Wednesday, August 05, 2009

A Cry for Help (Amended)

Note: I cleaned this up a bit for clarity and to eliminate evidence of my poor typing skills.

An anonymous commenter asked for an explanation of the difference between NAFTA marking, NAFTA originating, and origination for purposes of government procurement. That's a tall order, but here is a start.

As I said here, determining whether some good is NAFTA originating does not tell you its country of origin. The NAFTA rules of origin embodied in HTSUS General Note 12 only tell you whether the article can be considered to have North American origin and, therefore, can be granted NAFTA duty benefits on entry. But, if the thing contains materials or labor from more than one NAFTA country, the Note 12 rules do you no good in figuring out what country to declare as the origin and how to mark the product itself.

For that, you have to turn to the so-called NAFTA marking rules. Those are not in HTSUS 12(t). [Repeat that to yourself if you must.] Rather, they are in the Customs Regulations at 19 CFR Part 102. For my Canadian friends, look to D-Memo 11-3-3. I think I pretty well explained the NAFTA marking rules in the earlier post. But, I left off one detail.

A problem sometimes arises in the NAFTA context. It is possible to have a NAFTA originating good under HTSUS Note 12 that was processed in Canada or Mexico but ends up having the U.S. as the country of origin. That's what happened to HQ H046759 (Jun. 29, 2009). You can tell this is complicated because the sole purpose of this ruling is to modify a previous ruling in which Customs and Border Protection messed up the analysis. Stuff happens.

The merchandise at issue in the ruling was polyurethane foam product. The merchandise consisted of a liquid manufactured in the U.S., which was subsequently processed in Mexico by the addition of a "blowing agent" to produce the foam, which was then exported back to the U.S. In the original ruling, CBP determined that the merchandise is originating and then opined that it should be marked "Made in Mexico."

In the new ruling, CBP did a better analysis of the NAFTA marking rules and determined that the country of origin for the foam was the United States. This was a result of the fact that the foreign material (i.e., the non-Mexican materials) failed to undergo a section 102.20-specified tariff shift (i.e., a shift specified in the marking rules). In that case, the country of origin is based on the material that imparts the essential character to the whole (excluding materials that are permitted to shift). That single material was the U.S.-origin liquid.

But, if the country of origin is U.S., how does one make a NAFTA claim? You will recall that there are only two permitted NAFTA claims: MX and CA. An importer of a U.S.-origin, NAFTA-originating product cannot just declare MX or CA to be country of origin to facilitate the NAFTA claim. Rather, the NAFTA Preference Override comes into play. Under the NPO, 19 CFR 102.19(b), when the good is both originating and the country of origin is determined to be the U.S., then for duty purposes the country of origin is the country of last production. In this case, that permits a NAFTA claim with MX as the special program indicator.

The NPO, however, says nothing about all other purposes. This is the part CBP is correcting. For marking and all other purposes other than determining the rate of duty, U.S. is still the right choice. That means that the goods need not be marked at all because, although they were finished in Mexico, they are not "foreign products."

Isn't it great how these guys thought of everything?

Now, just to be complete, what else does the NAFTA origin NOT do for us?

First of all, just because a product is of U.S. origin for purposes of the marking regulations, that does not mean it is "Made in USA" for purposes of advertising and labeling. Advertising the U.S. origin of a product falls under the jurisdiction of the Federal Trade Commission, which has its own test for what is American. According to the FTC, a product is "Made in U.S.A." only if all or substantially all of the labor and materials are American. There is no strict percentage of content test but whatever the magic number, it is way more than the 50% level found in NAFTA rules (plus, those rules count U.S., Canadian, and Mexican content as all originating). If a product fails the FTC test but the manufacturer wants to advertise some aspect of American involvement, it is possible to make a qualified claim such as "Assembled in the U.S. of foreign and domestic components." Marketing people never seem to be happy with that. Here is the FTC policy statement on Made in USA claims.

I am often asked how NAFTA origin relates to other trade agreements. The short answer is that is doesn't. Each agreement has its own set of rules based on the trade conditions between the parties. Mexico and the U.S., for example, have very different concerns than do the U.S. and Australia. That's because of economic factors (e.g., employment levels, labor rates, etc.) and geographic factors (i.e., few poor Australians are likely to try and sneak into the U.S. and few U.S. companies are likely to shift production to Australia). The rules of origin of the various free trade agreements reflect those different concerns. For example, a product might need a certain regional value content to qualify under NAFTA but require only a tariff shift for the Australia agreement. Other agreements, like the one with Israel, have no tariff shift requirements at all. So, you cannot assume that your NAFTA-qualifying product necessarily qualifies under another agreement. Plus, don't forget that Mexican and Canadian content count in your favor under NAFTA but against you in all other agreements.

OK, I've stalled all I can. Now, about government procurement. This is a bit of mess. A safe place to start is with the statement that the NAFTA rules of origin are not applicable in the procurement context.

First, some background, under U.S. Federal Law, government procurement rules give a preference to U.S. goods and services. The Buy American Act of 1933 ( 41 USC 10a, et. seq.) requires federal agencies to purchase American materials for use in the U.S. unless an exceptions applies. Exceptions include that the material is not available in the U.S., the foreign product is substantially less expensive, or national security favors buying the more expensive U.S. product). Obviously, these rules skew the market away from the most efficient producer.

In 1979, the GATT Agreement on Government Procurement was adopted. Not all WTO members have adopted it, making it "plurilateral." Under this agreement (updated in 1994), contracting members give each other national treatment for purposes of government procurement for covered purchases. That means that a U.S. bidder is given the same status as, say, a bidder from Iceland (which is a member to the agreement). In that case, the Buy American Act does not apply and the question is whether the goods involved originate in Iceland. The test to be applied is the same test the U.S. uses to determine if something originates in the U.S.: substantial transformation. Same goes for NAFTA countries, which pursuant to NAFTA Article 1003, have agreed to grant national treatment to one another in procurement at the federal level.

If, on the other hand, the country is not a party to the WTO procurement agreement or an equivalent undertaking in another agreement, all bets are off and the Buy American Act applies. That means the product will have to have 50% American component value to qualify for the preference granted under the Act. And, to confuse things further, some agencies (notably the Department of Defense) have different rules.

So, in rough summary, the NAFTA origin status of your goods has almost nothing to do with government procurement. Chapter 10 of the NAFTA does provide lots of procedural rules for procurement and dispute resolution, but those don't relate to the origin of the merchandise at issue. Chapter 1004 permits the future application of the NAFTA marking rules as a basis for procurement determinations, but only if the marking rules become the generally applicable rules of origin (which CBP would like to do).

By the way, NAFTA looks as if it makes the procurement rules applicable to state and provincial governments. Article 1001(1)(a) expressly includes "state or provincial government entit[ies] set out in Annex 1001.1a-3." Funny thing--that annex is blank except for a promise to revisit the issue in 1998.

Which leads to the last point: state, provincial, and municipal governments have their own local purchase programs. Many are confusingly called "Buy America" rules. The origin rules for these programs vary, and for that . . . well . . . you are on your own (or you could actually hire me).


Anonymous said...

thank you

Anonymous said...

On this issue, all tires made in the US must have a DOT number marked directly on the tire which indicates, among other things, what plant the tire was made in the USA and also tires made in the USA usually, if not always, have a mark on the tire "Made in USA". Do either of these markings have any significance from a NAFTA country of origin perspective? It would seem all tires made in the USA meet the country of origin tariff classification change requirement for their component parts.