Key issue is global supply chains created intersection of compliance between sourcing for manufacturing purposes against export costing including declaration that goods were NAFTA qualifying.
Case in Point – NAFTA Regional Value Content
In North America the key event that started driving focus on Trade Agreements was the original Canada/USA Free Trade Agreement (FTA). That evolved into NAFTA which included Mexico along with Canada and the USA. One of the key components about declaring NAFTA status on goods that are imported or exported is the process of defining Regional Value Content (RVC)
Regional Value Content is simply the calculation of the percent of the value of a good that comes from manufacture/assembly in a NAFTA originating country. The are 2 methods to calculate the RVC; a Transaction Value Method or the Net Cost Method, but that is a topic for another day.
The case in point today relates to an aspect of why you need to consider an integrated trade compliance strategy. It comes from a North American manufacture of electrical transformers, Chapter 84 of the harmonized Tariff.
When this manufacture began exporting they went through the exercise and calculated their Regional Value Content. At that time the goods in question were 94% of RVC. Although the regulations suggest that you need to validate your RVC annually, the effort involved was extensive for this manufacture and they renewed for many years their NAFTA declarations by simply changing the date and providing it to their export clients.
Problem is they began to be challenged as all manufactures have been with global based sourcing in order to stay competitive, and this was never factored in to their NAFTA declarations. The risk of course is that by changing the sourcing or inputs they may no longer qualify for NAFTA benefits, thereby increasing their costs and potentially making their product non competitive in the markets the sell to.
To compound the risk, the issue only came to light when the US CBP requested a NAFTA verification audit. They have been doing this a lot lately because they know that manufactures are facing a global sourcing challenge and that leaves a large GAP in the past trade agreement declarations, especially when there are preferential duty rates as there are with the NAFTA program. This can lead to large financial penalties and other costs that the manufacture did not allow for on the original contract, thereby reducing or eliminating any profit related to that sale.
The risks are increased substantially if issues are found during an audit, especially with US CBP who take a rather black and white approach to mitigating the issues they find during an audit.
The outcome in this case is good news, but clearly a warning that something must change in the strategy used to manage global trade issues. The cut off for RVC content when declaring NAFTA preferential tariff’s is 60%, and while in this case the goods pre global sourcing started at 94%, the revised calculations came back saying the RVC was now 64%. So while the did not incur any financial issues related to RVC calculations on their NAFTA declarations, they are clearly very close to no longer qualifying for those extended trade benefits.
Bob Cowie, Vice President Consulting, GHY International says, “some products which seem very simple compared to an electrical transformer can be even less obvious if NAFTA benefits apply when you consider Regional Value Content.” He offers this advise, “as an example if you look at Chapter 39, Products made of Plastic as defined by the US HS Tariff, the regional value content rules are very clearly laid out for every product in that category, we find numerous mistakes because the assumption is made because a product was made in a NAFTA country from plastic pellets as an example, that it qualifies and the NAFTA benefits are built in to their costing, When doing a detailed evaluation it is often not applicable so caution should be used when making these declarations that you understand the RVC rules and how they apply to your products.”
Key issue is global supply chains created intersection of compliance between sourcing for manufacturing purposes against export costing including declaration that goods were NAFTA qualifying.
Does this sound like your organization? Could you use an integrated trade compliance strategy?
The federal government has launched a $1.1 million lawsuit against Canadian clothing exporter, saying it illegally applied North American Free Trade Agreement exemptions to clothes that were actually made from Taiwanese fabric.
US Government Sues Company Over NAFTA Exemptions
In a recent article on the Canadian Apparel Federation website, they had a piece that emphasizes the impact of not considering the benefits of an integrated trade compliance strategy. Here is an excerpt of that article.
The Company exported to the U.S. clothes made from Taiwanese polyester…while claiming they “originated” in Canada. The alleged mis-classifications allowed The Company to completely avoid duties under a NAFTA provision that exempts Canadian goods“… The government asked the court to force the company to pay duties of $361,000, plus a penalty of about $766,000 … The suit was filed under 19 U.S.C. § 1592, which covers penalties for duties withheld by “fraud, gross negligence and negligence.”
“Textiles is one of the most complex areas of International Trade Compliance” says Bob Cowie, Vice President of Consulting at GHY International. ” It is hard to believe a firm with this type of volume is not aware of TPL (Trade Preference Levels) requirements. Somehow you would think their Canadian or USA international trade service providers would have made them aware of TPL since they need to file declarations (Multi Country Textile Declaration) indicating the steps and origin of production products.
Bob Cowie explains the process in this way, Textiles are very complex because the declarations require detail back to the origin of the fiber’s that fabric is made from. The fiber’s through to completed fabric is only part of the equation. The garments must be cut and sewn in a NAFTA (North American Free Trade Agreement) country to qualify. when exporting you have this audit trail and to qualify for TPL you must secure a Certificate of Eligibility.
The intersection of import requirements and export requirements are very clear in this issue. The use of an integrated trade compliance strategy would have ensured that the import requirements were understood in conjunction with the export requirements, thereby mitigating the potential risk of a $1.1 million dollar issue.
This is the first in a series of “case in point” articles that we hope to share and bring clarity in real terms to the case for an integrated trade compliance strategy.
