GTM Best Practices

The North American Free Trade Agreement (NAFTA), implemented in 1994, created the world’s largest free trade area, stimulating exports between the U.S., Canada, and Mexico by eliminating tariffs and creating international rights for business investors. NAFTA ultimately produced sales of $17 trillion, establishing a model that was adopted globally. For new members, however, managing the red tape can be daunting and potentially risky.

To take advantage of the reduced duties afforded by NAFTA and other free trade agreements, exporters and importers have to verify the eligibility of their products. The qualification process involves classifying products via the Harmonized Classification System and NAFTA rules of origin. Each of the three partner governments may audit an importer, exporter, or producer of NAFTA products in any of thee three member countries, and hefty fines are levied on non-compliant manufacturers or distributors.

Best Practices for Firms Qualifying Product for NAFTA Eligibility

Qualifying products under NAFTA and other trade agreements such as CAFTA, Australian, and Singapore programs, can be a challenge but one that reaps significant savings when trading internationally. The following best practices recommended by a 2010 Global Trade Management study provide guidelines for developing a documented and verifiable process to meet NAFTA qualification compliance regulations, as well as lower the risk of fines for non-compliance.

1. Product qualification requires expertise with classification programs, trade laws, and NAFTA rules of origin such as Tariff Shift Concepts. This process is labor intensive, so companies are well advised to align trained staff and resources to the project on an annual basis. Given the complexity of classification and NAFTA rules of origin, companies that allocate trade agreement qualification to departments with fiduciary responsibility generally reflect high levels of compliance. Also, for companies with multiple sites, centralized trade agreement compliance programs yield better compliance results as well.
2. Review the list of products exported to NAFTA countries and determine which products carry the highest duty rates in the receiving country. The greatest savings will be realized for product with high duty rates or highest volume of exports. Offset the number of products to be NAFTA verified against the duty savings to quantify the bottom-line impact.
3. Use cost savings data to offset training program costs for staff. The ability to monitor trade agreement programs through documented savings can enable strong compliance programs and also better support sales — lower costs to the end customer makes the exporter’s product more competitive.Consider the estimated savings that would increase if an automated system was utilized. Automation of NAFTA programs has the ability to improve processes and expedite the confirmation of information needed to qualify products for NAFTA as well as communicating and archiving it. Automated systems, however, don’t remove the need for internal expertise on classification and rules of origin.
4. When soliciting NAFTA certificates from producers/exporters, it is imperative that the supplier or exporter have completed NAFTA certificates for their customers before shipping product. In most cases, suppliers or exporters focus on securing NAFTA certificates and supporting documentation in the latter part of the year in order to be able to sign NAFTA certificates for the coming year.Importers of NAFTA qualifying product generally seek the NAFTA certificates from their supplier/exporter by December 31st for products to be shipped in the next calendar year, well in advance of the shipment arriving in their country. Importers cannot legally declare the NAFTA reduced duty benefit without the certificate on file.
5. Conduct annual audits of your trade compliance programs – whether import or export oriented and include alls trade agreement reviews. Working with experts will expedite the process, ensure accuracy with information declared to Customs, and lower the risk of non-compliance for both current and future shipments.

For additional information on NAFTA support, training or best practices, please contact Ms. Suzanne Richer at Customs & Trade Solutions, Inc, at smricher@ctsiadvisors.com

If your company is considering utilizing a free trade agreement such as NAFTA, or wants to maximize the savings from a free trade agreement, read our Trade Agreement Best Practices Benchmark.

Implementing and maintaining compliance with a free trade agreement is a complex and technical process. Make sure your company takes full advantage of the trade agreement savings by benchmarking your process against 300 respondents across many different industry verticals and revenue size.

Receive the Trade Agreement Best Practices Benchmark Study Now!

Next in the series of prognostications for 2009: look for companies to expand the benefit of low-cost country sourcing by leveraging the duty savings from preferential trade agreements.  NAFTA was signed into law in 1993, and in the past decade the number of trade agreements has multiplied many times over.  The World Trade Organization tracks this trend and has this nifty chart on the the number of trade agreements in force and also tracks the degree of change (see the solid lines) associated with “notifications” related to regional trade agreements

And if you are interested in the details, here is a link to a database of all 220+ regional trade agreements.  Behind each of these agreements is a mountain of legalese that defines the rules to get preferential rates and save on duty.  Also called rules of origin, it is pretty straight-forward to determine the origin of the product and whether an adjust to duty is warranted.  Where it gets more complicated when a product is assembled from multiple component parts from multiple suppliers and origins.  Here the rules of origin try to close the loophole on a simple trans-shipment strategy to test whether the end-item has undergone sufficient processing or has been substantially transformed into a different end-item.  If you can master the rules of origin for a trade agreement and integrate this knowledge into how you make sourcing decisions, solicit suppliers and ultimately justify whether a product qualifies for preferential treatment you can save millions of dollars.

Sounds good, but without automation you need a small army of compliance experts to interpret the rules and test each and every product, transaction by transaction to ensure that you are in compliance.  This makes sense for a company that has just a few products and sources from a few origins.  However, if you source from mulitple countries with an assemble-to-order strategy, it becomes a complicated process that doesn’t scale.

The way to capture this hard dollar savings is through  automation.  Since the early days of NAFTA, trade agreement solutions have matured and offer a number of benefits to any company that is interested in reducing total landed cost:

• Campaign Management – automate the process of developing campaigns that solicit suppliers to certify the country of origin for their various purchased parts
• Supplier Portal – give suppliers a portal to interact with the import, respond to the campaign and generate certifications
• Multi-FTA Qualification – integrate a qualification engine with your order management system to determine if a give bill of material qualifies for preferential treatment
• Trade Content – identify a partner that can power the qualification engine for the trade agreements that apply to your supply network (hopefully without having to make code changes to your software).