NAFTA 2001

What is NAFTA?

North American Free Trade Agreement

A preferential agreement among Canada, the US and Mexico

Reduces the taxes the importer pays

NAFTA

C an ad a U n ited S ta tes M exico

N A F TAN orth A m erica

Misnomer

The NAFTA isn’t really a free trade agreement; calling it a FTA is a misnomer. The NAFTA is a preferential trade agreement.

A free trade agreement makes a common customs territory. Once a good enters that territory, it can transit freely - that isn’t the case with NAFTA.

The NAFTA is a PREFERENTIAL TRADE AGREEMENT.It provides reduced duty rates for qualifying merchandise.

What is Qualifying?

Just because your product is made or assembled in the U.S. does not mean that it qualifies for NAFTA tariff reductions

Can I still send my product if it doesn’t qualify for reduced rates?

Yes, but you can’t use the NAFTA Certificate of Origin

Your customer can not claim reduced NAFTA tariffs

How do I qualify?

Find your harmonized number for trade MFN vs NAFTA Look up the appropriate rule of origin Interpret the rule of origin for your

product Perform necessary qualifying steps

Harmonized Schedule

HS#

Schedule B

Harmonized tariff schedule #

What is the HS number?

Like a Social Security number for a product

HS# is used because custom officials around the world don’t speak the same language.

Chapter: 85 (two digits)

Heading: 8539 (four digits)

Subheading: 8539.49 (six

digits)

The first six digits are the same worldwide

The last two to four digits, following the first six, differ from country to country.

Where to find the HS Code

U.S. Dept of Commerce Schedule B classification of exports - can be purchased at the gov’t bookstore

U.S. Census Bureau tel: 301-457-1084 fax: 1158

On-line: http://www.census.gov/foreign-trade/schedules/b/– on the next page select “Search” and type in a key

word(s)

Ultraviolet lamp

8539 Electronic filament or discharge lamps, including sealedbeam lamp units and ultraviolet or infrared lamps; etc

Ultraviolet or infrared lamps; arc lamps:8539.41.0000 Arc lamps………………………8539.49 Other: …………………………..8539.49.0040 Ultraviolet lamps………8539.49.0080 Other……………………………8539.90.0000 Parts………………………………………

The Chapter is 85; the heading is 8539 and the subheading is 8539.49; 8539.49.0040 is specific to the U.S. The digits for Canada are 8539.49.10………..

Tariff# and rates for Canada

Option 1 Go to www.apectariff.org/ register, select the country, in this example, Canada, and

search by HS# or description and scroll through until you find the right description. Tariff information is also available here.

Option 2 Call 1-800-USA-Trade and follow the prompts for the US

Department of Commerce Trade Information Desk. You’ll need your HS # to identify tariff rates

email a trade specialist at tic@ita.doc.gov with specific questions

call Canada Revenue (Canada Customs) at 1-800-661-6121

MFN vs NAFTA

MFN NAFTA(Most Favored Nation)

For Lamp: free For Lamp: freeFor parts: 7.5% For Parts: free

8539.49.10 For use in measuring, checking or testing instrumentsof chapter 90 (optical, photographic, cinematographic, measuring,checking, precision, medical, or surgical instruments and apparatus.)or for indicating intervals of time; Ultra violet hollow-cathode lamps,for use in instruments and apparatus for measuring or detectingnoxious gases8539.90 Parts

This is Canadian specific

If MFN = zero then NAFTA = zero

Remember, NAFTA is a preferential agreement, with preferenceover MFN. Therefore, you can type on your invoice:

Since MFN is zero for HS# 8539.49.10, no NAFTA Certificateof Origin is necessary.

However, for the sake of this presentation, let’s pretend that MFNis greater than zero and NAFTA is zero. You want to use a NAFTA Certificate of Origin to give your Canadian customerthe lowest possible tariff,the difference between MFN and NAFTA.

If the NAFTA rate is lower than MFN

Find the General Note 12 (GN12) formerly known as the 401 Annex at http://www.customs.gov/nafta/docs/us/gn12t1-29.html

This is organized by chapter headings (the first two digits of you HS code tell you the chapter). Scroll through until you find the applicable rule.

Example of the General Note 12 page:(B) A change to heading 8537 from tariff items 8538.90.10, 8538.90.30 or8538.90.60, whether or not there is also a change from any other heading,provided there is a regional value content of not less than:

(1) 60 percent where the transaction value method is used, or(2) 50 percent where the net cost method is used

122. A change to heading 8538 from any other heading.

Subheading rule: The underscoring of the designations in subdivision 123 pertainsto goods provided for in subheadings 8539.10 or 8539.21 for use in a motor vehicleof chapter 87.

123 (A) A change to subheadings 8539.10 through 8539.49 from any other heading; or(B) A change to subheadings 8539.10 through 8539.49 from subheading8539.90, whether or not there is a change from any other heading, provided there is a regional value content of not less than:

continued

General Note 12 example continued

(1)60 percent where the transaction value method is used, or

(2)50 percent where the net cost method is used.

124. A change to subheading 8539.90 from any other heading

125. A change to tariff item 8540.11.24 or 8540.11.28 from any other subheading, except from more than one of the following:

(A) tariff 7011.20.10,

(B) tariff item 8540.90.15

Example….again, on one page

123 (A) A change to subheadings 8539.10 through 8539.49 from any other heading; or(B) A change to subheadings 8539.10 through 8539.49 from subheading8539.90, whether or not there is a change from any other heading, provided there is a regional value content of not less than:

(1)60 percent where the transaction value method is used, or

(2)50 percent where the net cost method is used.

THIS IS OUR RULE!!!

Your CompanyMX #6000 Ultra-violet lamps HS# 8539.49ZB-100 Blacklight (115/60/1

Costed Bill of Materials

Components Price/unit HS# NAFTA Cert?1) plastic lamp body $3.10 8539.90 No (imported from Asia)2) electric cord $4.26 Yes3) paint $ .20 Chpt.32 No4) light bulb $1.30 8539.31 Yes5) nuts/bolts/screws $ .50 No6) metal stem of lamp $8.86 8539.90 No (imported from Asia)

Total cost of parts: $18.22

What does this really mean?

(A) A change to subheading 8539.10 through 8539.49 from any other heading….

Okay, so if the components that go into the ultraviolet lamp come from outside of heading 8539 the lamp qualifies for NAFTA. But, we canbe 99% sure that some of the components can only be classifiedas parts of the ultraviolet lamps.

Since parts of the lamps are classified as 8539.90 the lamp would not qualify because the heading of the parts is the same as the heading of the lamps, 8539, there is no change to heading 8539. So we must try the B rule for a regional value content

Rule B of 123

(B) A change to subheadings 8539.10 through 8539.49 from subheading8539.90 (parts), whether or not there is a change from any other heading,provided there is a regional value content of not less than:

1) 60 percent where the transaction value method is used2) 50 percent where the net cost method is used

Since parts that can only be classified as parts of an ultraviolet lamp are classified as 8539.90 and are part of the components for the final product,we must attempt to prove regional value content.

What is Regional Value Content(RVC)?

The idea behind Regional Value Content is to prove that a percentage of the content is actually from within the NAFTA territory.

•Not from Asia•Not from Europe•Not just distributed from a NAFTA country•Rather, made in a NAFTA country

Regional Value Content (RVC)

Tran sac tionV a lu e

M eth od

N et C os t

M eth od

R eg ion a lV a lu e

C on ten tR V C

Net Cost Method (NC)

• Under the net cost method, up to 50% of the net cost of the good may be foreign-originating components.• NC is defined as the total cost of production, includingoverhead and labor (but not profit) less sales promotion,marketing and after-sales service costs, royalties, shippingand packing costs

NC formula: RVC = NC-VNM* x 100 NC

* VNM (value of non originating material)

Transaction Value Method (TVC)

• Up to 40% of the transaction valueof the good can be non originating.• Under this method, the transactionvalue (TV) is defined as the price actually paidfor the good.

TVM formula: RVC = TV - VNM* x 100TV

* VNM (value of non originating material)

Let do an example of TVM

Here is what you need:

• Costed bill of materials

• Selling price/transaction value

Calculations of TVM

Selling price is $40 for the model MX#6000 ZB-100Blacklight (115/60/1)

The formula is: TV-VNM x 100 TV

Lets make it simple first try. Rather than figuring the cost ofall the non-originating material, lets save time and simply add all the components (not just non-originating) and plug it into the formula.

40-18.22 x 100 = 54.45% This is under the 60% RVC 40 requirement and doesn’t

pass for NAFTA

Bill of Material

Costed Bill of Materials

Components Price/unit HS# NAFTA Cert?1) plastic lamp body $3.10 8539.90 No (imported from Asia)2) electric cord $4.26 Yes3) paint $ .20 Chpt.32 No4) light bulb $1.30 8539.31 Yes5) nuts/bolts/screws $ .50 No6) metal stem of lamp $8.86 8539.90 No (imported from Asia)

Total cost of parts: $18.22

18.22-(4.26) - (1.30) = $12.66 This is the cost of non-originating parts.

TVM take two...The second time we’ll reconsider and calculate the actual value of non-originating material: $12.66

We have subtracted the components of which we aresure originate because we have NAFTA certificates for them.

TV(40) - VNM (12.66) x 100 = 68.35%TV (40)

Therefore, we exceed 60% RVC and can qualify for NAFTA