EXPORT MONTANA
OFFICE OF TRADE & INTERNATIONAL RELATIONS
North America Free Trade Agreement (NAFTA)
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OVERVIEW
The North America Free Trade Agreement (NAFTA) became effective on January 1st, 1994. In its purest form, the NAFTA treaty is an agreement among the three NAFTA territories, Mexico, Canada, and the United States, to standardize trade regulations, open markets, and eliminate import tariffs on trade originating within the regions. On January 1st 1994, tariffs were eliminated on fifty percent of the tariff classifications. The remaining tariff classifications will be reduced to zero over a fifteen-year period.
NAFTA RULES OF ORIGIN
The key to NAFTA is in the Rules of Origin for goods traded among the three NAFTA members. To qualify for the preferential NAFTA tariff, goods are required to either originate entirely within the NAFTA territories, or contain a certain percentage of value that originates from within the NAFTA territories. These rules are strictly enforced to eliminate the potential for goods from other parts of the world coming into the NAFTA territory at the preferred NAFTA treaty tariff, even though none, or little of the raw materials or labor included in the product originated from the member countries.
To qualify as "wholly originating", products must include raw materials or parts grown or produced within the three NAFTA countries and all labor necessary to manufacture or produce the product must have been performed within the territories. Products may also qualify for preferential NAFTA treatment even though some or all of their raw materials or ingredients may have come from outside the NAFTA territories. Complex, detailed formulas have been established to determine the percentage of materials and labor that are contributed from within the NAFTA territories and from outside the territories. There is no blanket percentage number for all products that determines NAFTA qualification. Exporters wishing to take advantage of the benefits of NAFTA with products that are not "wholly originating" should determine the Harmonized Code number of their product and check with the destination NAFTA country to learn what minimum NAFTA content percentage is required.
EXPORTERS WISHING TO TAKE ADVANTAGE OF NAFTA MUST USE THE SPECIFIC 'NAFTA CERTIFICATE OF ORIGIN' DOCUMENT FORM IN THEIR DOCUMENTATION PACKAGE.
Shipments without this specific form will not receive the preferred NAFTA treatment.
WHAT NAFTA DID
- Immediately eliminated 50% of the tariffs on January 1, 1994, with the remaining 50% to be eliminated over a 15-year period.
- Set out transparent regulations and qualifications for goods traded between the NAFTA members. Example: US and Canadian goods shipped into Mexico meet the same regulations and requirements as domestic Mexican products.
- Imported products do not have to meet additional requirements to be allowed into the marketplace. All regulations and requirements are published and open.
- Opened government procurements and projects to qualified bidders from throughout the NAFTA territories.
- Eliminated the legal requirements to have a native local partner or 51% locally owned entity as the nominee bidder.
- Insured transparency of the bid project by requiring public posting of the bid specifications. Allowed 100% ownership of property and corporations by NAFTA territory individuals or entities. NOTE: Certain strategic properties are excluded.
- Set out a NAFTA arbitration panel to resolve disputes that may arise under the treaty. The actions and governing rules of this arbitration panel are published and are transparent.
WHAT NAFTA DOES NOT DO
NAFTA does not mean "free for all" on the borders. Documentation is still required. In many cases, NAFTA documentation requires more paperwork than before. NAFTA does not immediately allow for all products to enter free of tariffs.
Fifty percent of the product tariff classifications remain, with the tariff rates declining over a 15-year period to zero. Exporters should check their particular product classifications to determine their particular rates, if any. Certain products may require specific permits or meet specific quality or safety standards before entry.
NAFTA BENEFITS TO EXPORTERS
Exporters from within the NAFTA territories may enjoy a competitive benefit when competing against non-NAFTA vendors. With import duties ranging up into double-digit percentages for non-qualifying goods, NAFTA products can be more price competitive. Manufacturers may be able to source raw materials from less expensive NAFTA regions, bring those materials into their manufacturing stream more economically, and achieve a greater competitive advantage domestically and internationally.
Both manufacturers of products or service providers can take advantage of the opportunities to bid on government contracts, knowing full well the bid qualifications and performance expectations of the buyer. Opportunities to joint venture with other NAFTA qualified companies increase the ability of small to medium size businesses to participate in these procurements.
WHAT EVERY NAFTA EXPORTER SHOULD KNOW
Exporters intending to take advantage of NAFTA benefits should be fully aware of the rules and requirements of the treaty. The NAFTA Rules of Origin are specific and can be complex. Documentation requirements under NAFTA are strict. Documents not properly completed, or shipments lacking proper documents may be subject to seizure, greatly increased tariffs and penalties. Know the rules before shipping or quoting.The International Trade Center staff is experienced in the NAFTA rules and paperwork requirements.
