Nafta Preference 

Supporting Your Claim

By: Jason M. Waite

         Many Mexican producers and their U.S. customers avail themselves of the substantial duty benefits of the NAFTA.  The typical Mexican producer executes a NAFTA Certificate of Origin for the products it exports to the United States.  The typical importer customer receives and files the Certificate, and declares NAFTA preferential treatment for the goods upon entry into the United States.  Indeed, the NAFTA Certificate of Origin is the one required document that almost all companies engaged in trade between the United States and Mexico prepare and maintain regularly.  But it is often not enough.

            Under NAFTA, the importing country’s customs administration is authorized to conduct verifications of the exporter and producer of the exported good, and in some circumstances, of the producers of the materials used in production of the exported good.  These NAFTA Verifications take varying forms, but they essentially require an exporter or producer to supply documentation to support the claim for preference made in the NAFTA Certificate.  We have seen an increased number of NAFTA Verifications conducted by U.S. Customs over the past year.  The result of a NAFTA Verification is either a positive or negative origin determination.  Although the verification will most likely focus on a single import transaction, a negative determination on a product imported into the United States could result in additional duties being owed on the examined transaction and on all other imports of the same product for the past five years.

            To understand what type of supporting documentation is required, it is necessary to understand the different types of Preference Criteria under which products qualify as NAFTA originating goods.  The Preference Criterion applicable to exported goods is entered in Box 7 of the NAFTA Certificate executed for the goods.  The three most common Preference Criteria are probably A, B, and C.

            Preference Criterion A is utilized when the exported product is “wholly obtained or produced” in the NAFTA territory.” Preference Criterion B applies when a product is produced entirely in the NAFTA territory and satisfies a specific rule of origin that applies to its tariff classification as set out in Annex 401 of the NAFTA.  For imports into the United States, Annex 401 is codified in the Harmonized Tariff Schedule of the United States at General Note 12(t).  Specific rules of origin may require a tariff classification shift, or a regional value content requirement, or a combination thereof.  Preference Criterion C should be used where the exported product is made from materials, all of which are not “wholly obtained or produced” in the territory, but all of which qualify as originating goods under the specific rule of origin that applies to their tariff classification.

            “Wholly obtained or produced,” as used in Preference Criterion A, is subject to a complex definition in Article 415 of NAFTA.  Essentially it applies to animals, vegetables, and minerals that are raised, caught, hunted, harvested or extracted from the NAFTA territory or from certain waters to which a NAFTA country has rights, and goods produced in the NAFTA territory exclusively from such animals, vegetables or minerals.  The documentation necessary to support this type of claim would include an affidavit or certificate by the farmer, hunter or fisherman as well as documentation demonstrating the subsequent use of the natural materials in the production of any goods for which NAFTA treatment is sought.

            Preference Criterion B is probably the most commonly applicable preference category, at least as to any type of manufactured goods.  Preference Criterion C is less common, but similar to Criterion B in so far as eligibility under Criterion C depends on the satisfaction of specific rules of origin and these rules are usually dependent on tariff classification.  The difference is that under Criterion C it is the individual components or ingredients of the exported product that must satisfy the rule of origin applicable to their classification, as opposed to the exported product itself.  This article focuses on Criterion B claims and on satisfaction of tariff shift rules.  The documentation necessary to support a good eligible under Preference Criterion B includes NAFTA Certificates of Origin or Manufacturer’s Affidavits of Origin for the ingredients or components of the exported product, especially for those ingredients or components that, under the applicable origin rule for the exported product, may not be non-originating. 

            These rules are best explained by example.  Recently, a NAFTA verification was conducted by U.S. Customs for goods entered into the United States under Preference Criterion B.  The product, a powdered drink mix, was classified in HTSUS 2106.90.9973.  The applicable NAFTA rule of origin for products of this particular classification is “a change to heading 2106 from any other chapter.”  This rule means that non-originating ingredients could be used in producing the drink mix in the NAFTA territory, but if any of those ingredients were themselves classifiable in Chapter 21 of the HTSUS the finished product would not qualify for preferential NAFTA treatment.  The manufacturer of the product, who was the subject of the verification, purchased most of the ingredients from other companies and believed that some of the ingredients may have been imported into the NAFTA territory by its vendors. 

            Facing a verification inquiry from U.S. Customs, with our assistance, the manufacturer quickly examined each of the ingredients of the drink mix to determine their individual tariff classifications.  Tariff classification is often a complicated matter and may vary, believe it or not, between Mexico and the United States.  For each ingredient that U.S. Customs could have possibly considered classifiable in Chapter 21, HTSUS, we had to inquire with the supplier as to whether it was a NAFTA originating good.  Fortunately, each supplier of an ingredient that we were concerned could have been classified in Chapter 21 by U.S. Customs provided a Manufacturer’s Affidavit certifying that the ingredient was NAFTA originating.  In short, if we could not be sure that the ingredient was classifiable outside of Chapter 21 we needed to be sure that it was NAFTA originating.  Anything less would have been flirting with the danger of a negative origin determination by U.S. Customs.

            This exercise is easier when conducted in advance of manufacture and exportation.  That is, when a producer requires each supplier to provide a Manufacturer’s Affidavit of Origin for the ingredients or components it supplies.  Thus, in our drink mix example, if a supplier indicated at the time of purchase that an ingredient was not NAFTA originating, then the manufacturer would have inquired about the classification of that ingredient to determine whether it could nonetheless be used to manufacture drink mix that properly qualifies as originating goods.  Moreover, the maintenance of such affidavits is effectively required of producers that execute NAFTA Certificates of Origin using Preference Criteria B or C because producers or exporters cannot legally execute a NAFTA Certificate unless they have reason to believe that the exported product qualifies as a NAFTA originating good.  In the case of manufactured goods such as the drink mix discussed above, it is difficult to justify a belief in the manufactured product’s eligibility without receiving representations from the producers of some or all of the ingredients or components used in manufacturing the exported product.

            Because so many of the NAFTA origin rules require tariff shifts, the uncertainty of the tariff classification of some exported products, let alone the classification of each of the ingredients or components that are used to manufacture the products, can be perilous for parties relying on Preference Criteria B and C.  In the drink mix example above, we were confident that HTSUS 2106 was the correct classification because the manufacturer had obtained a binding ruling from U.S. Customs on the product’s classification. Without that ruling in place, U.S. Customs could have taken the position during the verification that the finished product was classifiable in a provision other than HTSUS 2106.  If that happened the NAFTA rule of origin applied would have been different, and any one of the non-originating ingredients used may have disqualified the finished product from NAFTA treatment.  Thus, a binding ruling, even if it only addresses the tariff classification of the product to be exported, can provide exporting and importing parties with greater certainty as to the applicable preferential origin rule.

            An example of the difficulty of tariff classification and its impact on NAFTA eligibility may be drawn from the plastics industry. Specifically, injection molding machinery components may be subject to varying tariff classifications that directly impact the NAFTA eligibility of the injection molding machines into which they are incorporated.  Injection molding machines for processing thermoplastics are classifiable in HTSUS 8477.10.90, the NAFTA rule of origin applicable to this classification allows such machines manufactured in the NAFTA territory to qualify for preferential treatment, even if manufactured with some parts that originated outside the NAFTA territory, provided the non-NAFTA parts are not classifiable in certain provisions. 

            Thus, NAFTA eligibility of an injection molding machine entering the United States from Mexico could be negated by the use of castings or molds in the clamp section of the machine that were not NAFTA originating if those components were classifiable as injection castings in HTSUS 8477.90.25.  However, eligibility of the machine would be preserved if the non-originating components were instead classifiable in HTSUS 8480.71 as molds for rubber or plastics, injection or compression type.  Of course, the correct classification of these components may be difficult to determine in the absence of a ruling from U.S. Customs.

            The duty benefits provided by NAFTA are substantial and have played a tremendous role in fostering the growth of cross-border trade and industry in both Mexico and the United States.  Companies should take care to ensure that claims for NAFTA preferential treatment are properly documented so as to avoid potential set backs to growth in the future.

Jason Waite is an attorney with Alston & Bird LLP. He practices customs and international trade law and can be reached at jwaite@alston.com or at (202) 756-3300. With more than 600 lawyers in Washington, Atlanta, Charlotte, Research Triangle and New York, Alston & Bird represents a broad range of clients in virtually every area of practice related to international business and trade.