The Chamber of Commerce of Metropolitan Montreal

NAFTA: How to prepare for the unpredictable

After he imposed a tariff on Canadian softwood lumber, what should you expect from unpredictable President Trump when it comes to renegotiating NAFTA? The truth is, no one knows. Let’s take a look at this Agreement to understand its regulations, the benefits for Canadian companies, and the first thing exporters should do to prevent risks.

The benefits of NAFTA for our Canadian exporters

NAFTA is an agreement that entered into force in 1994 and benefits both American and Canadian exporters because it prevents any customs duties from being added to exported products that have a NAFTA Certificate or Origin. According to the Customs Border Protection (CBP), in 2016, 28% of American imports were claimed under this agreement, amounting to US$591 billion, of which Canadian products accounted for more than 40% (second behind Mexico). Keep in mind that the CBP needs American authorities to target non-valid certificates in order to protect legitimate trade and the national economy.

Rules you need to understand

What exactly is a non-valid certificate? As an instructor on customs compliance, I often deal with exporting companies that misunderstand NAFTA’s rules.

To benefit from the Agreement and reduce American customs duties to zero, exporters need to fill out the NAFTA Certificate of Origin. Unfortunately, many fill out this legal document without understanding the rules of origin. For instance, it is incorrect to believe that a product with 50% of its components made from Canadian materials is automatically eligible for NAFTA. There are approximately 1,500 rules of origin in the Agreement and while some of them might call for North American materials, many rules focus on the transformation of raw materials. Take a simple aluminum coupling manufactured in Canada and exported to the U.S. If this coupling was made from a pipe that comes from a country that is not a member of NAFTA, the product does not comply with the rules of origin, even though it was manufactured in Canada. As a result, a 5.7% customs duty will be imposed in the U.S. because not enough manufacturing took place in the country to make it a NAFTA product. The source of raw materials is extremely important.

It is important to fully comply with these regulations and to understand the rules of origin of your exported products. You need to thoroughly assess whether a product you are exporting, but are not the manufacturer, complies with NAFTA. When you sign a “NAFTA Certificate or Origin” you put yourself at risk for verification by American customs authorities. In such a case, will you be able to prove your product is eligible with the right paperwork, identify your sources of supply, etc.? Once you sign the Certificate, you are responsible for a period of four years.

Tips for preparing for the unpredictable

Many clients are worried, and rightly so, that NAFTA will be annulled or renegotiated. The first thing to do is to find out the duty rates on your exported products if the Agreement is annulled. Steel garage doors or furniture will maintain a 0% customs tariff, whether they are eligible for NAFTA or not because their financial impact is negligible. However, duties will be higher for some industries such as food, textile, aluminum products, chemical products, etc. It’s important to start evaluating the risks in these sectors. Renegotiating NAFTA will have economic consequences on both sides of the border because it is likely that exporting companies will absorb this tax through the cost of their products.

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