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What Products Qualify For Nafta

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 18 minute read

For nearly twenty-five years, the North American Free Trade Agreement (NAFTA) has been the most widely implemented and hotly debated of the several trade accords that the United States has signed. However, it expired on July 1, 2020, and the new United States-Mexico-Canada Agreement (USMCA) has taken its place.

How will this impact your company or the company you work for? After three years of slow development through negotiating and legislative processes, the news in April 2020 of a midsummer 2020 implementation came as a surprise. This brief span was insufficient for many businesses.

To keep your business and your clients safe, it’s crucial that you come up to speed as soon as possible. In this way, you may get ready for 2021, the first full year of enforcement, with no surprises.

How Trade Treaties Affect You and Your Customers

Free trade agreements (FTAs) involving several nations, such as NAFTA and the USMCA, aim to boost local sourcing and production by domestic enterprises. For doing so, they are rewarded with duty-free access to their country (which they are denied access to if they do not comply).

Assume you have a factory in the United States where you produce upholstered wooden chairs for sale on the internet. Importers in Canada and Mexico pay around 10% in import charges to respective governments on upholstered wooden chairs, thus they need to know if the items qualify for NAFTA. If you can verify that they qualify for duty-free import of your chairs, you’ll cut their final cost by 10% and give yourself a leg up on the competition.

However, local enterprises will still be able to export your goods even if you don’t. If your neighboring businesses want to resell your products to their own international clients, they, too, will need to know whether or not they qualify for NAFTA. Some distributors will presume you can give a NAFTA certificate even if you haven’t explicitly said that you can. People are usually really taken aback when you tell them you can’t.

In terms of both imports and exports, the United States, Canada, and Mexico are all among the top five markets for the other two countries. For the past quarter century, hundreds of businesses have avoided paying millions in additional import taxes by taking advantage of this scheme.

As intended, the initiative has benefited many more suppliers and workers than originally anticipated by encouraging exporting businesses to increase their use of domestic suppliers for both raw materials and labor.

However, it has contributed to unnecessary complexity. No one learns about trade regulations in school. Furthermore, throughout the past quarter century, many individuals have thought that NAFTA advantages would be applied mechanically to all goods crossing borders, only to learn the hard way through harsh Customs audits, prosecutions, and penalties.

By modernizing NAFTA in key areas like intellectual property protection and financial norms, the USMCA makes up for some of that agreement’s flaws. It also raises the bar for some product categories and toughens enforcement, making it much simpler to meet the program’s stated aim of boosting domestic manufacturing. The burden of proof for NAFTA compliance is shifted from the seller to the customer when the NAFTA certificate of origin is no longer required.

The Origin Rules

Products must have been cultivated or manufactured (not merely tested, completed, or packed, but actually manufactured) in one of the FTA member countries in order to be eligible for free trade. They must also be able to transport it straight to one another without stopping at any other countries’ customs.

After receiving this information, the supplier must evaluate its product to see if it meets the requirements.

Cheese manufactured at a local dairy from local milk or wine made from locally grown grapes are examples of products for which this is quite straightforward. This product meets the requirements since it was made entirely in the United States.

However, if the product is a composite made up of domestic and foreign components, you must review the rules of origin and do the tests it permits. This is done by consulting the treaty itself and locating the item in question using its corresponding harmonized tariff code (HTS).

Each HTS code is governed by its own set of regulations, which vary each Free Trade Agreement. From one to four de minimis (or “tariff shift”) tests or regional value content (RVC) tests are available under both the current NAFTA program and the new USMCA, with the RVC-net cost (RCV-NC) and RCV-transaction value (RCV-TV) tests serving as the principal ones.

The price, country of origin, and Harmonized Tariff Schedule (HTS) code of each component used in the product are all taken into consideration in these analyses. They factor in not just the raw materials and finished goods, but also the overhead and profit margins of the producer. As prices fluctuate at different auctions, so do these totals.

When a vendor is ready to provide a certificate of origin for a product, they must first demonstrate that the product has passed one of the permitted tests for that product, and they must also be satisfied that their claim will hold up under audit by Customs. In that case, the client will be responsible for the duties and will be unable to lodge an FTA claim.

The USMCA addresses NAFTA’s flaws.

Since the outset, there has been concern that free trade agreements (FTAs), and particularly NAFTA, don’t do enough to advance the aim of reshoring production and jobs to North America. Many businesses in the manufacturing sector, both large and small, have gone out of business in recent years, replaced by competitors in other countries, mostly China. 

Despite the best efforts of free trade agreements like NAFTA, more and more of the parts we import to produce our final products now originate from abroad.

The USMCA is an attempt to halt this development. As a result, lawmakers believe it will encourage U.S., Canadian, and Mexican manufacturers to buy more components made in the country.

The USMCA makes an effort in this direction by reeducating the industrial sector, reemphasizing certification standards, and establishing new criteria in specific sectors, notably the automobile and textile industries. As a result of these supplementary efforts, the agreement expands some advantages for agricultural goods.

The amount of non-qualifying components allowed in the final product is raised from 7% to 10% of the ex-works (EXW) selling price, making the de minimis test more forgiving. Your procedure only has to be compliant now. However, you should make sure it helps clients here and in our ally nations meet their own compliance requirements.

Today’s Activities

The United States Mexico Canada Agreement (USMCA) is, like NAFTA, an enormous set of rules, and it will be extremely challenging to develop a comprehensive compliance program in just a few weeks. However, it shouldn’t be required to begin from scratch. With these 10 guidelines in mind, you should be able to adjust your current FTA procedure to accommodate the requirements of NAFTA’s successor.

  1. Determine if the USMCA affects you.

Start by considering your company. Do you purchase any commodities (either finished products to resell or raw materials to create your own) that were manufactured in the United States, Canada, or Mexico? Do you mail anything at all to or from a place in the USA, Canada, or Mexico?

If not, this change might not affect you at all. Products from outside of North America were excluded from NAFTA’s purview. It’s also worth noting that the USMCA has its limitations. If you don’t deal in physical commodities or if you solely import from nations outside of North America, the North American Free Trade Agreements are probably not anything you need to worry about.

But if you do acquire and sell actual commodities of U.S., Canadian, or Mexican origin, then sure, you need to evaluate how the shift affects your firm. Finding out if the things you bought are still eligible for duty-free treatment is important if you already received that treatment. In case they didn’t, but narrowly failed the exams, it’s prudent to determine if they’ll be eligible under the revised standards.

Businesses like restaurants, lawn care services, banks, and dry cleaners who acquire local products and sell only to local clients are unlikely to be greatly impacted by this shift.

Customers that rely on duty-free advantages are the ones who are most affected by FTAs, therefore these persons are often those who purchase and sell internationally or supply wholesalers who sell internationally.

  1. Check with vendors to see whether the changes have an impact on their certifications.

You can’t assume that the certifications, statements, or declarations your suppliers have been providing you under NAFTA would be legitimate under the new agreement. You should send a quick request to all of your current suppliers, asking them how the transition from NAFTA to USMCA will affect any NAFTA certification they have previously provided, and whether or not the products they currently sell you will lose or gain qualification under the new rules of origin.

New certification requests are being sent out by certain businesses as though it were the beginning of the yearly vendor origin solicitation. Even so, you’ll need to do it annually, usually in the later part of fall. Dealing with the issue via exception management must be the very least if you opt not to try a completely new approach. If Customs does an audit and discovers issues, you may protect yourself by asking suppliers to respond.

Besides, unexpected findings are always a possibility. From one year to the next, most businesses revamp their whole supply chain, if not at least part of the components. There’s a chance that years ago, businesses you trusted to provide you with goods created in the U.S. really began sourcing those goods from elsewhere.

  1. Examine Your Own Products’ USMCA Qualifications

There should be a reassessment of product eligibility under NAFTA if you now give certifications or declarations.

It might be simple if all you do is wholesale or retail and not any actual production. In the past, you would have needed confirmation from your suppliers that they qualified in order to correctly issue these declarations; today, all you need to do is check to make sure their qualification still stands. The declaration you give to your clients is supported by the declarations your suppliers have made to you or by their affirmative response to your update request.

If you’re making anything out of raw materials or putting your own spin on something already on the market, you should always conduct your own tests before certifying it to your clients. 

As you make this shift, you may want to double-check the laws of origin that apply to your items. Then, depending on the nature of your vendors’ comments and whether or not your rates have shifted, you may need to rerun some or all of your studies before issuing anything to your clients.

  1. Perform Some Research

There are two primary ways in which a handcrafted item could qualify, depending on whether or not its value is determined by its selling price. Any time a selling price changes, your qualification might change. This includes the RVC-TV or de minimis tests in NAFTA or USMCA, as well as the build-up and build-down tests in most other FTAs.

There are a few profit-based requirements in the NAFTA-like group of FTAs (the accords in Asia and the Pacific). The higher your EXW selling price is in the end, the more your profit will go toward meeting the requirements.

On the other hand, the generalized system of preferences (GSP) group of FTAs (such as the ones the United States has in the Middle East, which are based on the GSP agreement) penalize you for profits, so higher sale prices eventually kick a product out of qualification when selling to that group of countries.

The benefit of NAFTA may be nullified if your pricing to the consumer has decreased when you last assessed it.

Some items that previously failed the de minimis test may now pass because of a change in how the test is calculated, from allowing just 7% of untransformed non-NAFTA value materials to allowing 10%. It’s important to double-check.

It’s not easy to qualify for a certain price range, but assume you produce a chair in the United States and sell it for $100. Although the majority of the wood, stain, and varnish used are American-made, the chair’s cross bracing and arms are both European imports that drove up the price by $8.50.

The $100 chair wouldn’t have qualified for NAFTA if it had more than the allowed 7% of non-NAFTA components in its original form. Now that such components are exempted from tariffs at a rate of 10% under the USMCA, the same chair may be purchased for the same price as before.

However, it is just the case for sales-based evaluations. In two cases, the sale price is irrelevant to qualifying since the focus is on the cost of production.

Wholly Originating

Numerous goods are “wholly original,” which means that all of the constituent parts meet NAFTA’s requirements. No calculations or examinations are required here.

There are no foreign components in a wood carving made from a branch cut from a tree in the backyard or a bushel of vegetables grown and sold on a nearby farm. It has perpetually met the requirements, thus there’s no need to submit it for approval.

Net Cost Method

This type of RVC evaluation relies on the cost of external factors like materials, labor, and machinery where it is allowed (though not on upper management costs and profit). If the product passes the net cost test, then adjustments to the product’s selling price on the outside won’t affect its profitability.

The new agreement does not alter this stipulation. As long as the math hasn’t changed, the items you’ve already purchased that passed the test should be OK.

The goal is, then, to understand the criteria by which your items are accepted. In the United States, it is not uncommon for a single business to produce both qualifying and non-qualifying goods. Each BOM consists of a unique assortment of materials. Price points vary from product to product, and each HTS code has its own set of regulations about where it may be produced and what kinds of quality control measures can be applied to it.

It’s possible that you’ll be limited to just one product test, or that you’ll be able to try three or four. To keep everyone safe, including you and your clients, you must master your procedure and adhere to it religiously.

  1. Find Out If You Belong to a Specific Audience

The negotiators narrowed their attention to the three most politically and economically significant sectors: agriculture, the automobile industry, and the textile industry.

Agriculture

Agriculture-wise, the new pact expands access to markets for dairy products produced in the United States, notably in Canada. It’s a little window, but if your company makes agricultural goods in the United States, you might want to see whether there are any new export opportunities because of the United States-Mexico-Canada Agreement (USMCA).

Canada is reducing or removing a wide range of product limits and high import taxes during the next decade. Canada is a promising market for the poultry, eggs, milk, cream, and cheese produced by America’s dairies.

Automotive

Both the automobile and textile industries benefit from the agreement’s novel strategy. It has long been a source of fear that uncompensated labor will be sent to corporations outside of North America, and that products will be able to pass through NAFTA’s requirements for transformation while having very little North American content.

Under the USMCA, automobiles must have 75% North American content, up from 62.5% under NAFTA. Vehicles must also use at least 70% North American-made steel, aluminum, and glass. In addition, a new labor value content standard mandates that by 2023, 45% of the work on a vehicle must be performed by workers making at least $16 per hour.

There is a demand for, and an opening for, those already working in the automotive industry to produce, import, or export.

  • Some of your suppliers may have a hard time maintaining their USMCA eligibility, so it’s important to double-check with them. Since all automakers in North America are frantically trying to enhance their North American content, you now have a more compelling argument to give to prospective buyers. For example, automakers may not have considered using real burl for things like hubcaps, door handles, sun visors, gear shift knobs, and dashboard burl since it is more expensive than the plastic or metal substitutes they could get from China. But they need to invest significantly more on North American content.

Textiles

Many of the rules of origin have evolved, with new restrictions on certain tests and higher standards for passing others. Domestic sewing thread, select coated fabrics, and pocketing are now required for items to qualify, whereas textile inputs such visible lining fabric and rayon fibers can be used for the first time under the new standards.

Each product has its own unique set of needs. Importers and exporters in these sectors in particular need to double-check the HTS codes and corresponding chapter and section comments that apply to their items. Then, to make sure they comprehend the new qualifying standards, they must evaluate the rules of origin for those codes.

These are the main places they’ve made significant changes to. Even if your items aren’t specifically mentioned here, that doesn’t mean they’re safe. It’s always a good idea to verify regulations, no matter what field you work in.

  1. Learn About the New Recordkeeping Regulations

Enabling twenty-five years, an exporter’s principal legal responsibility in utilizing NAFTA was to provide a NAFTA certificate for an importer to lodge a duty-free claim.

In accordance with the practices of many other FTAs, the USMCA shifts the burden of meeting this criteria to the importer. In principle, the burden of proof is on the importer to prove its claim with supporting documents.

Although, one may argue that this is just a ploy and won’t truly change your business’s requirements. Importers require a paper trail that protects their claim to duty-free advantages under the USMCA in the event of an audit, which is likely given how frequently importers are audited.

In order to import, the importer needs confirmation from the vendor as to which precise part numbers are acceptable. A NAFTA certificate equivalent should have similar information but need not have the same structure.

Documents issued by a vendor must be supported by the company. If Customs conducts an audit of the importer, it will inevitably go on to the supplier.

Therefore, vendors still want the same documentation they always had, such as bills of material or other documents detailing the testing and calculations undertaken to ensure the product meets all requirements. In addition to contracts, purchase orders, and work instructions or other papers established by the International Organization for Standardization (ISO), they need vendor invoices that contribute to the cost estimates.

Most of this paperwork must be stored neatly for at least five years from the latest date necessitating its storage, in accordance with the standard recordkeeping period for import and export transactions. Seven years However, Mexico has even lengthier retention obligations, so it’s important to check. Additionally, ten to fourteen years of retention is suggested if duty drawback is a possibility.

Maybe neither you nor your clients will ever be subjected to a Customs audit. But in case they do, you want everything to be so easily accessible and correct that the auditors opt to move on to easier prey.

  1. Examine Your Needs for Intellectual Property

The IP provisions of the USMC have been the focus of most media attention. However, they do not materially alter the way we do things in the United States. The norms of the United States currently apply across North America in the fields of copyright, trademark, and patent. 

Some of these requirements include a copyright safe-harbor statute to discourage internet piracy and a minimum of 15 years of protection for industrial designs and the author’s lifetime plus 70 years for copyright protection.

It would be nice to assume that this indicates it’s safe to export patented goods to other markets, but it would be a huge leap of logic. Giving intellectual property to a foreign seller is risky. The USMCA has unquestionably made things safer. But don’t assume that the dangers of infringement and imitation will vanish magically at the stroke of midnight on June 30.

When feasible, it’s best to make secret items yourself and outsource only non-secret tasks.
Consult your attorney to see if any changes need to be made to your normal contract templates or customer- or vendor-generated contracts regarding patents, trademarks, or copyrights for your product. Depending on the company, intellectual property (IP) concerns might range from being nonexistent to seeming like they’re mentioned in half of all contracts.

Do you sell officially endorsed products like apparel and toys? I was wondering whether you dealt in used media. Do you sell any merchandise that has the logos of popular media properties, sports teams, or well-known companies? If this is the case, you should also have your purchase orders and associated forms reviewed by an attorney. Some of your terms may require revision in light of the new regulations.

  1. Maintain Your Legal Documents

Any contract or purchase order forms that previously displayed NAFTA should now display USMCA. You can’t take it for granted that any duty arising out of the previous treaty would be carried over into the new contract just because it was included into the contract.

Make sure that all references to the previous agreement are updated to reflect the new one, and look over any relevant papers to determine whether they give rise to any obligations that need to be looked into. At some point, you may have consented to something in a template without fully understanding what you were doing.

Numerous businesses have pledged, on record, for many years, to only fulfill customer orders using NAFTA-eligible products. However, over the years, they developed new services and widened their supply chain without understanding they were moving farther and further away from meeting their original contractual responsibilities.

You now have a fantastic, and possibly necessary, chance to update. Finding instances of the old term and replacing them with the new one using a computer’s find-and-replace function isn’t enough. You need to get back in line before the new enforcement initiatives from the three countries take effect.

  1. Inform Your Brokers and Forwarders

A good number of freight forwarders and Customs brokers excel in handling and advising on FTA procedures. Some of them put their employees through extensive training to make sure they are cautious, actively assisting their customers in making safe decisions.

Unfortunately, not all brokers and forwarders pay equal attention to both the transportation and Customs aspects of a shipment. They need an informed consumer base to succeed. To prevent companies from putting too much reliance on their brokers and forwarders, the Customs Modernization Act imposed criteria for reasonable care and informed compliance. 

The quality of service you receive from any broker or forwarder depends on the quality of the individual working on your account.

In order to help businesses adapt to USMCA, several consultancies, trade law firms, and freight brokers are providing resources including webinars and white papers. Examine your partners to see if they provide similar amenities, and if they do, use them.

It’s best to play it cautious and remind brokers and forwarders not to presume USMCA eligibility for incoming or outgoing shipments. Instead, they should get in touch with you first to make sure the necessary paperwork is in order to safeguard you and your clients as enforcement efforts increase. Getting clients in legal hot water is a certain way to lose them as customers.

  1. Modernize the Information Technology System

Large corporations often use costly IT add-ons to help them deal with trade compliance issues. However, enrolling in their program is a must.

It’s possible that you’ll have to handle these changes on your own if your firm is tiny, which is often the case with home and other small enterprises. Depending on the current setup, for instance:

  • Making a USMCA declaration to replace the NAFTA certificate that is in compliance
    It’s possible that you need to revise your outgoing bills’ origin declarations.
  • The retention method should be reviewed and improved regularly if electronic records are kept.
  • Update these formulae as necessary, at the very least to adjust the de minimis test from 93% and 7% to 90% and 10%, but probably much more if you have already incorporated FTA qualifying testing into your present system.
  • The NAFTA trade agreement has been replaced by the United States-Mexico-Canada Agreement (USMCA), thus you should update your yearly vendor trade compliance request system to include a request for USMCA qualification
  • To check if any NAFTA-related terms need to be updated or new USMCA-related clauses added, you should review commonly used documents such purchase orders, order confirmations, broker and forwarder cover letters, and shippers’ letters of instruction.
  • If NAFTA (now USMCA) status is being captured or tracked on products being bought or sold, then the item master in the ERP or other software may need to be checked or updated.

Bottom Line

To put it mildly, the USMCA is not an easy deal to understand. Get in touch with your brokers and suppliers, review the regulations that affect your industry and goods, and go over the data sheets provided by the U.S. trade representative to see if there’s anything further you need to know. The United States International Trade Administration and U.S. Customs both have extensive online resources about the USMCA that you may peruse for further details.

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