It’s November, or “NAFTA season”, and that means most North
American companies are knee deep in NAFTA certificate gathering. They are
requesting certificates from all their vendors for 2016, and already receiving
requests from their customers for the same. If you are involved in the supply
chain for a North American goods manufacturer, you are likely familiar with
what I’m talking about. The process is simple, but depending on the scale, can
be very time consuming. Requesting and tracking the certificates of origin from
hundreds or thousands of vendors, while simultaneously responding to requests
from the same amount or more of customers.
Article 501 of NAFTA states that a certificate must be
completed by the exporter, if the import in question is going to claim NAFTA
status. Article 502 requires the importer to have this certificate in their
possession at the time of declaration. Since most companies use a 1 year
blanket period for their certificates, starting January 1, that means autumn of
each year is a scramble to secure certificates for the coming year, so they are
in possession by the earliest possible date of declaration (January 1).
That’s the certificate of origin process, but it’s only half
the battle (if that much!)...
If you are an operation that merely purchases and resells goods in the same condition, the above process may be adequate for you. You can export goods and issue valid certificates based on the vendor certificates you possess. You can safely import those same goods on the strength of the same certificates. If only all of our lives were so easy. Have you ever noticed that the text of NAFTA has multiple chapters and dozens of articles, and the above process requires only 2 to spell it out? There’s a lot more in that agreement than articles 501 and 502…
If you are an operation that merely purchases and resells goods in the same condition, the above process may be adequate for you. You can export goods and issue valid certificates based on the vendor certificates you possess. You can safely import those same goods on the strength of the same certificates. If only all of our lives were so easy. Have you ever noticed that the text of NAFTA has multiple chapters and dozens of articles, and the above process requires only 2 to spell it out? There’s a lot more in that agreement than articles 501 and 502…
If you are a manufacturer, you must deal with the full truth
of Chapter 4 and Annex 401. This is the part of NAFTA that takes the real time
commitment, and unfortunately it’s the least understood part. The rules of
origin in Annex 401 cover hundreds of specific rules that you must use to
determine if your manufactured product is NAFTA eligible. Soliciting vendor
certificates is a critical part, but only a small part of this process. You
then use the data from those certificates to make decisions based on the
appropriate rule of origin. The “appropriate” rule is driven by the tariff
classification of your finished good. Get the classification wrong and all your
work is irrelevant. Furthermore – the rule test is not a static process – if
any ingredient or formula changes occur you must check again to see if the
change impacted the result.
To be completely honest, most large, complicated
manufacturing operations can’t manage this process without automation. To do so
manually would require excessive staffing levels and take too long. You would
be lucky to complete the process in time for next year’s round of blanket
certificates! SAP Global Trade Services is a good example of an automation tool
that can help you with this.
This is confirmed by a recent study which found that 70% of
companies do not take full advantage of Free Trade Agreements (FTA’s), and the
primary reason cited is the difficulty of a manual process to comply with the
rules of origin[1].
There is also a flip side to this – if you are claiming FTA,
but not automated (assuming you are large and complex enough to need
automation), are you sure you are compliant? If not, the penalties can be quite
serious. Just in case you doubt that the risk is real, have a look at US
Customs website – they have identified FTA compliance as a “priority” issue[2].
In closing – have a look at your operation – if “NAFTA
season” involves little more than soliciting and filling out certificates, you
may want to dig deeper. How do you know your products actually qualify?
Remember – TPP is coming – free trade is not only going to
become more important in the future, but also more complicated to comply with
(more on that to come!). For now, Happy “Nafta season!”
Kevin Riddell
Kevin Riddell
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