency will push for a rapid expansion of NAFTA-style trade agreements.
The current NAFTA agreement goes beyond the benefits provided to qualifying goods upon import. The agreement covers many aspects of trade and business as well as environmental and workers' rights issues. A major element of the agreement is trucking between the three countries. While regulations concerning carriers moving between Canada and the U.S. have been reduced, there has been a reluctance to do the same between Mexico and the U.S.
Under the terms of the NAFTA agreement, U.S. and Mexican truckers were supposed to have reciprocal access rights in each country in December, 1995. This did not occur. The areas of concern have included; vehicle safety, driver training, environmental issues and possible illegal drug trafficking This issue is of major importance to both countries since more than 11,000 trucks cross the U.S./Mexican border every day. It is hoped that, with new presidents in the U.S. and Mexico, these issues will be resolved. Recent legislation has begun to move in this direction.
Want to learn more?
Additional information on NAFTA can be obtained through your Customs Broker or through several automated NAFTA "hotlines" and websites. Some of these are:Office of NAFTA & Inter-American Affairs Market Access & Compliance: www.mac.doc.gov/nafta
U.S. Customs NAFTA Website: www.nafta-customs.org
Text of NAFTA Agreement: www.sice.oas.org/trade/nafta/naftatce.asp
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