Friday, September 15, 2006

Friday Question: NAFTA Preference Override

Someone from Italy visited my site this week via the search "NAFTA preference override." I am going to assume that means someone is sitting at a desk in Rome right now trying to make sense of the crazy NAFTA marking rules and, in particular, the NAFTA preference override. I'm here to help, paisano.

The first thing to understand is that the regular NAFTA rules of origin are designed only to tell you whether something is originating in North America. They do not tell you what country in North America. Normally, that would not be a big deal. Once you know it is originating, you could just apply the normal substantial transformation rules to figure out how to mark it. But, this is not normally. First, because Canada had a head start on duty reduction under the U.S. Canada Free Trade Agreement, the rates for Canada and Mexico were not always the same. Now, they are in all but a few sensitive products from Mexico. Second, there is a general understanding that Mexico and Canada did not like the substantial transformation rule because it is somewhat subjective. They wanted a more objective and, therefore, predictable test. And that is how we ended up with the NAFTA marking rules in 19 CFR Part 102 and, in particular, the NAFTA preference override in 19 CFR 102.19.

The NAFTA marking rules are applicable to all "goods of a NAFTA country." You know if something is a good of a NAFTA country by applying the same rules. Very circular. It is safe to assume that cuckoo clocks from Switzerland are not goods of a NAFTA country but if there is any content from or production in Mexico or Canada, you should run through the NAFTA marking rules to be sure.

Sometimes, stange things happen. You can run through the NAFTA rules and end up with more than one country as the country of origin. When that happens, and if the goods are NAFTA originating, then the country of origin is the single NAFTA country in which the goods last underwent more than minor processing. This is just a tie breaker provision.

The second thing that happens is that you might end up with the U.S. as the country of origin. That causes problems, although it should not. You might think that if you are importing U.S. goods from Canada that you could make a NAFTA claim. The problem is that you can't. There is no NAFTA rate for U.S. goods. You need to treat it as U.S. goods returned or make entry at the MFN rate. That is, of course, silly. There should be a "US" NAFTA code just like there is a CA and MX NAFTA code. That would allow for some flexibility at the border and permit uniform documentation for companies that move stuff back and forth a lot.

But, the way it works is this: if the country of origin turns out to be U.S., then the second part of the NAFTA preference override applies. Under that rule, the goods are treated as if they originate in the last NAFTA country in which they were advanced in value or improved in condition. But, this treatment is limited to figuring out duty. So, if you paint some U.S. origin rocking chairs in Canada, they keep their U.S. origin for marking purposes. For duty purposes, they are treated as if they come from Canada. This lets you make a NAFTA claim.

Make sense? No, it doesn't. Again, there should be a "US" NAFTA rate, but I don't write the rules.

There is a more lawyerly discussion of this on my firm's web site here.


Anonymous said...

When importing US originating textiles that were processed in Canada, the origin for customs purposes remains US, but the origin for duty purposes becomes Canada as far as I understand (NAFTA override). In order to benefit from preferential tariff treatment, the customs paperwork and NAFTA certificate must state the origin as being Canadian.

However, if I'm not mistaken, the MID for the import must reflect the entity performing the origin conferring operation, which in this case is the US (as per 19 CFR 102.21).

This poses a problem. When presenting US customs with a US MID and paperwork (NAFTA Cert, invoice) showing Canadian origin, more often than not, shipments are held by US customs at the border.

Importing the goods as US goods returning is not an option either as the product has been advanced in value while in Canada.

To work around this, a Canadian MID was used to complement the Canadian origin on the NAFTA certificate/invoice, however this poses another problem when dealing with the Berry Amendment and similar legislation requiring 'US made' products.

Catch 22? What to do?!

electronic seal said...

Nice post about NAFTA Preference Is it really true that the regular NAFTA rules of origin are designed only to tell you whether something is originating in North America. They do not tell you what country in North America.How to get that data