The North American Free Trade Agreement (NAFTA), implemented in 1994, created the world’s largest free trade area, stimulating exports between the U.S., Canada, and Mexico by eliminating tariffs and creating international rights for business investors. NAFTA ultimately produced sales of $17 trillion, establishing a model that was adopted globally. For new members, however, managing the red tape can be daunting and potentially risky.
To take advantage of the reduced duties afforded by NAFTA and other free trade agreements, exporters and importers have to verify the eligibility of their products. The qualification process involves classifying products via the Harmonized Classification System and NAFTA rules of origin. Each of the three partner governments may audit an importer, exporter, or producer of NAFTA products in any of thee three member countries, and hefty fines are levied on non-compliant manufacturers or distributors.
Best Practices for Firms Qualifying Product for NAFTA Eligibility
Qualifying products under NAFTA and other trade agreements such as CAFTA, Australian, and Singapore programs, can be a challenge but one that reaps significant savings when trading internationally. The following best practices recommended by a 2010 Global Trade Management study provide guidelines for developing a documented and verifiable process to meet NAFTA qualification compliance regulations, as well as lower the risk of fines for non-compliance.
- Product qualification requires expertise with classification programs, trade laws, and NAFTA rules of origin such as Tariff Shift Concepts. This process is labor intensive, so companies are well advised to align trained staff and resources to the project on an annual basis. Given the complexity of classification and NAFTA rules of origin, companies that allocate trade agreement qualification to departments with fiduciary responsibility generally reflect high levels of compliance. Also, for companies with multiple sites, centralized trade agreement compliance programs yield better compliance results as well.
- Review the list of products exported to NAFTA countries and determine which products carry the highest duty rates in the receiving country. The greatest savings will be realized for product with high duty rates or highest volume of exports. Offset the number of products to be NAFTA verified against the duty savings to quantify the bottom-line impact.
- Use cost savings data to offset training program costs for staff. The ability to monitor trade agreement programs through documented savings can enable strong compliance programs and also better support sales -- lower costs to the end customer makes the exporter’s product more competitive.Consider the estimated savings that would increase if an automated system was utilized. Automation of NAFTA programs has the ability to improve processes and expedite the confirmation of information needed to qualify products for NAFTA as well as communicating and archiving it. Automated systems, however, don’t remove the need for internal expertise on classification and rules of origin.
- When soliciting NAFTA certificates from producers/exporters, it is imperative that the supplier or exporter have completed NAFTA certificates for their customers before shipping product. In most cases, suppliers or exporters focus on securing NAFTA certificates and supporting documentation in the latter part of the year in order to be able to sign NAFTA certificates for the coming year.Importers of NAFTA qualifying product generally seek the NAFTA certificates from their supplier/exporter by December 31st for products to be shipped in the next calendar year, well in advance of the shipment arriving in their country. Importers cannot legally declare the NAFTA reduced duty benefit without the certificate on file.
- Conduct annual audits of your trade compliance programs – whether import or export oriented and include alls trade agreement reviews. Working with experts will expedite the process, ensure accuracy with information declared to Customs, and lower the risk of non-compliance for both current and future shipments.
This post was published on November 11, 2010 and updated on March 6, 2015.