NAFTA Rules of Origin — Part 5
by Sue Senger | Format
The objectives of the North American Free Trade (NAFTA) Agreement, as elaborated by its principles and rules, are to:
- Eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the parties;
- Promote fair competition within the free trade area;
- Substantially increase investment opportunities in the participating territories;
- Provide adequate and effective protection and enforcement of intellectual property rights in each party’s territory;
- Create effective procedures for implementing, applying and administering the agreement and resolving any disputes;
- Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this agreement.
In the past four articles, we’ve looked at the correct way to fill out column number seven—Preference Criterion—on the NAFTA Certificate of Origin. These options are:
- Preference Criterion A: Goods wholly obtained or produced entirely in Canada, Mexico or the United States containing no foreign materials or parts.
- Preference Criterion B: Goods may “originate” in Canada, Mexico or the United States—even if they contain non-originating materials—if the materials satisfy the rule of origin specified in General Note 12. A tariff shift or regional content rule will apply.
- Preference Criterion C: Goods originate if they are produced entirely in Canada, Mexico and/or the United States exclusively from materials that are considered to be originating. This includes goods made of parts and materials that themselves meet NAFTA rules of origin.
- Preference Criterion D1: Unassembled goods and goods classified with their parts.
- Preference Criterion D2: Goods produced using materials imported into a NAFTA country that are provided for as parts according to the Harmonized System, and those parts are classified in the same subheading or undivided heading as the finished goods.
- Intermediate material: An intermediate material is a self-produced material, designated by the producer, that meets the rules of origin and that is incorporated into the final good.
This article will address Accumulation, De Minimis, and Fungible goods and materials.
When producers determine the regional value content of goods, the entire value of the materials used to produce the goods that they acquire from suppliers is considered as wholly originating or wholly non-originating as appropriate.
The accumulation provision allows the producer or exporter of goods to choose to include as part of the goods’ regional value content any regional value added by suppliers of non-originating materials used to produce the final goods. Accumulation allows the producer to reduce the value of the non-originating materials used in the production of the good by taking into account the NAFTA inputs incorporated into those non-originating materials.
This applies when a producer is unable to satisfy a regional value content requirement base on:
- His own processing costs, or
- The value of originating material used to produce a good.
Accumulation allows the producer to include any regional value added in the NAFTA territory by other parties that produced non-originating materials that were subsequently incorporated into the final good. The conditions for using accumulation are:
- Producers/exporters who choose to use accumulation must use the net cost method to calculate any regional value content;
- Producers/exporters of goods must obtain information on net cost and the regional value content of non-originating materials used to make their goods from the producers (suppliers) of those materials;
- All non-originating materials used in the production of the goods must undergo the tariff classification change set out in General Note 12, and the goods must satisfy any applicable regional value-content requirement entirely in the territory of one or more of the NAFTA countries, and
- The goods must satisfy all other applicable requirements of the rules of origin.
Although requiring a change in tariff classification is a very simple principle, it requires that all non-originating materials undergo the required change. If even a very low percentage of the materials do not undergo the tariff change, the exporter would not be able to classify the goods as originating.
To overcome this obstacle, NAFTA contains a de minimis provision that allows goods to qualify as originating even when a small percentage (seven percent in most cases) of the transaction value of the goods does not undergo the required change. In addition, where failure of materials to undergo a required change in tariff classification triggers a requirement for a minimum regional value content, the calculation of that content is waived if the value of all non-originating materials used in the production of the goods is not more than the specified de minimis amount.
Exporters who want to use this option must read article 405 of the NAFTA Agreement. Many additional requirements and exceptions are listed.
Fungible Goods and Materials
Article 415 of the NAFTA defines fungible goods as goods that are interchangeable for commercial purposes and have essentially identical properties. When a producer mixes originating and non-originating fungible goods so that physical identification of originating goods is impossible, the producer may determine origin of those goods based on any of the standard inventory accounting methods (e.g., FIFO, LIFO) specified in the Uniform Regulations. These provisions apply equally to fungible materials that are used in the production of a good.
For example, Company X of Mexico supplies clips to airplane manufacturers throughout North America. Some of the clips X supplies originate in Mexico and others are made in China. All of the clips are identical construction and are intermingled at X’s warehouse. On January 1, Company X buys 3,000 clips of Mexican origin; on January 3 it buys 1,000 clips of Chinese origin. If Company X uses FIFO inventory procedures, the first 3,000 clips it used to fill an order are considered Mexican regardless of their actual origin.
The NAFTA Agreement provides many options for exporters to qualify their goods for preferential duty treatment. Next month’s article will address accessories, spare parts and tools, and packaging for retail sale.