Canada: NAFTA Rules Of Origin Renegotiation – Make Trump An Offer He Cannot Refuse

Last Updated: February 6 2017
Article by Cyndee Todgham Cherniak

The Trump Administration has signaled that one of first areas of interest for North American Free Trade Agreement ("NAFTA") renegotiation is the rules of origin.  Rules of origin are boring, technical rules in Annex 401, which are permit goods to receive preferential duty-free treatment.  Only goods that originate in a NAFTA country are entitled to receive the benefits of preferential NAFTA tariff rates. Importers of goods that do not originate in a NAFTA country may have to pay duties at the MFN rate, which are a cost.  Unrecoverable costs must be recovered by charging higher prices to Canadian consumers.  This can be a problem when the market will not accept the higher prices.  Also, Canadian manufactured goods may not be competitive in the global market if there are embedded unrecoverable duties.  As a result, there are good reasons to care about any changes to the rules of origin.

Change can be good.  It is possible for changes to NAFTA rules of origin to BENEFIT Canadian importers.  The issue we must focus on is whether American manufacturers can sell more to Canadian importers if the rules of origin are amended to permit duty-free treatment. If American manufacturers can sell more, they will have to produce more.  If American manufacturers can produce more, more workers will be hired.  This is the core of President Trump's agenda – American jobs.  How can Canada make Trump offers that he cannot refuse?

I will save for a different post about how more restrictive rules of origin might harm Canadian automobile manufacturers,  I would like to focus this post on how Canadian importers can benefit from a win-win NAFTA rules of origin renegotiation. Canadian importers who have been denied NAFTA preferential tariff treatment should come forward quickly to inform the Canadian government of possible win-win negotiating opportunities. There is a great opportunity for Canadian importers so long as Canadian manufacturers are not disadvantaged.  Let me explain.

Goods do not have a birth certificate and many manufactured or processed goods are made from goods from more than one country.  This is why rules of origin are needed.  When the NAFTA negotiators were drafting the rules of origin, they drafted some rules restrictively in order to limit the availability of the preferential duty-free tariff rate.  The world has changed and some of the restrictive rules of origin are not working as intended.  These are the rules that need to be amended.

As a Canadian customs lawyer, I have seen many Canadian importers denied preferential NAFTA treatment by the Canada Border Services Agency ("CBSA").  The NAFTA allows the Government of Canada to verify the records of U.S. and Mexican exporters when NAFTA certificates of origin are provided to the Canadian importer.  Over the past 20+ years, the CBSA has applied the NAFTA rules of origin as written and determined in many cases that the goods imported into Canada did not satisfy the rule of origin.  NAFTA duty-free treatment was denied and, sometimes, large assessments against the Canadian importer were issued.

For example, the textile rules of origin often do not work in the favour of American manufacturers (and there are no Canadian textile manufacturers to protect).  The CBSA determined that an American manufacturer of theater curtains did not satisfy the NAFTA rules of origin in circumstances where the curtains were manufactured in the United States from fabric manufactured in the United States.  A fibre-forward rule of origin applied and required that the fibres be manufactured in the United States.  However, there were no U.S manufacturers of that type of fibre.  What this means is that there are opportunities to amend the NAFTA textile rules of origin to reflect the present circumstances of the U.S industry.

In another case, the CBSA denied NAFTA tariff treatment to protein bars and other food supplements manufactured in the United States by a significant player in the growing health foods industry.  A tariff shift rule of origin applied to each ingredient in the protein bars and foods supplements. However, one ingredient did not meet the rule of origin and the de minimis rule did not solve the problem.  As a result, the protein bars and foods supplements were subject to a high duty making the consumer products more costly in Canada.  The denial of NAFTA benefits decreased sales in Canada by over 50%.

In another case, a steel product was determined to not originate in the United States because it did not undergo the required tariff shift.  This negatively affected the output of an American steel plant.

Another area for consideration is whether NAFTA needs a rule to address antidumping and countervailing duties on goods that are substantially manufactured in the United States.  Should aluminum handles and balusters and railings manufactured in the United States from imported aluminum be treated as originating in the United States?  Should screws manufactured in the United States manufactured from duds/blanks from Chinese Taipei be considered to originate in the United States?  Canada has two interesting Canadian International Trade Tribunal cases (heard together) known as Ideal Roofing and Havelock Metals.  In these cases, the Tribunal used a dictionary definition for "origin" and "originating" because the NAFTA and the WTO Antidumping Agreement were silent on the issue of where goods are considered to originate for antidumping purposes.

The NAFTA rules of origin can be renegotiated to help Canadian importers and U.S. manufacturers at the same time.  The problem is that the negotiators may not know what amendments will benefit Canadian businesses.  President Trump wants to move quickly and Canada needs to be able to put opportunities on the table.  Any request that is followed by "This will benefit U.S .business" will likely lead to a positive reaction.  Canadian importers who have been denied NAFTA preferential tariff treatment by the CBSA due to a technicality in the application of NAFTA rules of origin should come forward.  Do not assume that the Government of Canada knows what you need. The negotiators will need your help in identifying NAFTA rules of origin by H.S. tariff code number.  The negotiators will need to understand the technical problem with the rule.  With this information, the negotiators may draft amended rules that help Canadian businesses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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