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Understanding the North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) came into effect in 1994, creating one of the world’s largest free trade zones and laying the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico.

NAFTA and the Canadian Economy

Today NAFTA has a combined output of US$17.0 trillion across North America. The most popular exports to our US neighbours include: mineral oil, fuel, motor vehicles, machinery, wood, and electrical machinery.

The agreement helps provide Canadian businesses with better access to materials, technologies, investment capital, and talent available across the rest of North America. Helping to provide a real competitive advantage for Canadian businesses compared to Non-NAFTA suppliers.

Qualifying for NAFTA’s Preferential Rules

As part of the free trade agreement, Canada, the US and Mexico will receive favourable, if not duty free terms of trade. For the products to be classified as duty free by Customs, you will require a certificate of origin to confirm the product was made in a NAFTA country. This enables customs officials to quickly decide which goods qualify for these preferential tariffs and undergo only minimal processing.

In order to benefit from these rules it is important that you clearly outline the origin of the raw materials in your product.  If you fail to do this, you risk your business being charged a penalty and your goods being charged duty at a later time. These duties can be up to 20% of the value of the goods.

The Rules of Origin

The Rules of Origin are identified as:

  1. Goods wholly obtained or produced in a NAFTA country e.g. minerals extracted, livestock, fish and shellfish, and vegetable goods.
  2. Goods made from materials that did not originate from a NAFTA country but have undergone a tariff classification change as specified in Originating Goods (Article 401).
  3. Goods produced entirely in a NAFTA country exclusively from materials originating from that country. For example a wine press made of parts originating in the US but made of metals sourced from countries outside the NAFTA agreement.
  4. Goods that are imported disassembled but are classified as assembled; or goods where the heading and subheading of the HS classification describes both the goods and its parts and providing that the regional value content of the good is not less than 60% of the transaction value. .

Refer to the CBSA’s Custom’s Guide to NAFTA for more information.

To benefit from the preferential tax tariffs, Canadian goods exported to another North American country, must satisfy at least one of the Rules of Origin. NAFTA certificates of origin are available at any Canada Customs office and via Revenue Canada’s website (form number is B232).

In order to obtain a certificate for your goods you will need to understand their tariff classification and the classification of all of the materials or components that it includes. For help understanding these classifications contact the CBSA, a Customs Broker or make an appointment with a Small Business BC Trade Advisor.

How to Apply for an Advanced Ruling from US Customs

To save time at the US border you can ask for an advance ruling from the US Customs officials. There are two ways to get this advanced ruling: the first, directly through US Customs and the second, through a licensed Customs Broker.

Requests for advanced rulings must be written in English and contain a complete statement of all relevant facts relating to the NAFTA transaction, including:

  • Names, addresses and other identifying information of receiving parties (if known);
  • Names and details of any port or place which the product, or components of the product, has come into contact with and the jurisdiction of that port or place;
  • Photographs, drawings, or other pictorial representations of the products;
  • Technical information about the product or even a product sample.

US Customs will issue an advance ruling letter within 120 days of receipt of your application, outlining their position on your products and the reasoning behind its decision.

When completed, your advanced ruling request should be delivered by registered mail to Trade Administration Services, Client Services Division, in the customs region in which your exports will be shipped. Letters should be marked “Attention: Advance Rulings Request.”

Using Customs Brokers

“Canadian companies can make a huge mistake assuming that a product manufactured in Canada is automatically a NAFTA good, but it is not always the case,” comments A&A Contract Custom Broker. It is therefore recommended that you request an advanced ruling no matter what type of product you wish  to export to save you time and stress at the border. But applying for those rulings can be time consuming, challenging and at times confusing.

Customs Brokers can help ease this process, guiding you through your application, ensuring that you complete the form with the exact details required. Use of a third party ensures you have an objective view of your application and that the submittal process is as smooth as possible. A&A Contract Custom Broker estimates the fee for this type of service to be between $150 and $250, depending on the broker you use.

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