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North America Free Trade Agreement (NAFTA)

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.

Seven Steps to Use in Qualifying a Product for NAFTA

  1. Determine the tariff classification number (Schedule B Number) of the finished product(s). This number can be found at www.census.gov.
  2. Check the duty rate for the product being shipped to Canada or Mexico. If the duty rate for "Most Favored Nations" is zero, a NAFTA certificate is not necessary. If there is a duty and the product qualifies for NAFTA, the customer can receive preferential duty rates on the product. Duty rates can be found by calling the U.S. Trade Information Center at 1-800-USATRADE (please have the first six digits of the Schedule B Number ready.
  3. Determine the NAFTA rule of origin that applies to the finished product.
  4. Prepare a list of components and materials used to produce the finished product.
  5. Determine which of the components or materials used to produce the finished product are originating and which are NON-ORIGINATING.
  6. Determine the tariff classification of all NON-ORIGINATING components or materials.
  7. Apply the rules of origin and determine whether the change in tariff classification occurs and/or whether the regional value content is met for NON-ORIGINATING components or materials.

Business Visitors

According to NAFTA, a business visitor is: "a business person seeking to engage in a business activity set out in Appendix 1603.A.1, without requiring that person to obtain an employment authorization, provided that the business person otherwise complies with existing immigration measures applicable to temporary entry...."

The business activities set out in Appendix 1603.A.1, include the following groups of people:

  • Research and design: Technical, scientific and statistical researchers, conducting independent research or research for a company located in the United States or Mexico.
  • Growth, Manufacture and Production: Harvester owner supervising (not hands-on work) a harvesting crew admitted which is authorized to work in Canada.
  • Marketing: Market researchers and analysts conducting independent research or analysis for an enterprise located in the United States or Mexico. Trade fair and promotional personnel attending a trade convention (this does not include the organizer of the trade fair, unless there are no Canadian exhibitors at the trade convention).
  • Sales: Sales representatives and agents taking orders or negotiating contracts for goods or services for an enterprise located in the United States or Mexico, but not delivering goods or providing services. These sales representatives or agents may bring into Canada the necessary number of samples required for display.
  • Distribution: American and Mexican transportation operators who are either transporting goods or passengers to Canada from the United States or Mexico OR loading and transporting goods or passengers in Canada to be taken to the United States or Mexico (without any unloading in Canada). A transportation operator is defined as: "a natural person, other than a tour bus operator, including relief personnel accompanying of following to join, necessary for the operation of a vehicle for the duration of a trip."
  • After-sales Service: Installers, repair and maintenance personnel, and supervisors, possessing specialized knowledge essential to a seller's contractual obligation, performing services or training workers to perform services, pursuant to a warranty or other service contract incidental to the sale of commercial or industrial equipment or machinery, including computer software, purchased from an enterprise located outside Canada during the life of the warranty of service agreement. If the installation, warranty or service work has been contracted out to a third party, this must be clearly indicated on the sales agreement in order for an employee of the third party firm to be admitted as a business visitor.
  • General Service: Professionals engaging in a business activity at a professional level in a profession set out in the table below in the section on professionals. Management and supervisory personnel engaging in a commercial transaction for an enterprise located in the United States or Mexico. Financial services personnel (insurers, bankers or investment brokers) engaging in commercial transactions for an enterprise located in the United States or Mexico. Public relations and advertising personnel consulting with clients or colleagues, or attending or participating in conventions. Tourism professionals attending or participating in conventions or conducting a tour that began in the United States or Mexico. Translators or interpreters performing services as employees of an enterprise located in the United States or Mexico.

Requirements for Business Visitors

Business visitors, in addition to meeting the above criteria, must also be able to do the following:

  • Provide proof (e.g. a letter from your employer) that you plan to engage in an approved business activity (those set out in Appendix 1603.A.1 of the NAFTA and listed above) and describing the purpose of your entry into Canada.
  • Provide proof (e.g. a letter from your employer) explaining that the proposed business activity is international in scope and that you are not planning on entering the Canadian labor market, by showing that (i) the primary source of remuneration for the proposed business activity is outside Canada; and (ii) that your principal place of business and the actual place of accrual of profits, at least predominantly, remain outside Canada.
  • If you are a "professional" (see table below in section on professionals) you may qualify for entry under the general service provision of the business visitor category. You must be able to prove that you have the minimum education requirements listed in the table for your profession (a letter from your employer or a copy of your professional license, certification, accreditation or registration suffices).
  • If you are seeking entry as an after-sales service person, you must provide copies of the original sales, warranty, or service agreement, and any extension to this agreement.

Length of Stay

Business visitors are generally given permission to stay in Canada for a period of up to six months. For after-sales service personnel the duration of the stay granted is generally equivalent to the amount of time required to carry out the service obligation.

Frequent Travelers

Business visitors that travel to Canada frequently over an extended period of time and always enter for the same reason can request, at the Canadian point of entry, that a visitor record be issued to them. This document will facilitate subsequent visits to Canada. There is no cost to obtain a visitor record, but whether or not to issue one is at the discretion of the immigration officer.

Types of Travelers

Professionals

According to NAFTA, a professional is: "...a business person seeking to engage in a business activity at a professional level in a profession set out in Appendix 1603.D.1, if the business person otherwise complies with existing immigration measures applicable to temporary entry..."

The arrangement to provide professional services can be as a result of an employee-employer relationship with a Canadian enterprise, a signed contract between the business person and a Canadian enterprise, or a signed contract between the business person's American or Mexican employer and a Canadian enterprise. Since this report is written for U.S. companies, the last option will be assumed in explaining the requirements below.

Under NAFTA, American and Mexican professionals are not subject to Canada's job validation process, whereby the Canadian employer must prove that there are no willing and qualified Canadians to fill the position. However, professionals do require an employment authorization from the Canadian government. The individual must also provide proof of the minimum education requirements or alternative credentials for their profession as set out in NAFTA. For professions not listed below, an employment authorization will be granted only if the Canadian employer is able to successfully show that there are no willing and qualified Canadians that can do the work required.

The professions set out in Appendix 1603.D.1 are as follows:

General

  • Accountant
  • Architect
  • Computer Systems Analyst
  • Disaster Relief Insurance Claims Adjuster
  • Economist
  • Engineer
  • Forester
  • Graphic Designer
  • Hotel Manager
  • Industrial Designer
  • Interior Designer
  • Land Surveyor
  • Landscape Architect
  • Lawyer
  • Librarian
  • Management Consultant
  • Mathematician (including Statistician)
  • Range Manager/Range Conservationalist
  • Research Assistant (working in a post-secondary institution)
  • Scientific Technician/Technologist
  • Social Worker
  • Sylviculturist
  • Technical Publications Writer
  • Urban Planner (including Geographer)
  • Vocational Counselor

Medical/Allied Profession

  • Dentist
  • Dietitian
  • Medical Technologist
  • Nutritionist
  • Occupational Therapist
  • Pharmacist
  • Physician (teaching or research only)
  • Physiotherapist/Physical Therapist
  • Psychologist
  • Recreational Therapist
  • Registered Nurse
  • Veterinarian

Scientist

  • Agriculturalist (including Agronomist)
  • Animal Breeder
  • Animal Scientist
  • Apiculturist
  • Astronomer
  • Biochemist
  • Biologist
  • Chemist
  • Dairy Scientist
  • Entomologist
  • Epidemiologist
  • Geneticist
  • Geologist
  • Geochemist
  • Geophysicist (including Oceanographer)
  • Horticulturalist
  • Meteorologist
  • Pharmacologist
  • Physicist
  • Plant Breeder
  • Poultry Scientist
  • Soil Scientist
  • Zoologist

Teacher

  • Teachers at post-secondary level institutions including College, Seminary, and University

Requirements for Professionals

Professionals are eligible for an employment authorization under NAFTA if they have pre-arranged employment with a Canadian enterprise in one of the above listed professions and are qualified in that profession. The following information must be provided:

  • the proposed employer(s) in Canada
  • the profession (including position title and duties) under which you are seeking entry
  • the purpose of entry
  • the anticipated length of stay
  • the educational qualifications or alternative credentials required to perform the job
  • the arrangements for remuneration of services to be rendered

Generally, a letter from the U.S. employer, a letter from the contracting Canadian enterprise, and a copy of all relevant educational qualifications should be presented.

Length of Stay

The length of stay for professionals is not limited. However, the situation must continue to be "temporary", i.e. the individual should plan to return to the U.S. and not be planning on remaining in Canada indefinitely. Professionals that qualify for temporary entry under NAFTA will be issued an employment authorization with a maximum duration of one year. Extensions may then be granted in one year increments.

Tools of Trade Temporary Entrance

The NAFTA requires Canada, Mexico, and the United States to grant duty-free temporary admission to certain classes of tools imported from another NAFTA country. Duty-free entry can not be conditioned on whether directly competitive or substitutable tools are available in the importing country. The tools do not have to originate in a NAFTA country.

These goods are considered "Tools of the Trade". Here is a general outline explaining some similarities among the different countries for temporary entrance of "tools of the trade."

  1. Tools imported to repair or modify equipment are examples "tools of the trade."
  2. If "tools" can not enter free of duty, then the exporting company may be required to make a contract with Customs so the articles are re-exported within a fixed period of time. This contract is in the form of a deposit or bond for the amount of the duty/tax or a percentage of it.
    • A temporary import bond (TIB) is equivalent to a percentage of the ascertained taxes and duties
    • An ATA Carnet ("merchandise passport") is an international customs document that facilitates temporary imports into foreign countries. A listing of the merchandise and countries covered by the ATA Carnet are available at http://www.uscib.org/
  3. The deposit of the duty payment or temporary import bond will be returned after the products have left the country and customs documents have been filed
  4. Any person who does not re-export the temporarily admitted tools within a specified period shall be subject to pay import duties and taxes
  5. The re-exported tools must be identical with those imported

North American Free Trade Agreement (NAFTA)

The NAFTA requires Canada, Mexico, and the United States to grant duty-free temporary admission to certain classes of tools imported from another NAFTA country. Duty-free entry can not be conditioned on whether directly competitive or substitutable tools are available in the importing country. The tools do not have to originate in a NAFTA country.

Professional Equipment and Trade Show Displays

A person can temporarily import the following "tools of the trade" duty-free: professional equipment, equipment for the press or for sound or television broadcasting, goods for sports activities, and goods for display or demonstration.

These goods must:

  • Not be sold or leased while in Canada/Mexico.
  • Be accompanied by a bond if they are not originating goods (chapter 4 or the NAFTA).
  • Only remain in Canada/Mexico until the departure of the person, or within a reasonable time.
  • Be capable of identification when exported.
  • Be imported in no greater quantity than is reasonable for the intended use.
  • Be imported by a national or resident of the United States, Canada or Mexico that is seeking temporary entry.
  • Be used solely by or under the personal supervision of the person importing the good in the business activity.

MONTANA OFFICE OF TOURISM AND BUSINESS DEVELOPMENT | MONTANA DEPARTMENT OF COMMERCE
301 S. PARK AVE. | P.O. BOX 200533 | HELENA, MT 59620-0533 |  T: (406) 841-2870 |  F: (406) 841-2871 | TDD: (406) 841-2702