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Moving Goods Across Borders in the NAFTA Territory
The North American Free Trade Agreement (NAFTA) has reduced all duty rates to zero and virtually eliminated the borders between Canada, the United States and Mexico. Sounds good, doesnt it, particularly if the bulk of your trade occurs within the NAFTA countries?
Its unfortunate that the misconceptions about NAFTA are widely held by senior management in many companies. Based on these views, very few resources are allocated to in-house customs departments, improvement of customs systems or processes. Why invest money in an area that is a cost centre? Things are running smoothly, so why attempt to fix what doesnt need fixing?
If you are moving goods across the borders in the NAFTA countries, then you definitely need to be aware of what is fact and what is fiction, particularly if customs duties, taxes and other resources need to be factored into your supply chain planning. Lets take a brief look at some of the key points of NAFTA.
All NAFTA qualified goods that are imported into Canada, where the NAFTA certificate of origin indicates United States as country of origin, are now duty free. However, Mexican originating goods and the combination of Mexican/U.S. originating goods (MUST) are a different matter. Some of these NAFTA qualified goods may be duty free while some will become duty free effective January 1, 2003. There is also another exception whereby certain goods do not become duty free until January 1, 2008, because of a 15-year phase-in period.
If an assumption is made that the goods being imported from a NAFTA country are automatically duty free because of NAFTA, then there may be an unpleasant surprise. Duty dollars may add up to a significant sum. Do the goods being shipped to Canada from the United States or Mexico, indeed, qualify under NAFTA?
Under NAFTA, the rules of origin provide objective criteria for determining whether or not goods are eligible for the benefits that NAFTA provides. Sometimes it is obvious that a product originates in a particular country. For example, if paper is made in the United States from trees that were grown in the United States, the paper obviously originates in the United States. However, if envelopes are folded in the United States from paper made in Brazil, which one is the country of origin? In brief, a good is considered to be an originating good if it meets one of the five criteria set out in the NAFTA rules of origin: the good is wholly obtained or produced in a NAFTA country; the good is made up entirely of components and materials that qualify in their own right as goods that originate in a NAFTA country; the good meets the requirements of a specific rule of origin for that product; the good qualifies under NAFTA article 401(d); the good or its parts qualify under the provisions of Annex 308.1.
Of these five requirements, the most common is the third, which applies to a good that includes any non-originating materials in its production.
If one of the above-mentioned conditions is met, the Canadian importer would have to be in possession of a properly completed NAFTA Certificate of Origin at the time of the importation of the good. This certificate needs to be issued by the exporter or producer of the good. It is a legal document that carries significant consequences for the importer, as they are left holding the bag if they are in possession of an improperly completed Certificate of Origin.
So have borders gone away with the implementation of the NAFTA agreement? Hardly. As Customs revenues are decreasing because of the falling duty rates, an additional focus has been placed upon border controls. Goods imported into Canada must be: reported at the border, properly classified under the Harmonized System (HS), identified in terms of their proper origin, properly valued, and clearly and legibly marked in accordance with Canadas marking rules. If these steps are not carried out, penalties and other more severe consequences can result.
To date, one of the areas most heavily focused on in terms of Customs post-entry verification review has been on NAFTA compliance. Scrutiny of Certificates of Origin is steadily increasing, as is the origin and tariff classification analysis, which underlies these certificates. With the Canada Customs and Revenue Agencys changing focus on borders and border controls, importers are slowly waking up to the fact that they are required by law to report trade data correctly.
Whats on the horizon? Some major initiatives that are on the horizon as part of the Customs Action Plan 2000 - 2004 include the Administrative Monetary Penalty System (AMPS), Customs Self Assessment (CSA) and Carrier Re-engineering. All these initiatives will have an impact on the importer in one way or another. Under AMPS, progressive penalties will be imposed upon the Canadian importer/exporter that will range from initial warnings to $25,000 per incident. Under CSA, importers bringing goods into Canada from the United States will be allowed the option of simplified release on as few as three data elements and the option of accounting for their goods on a monthly basis, based on their internal financial business systems. Third, Carrier Re-engineering will cover areas such as mandatory HS at time of release, along with other data elements that importers were previously allowed five days to provide to Customs.
The year 2001 will contain many surprises for importers that are not prepared. Importers will need to bolster their in-house customs departments and/or begin working even more closely with their customs brokers to ensure that they are not exposing themselves to any non-compliant trade practices. Time will tell which companies have invested wisely.