The long awaited NAFTA 2.0 agreement between Canada - US - Mexico is due to be implemented on July 1, 2020. This is part 1 of a Q&A styled 4-part series.
“What’s In A Name?”
As William Shakespeare famously wrote, ”What's in a name? That which we call a rose by any other name would smell as sweet.” In other words, depending on which country you are in or speaking to, the new agreement may be referred to by different acronyms. In Canada the agreement is referred to as “CUSMA”; in the US it is known as “USMCA” and in Mexico, they call it “T-MEC”.
Regardless of where you are in the world, the agreement is one in the same.
What Does This Mean For Importers?
After July 1st, 2020, a Certification of Origin with a minimum set of data elements (found in part 4 of this series) will be required instead of a NAFTA Certificate to claim a reduction in duty. There is no prescribed format or formal certificate for the CUSMA/USMCA/T-MEC, so the party certifying the good(s) can list the required data elements on a commercial invoice or any other document that accompanies the shipment.
NAFTA Certificates will not be accepted to reduce duty under this new agreement. Why? Because NAFTA certificates confirm the goods they reference meet the rules of origin of NAFTA. CUSMA/USMCA/T-MEC and NAFTA have different rules of origin, ergo different certification requirements.
If A Product Qualified Under NAFTA, It Qualifies Under CUSMA/USMCA/T-MEC Right?
Not necessarily. Although both agreements have similar rules of origin, you would need to refer to the new Rules of Origin for your product(s) to ensure that they would continue to qualify as an originating good.
For example, this is the NAFTA rule of origin for Chapter 4 of the customs tariff:
- ”04.01-04.10 A change to heading 04.01 through 04.10 from any other chapter, except from tariff item 1901.90.aa.”
And this is the Rule of Origin for CUSMA/USMCA/T-MEC for the same chapter:
- “04.01-04.04 A change to heading 04.01 through 04.04 from any other chapter, except from tariff item 1901.90.aa.”
- ”04.05 A change to heading 04.05 from any other chapter, except from tariff item 1901.90.aa or 2106.90.dd.” and
- ”04.06-04.10 A change to heading 04.06 through 04.10 from any other chapter, except from tariff item 1901.90.aa.”
As you can see, the new agreement has broken down the HS tariff further to add further specific exemptions for products of head 04.01 through 04.10 to meet before they would qualify for reduced duty. In order to know if your product qualifies for reduced duty under the new agreement, you will need to review the rules of origin for your products.
What Are Rules Of Origin?
Rules of Origin are a set criteria that must be met in order to determine if a product will qualify as originating under a free trade agreement and therefore enjoy reduced duty. All free trade agreements have these and some rules are simpler than others.
The Rules of Origin encompass both transportation and processing rules. The most common transportation rule is that in order to claim preferential duty rates the goods must be transported:
- Directly from the country of origin; or
- Remain in customs control when it transits through a party that is not part of the free trade agreement.
In other words, goods cannot enter the commerce of a country that is not a signatory of CUSMA/USMCA/T-MEC and still be able to enjoy reduced duty under the new agreement, if imported to Canada.
One of the rules of origin that is commonly found in all agreements is that goods must be “wholly obtained” or “produced entirely in the territory of one or more of the Parties”.
In the case of CUSMA/USMCA/T-MEC a few examples of “wholly obtained” goods are:
- a mineral good or other naturally occurring substance extracted or taken from there;
- a plant, plant good, vegetable, or fungus, grown, cultivated, harvested, picked, or gathered there;
- a live animal born and raised there;
For goods that are “produced entirely in the territory of one or more of the Parties”, more complex rules of origin may have to be applied to determine if those products would be considered qualifying. As although they are produced entirely in the territory of one or more of the parties, they may be produced with materials sourced from all over the world. In order to determine eligibility under those circumstances reference would be made to the Product-Specific Rules of Origin.
In some cases depending on the HS code of the finished product, or the value of non-originating goods in the finished product, the Specific Rules of Origin may allow the product to still be claimed as a qualifying good.
In the case of goods produced with non-qualifying materials it is recommended that a CUSMA/USMCA/T-MEC Advance Ruling be obtained to ensure a proper declaration is made to the designated Customs authorities.