Companies considering manufacturing in Mexico need to understand the basics of the NAFTA Rules of Origin, and how they apply to their industry. In short, if all inputs used in the manufacture of goods bound for export to NAFTA countries are themselves, imported from NAFTA countries, there are theoretically no duties or tariffs on those inputs, and potentially on the exported finished products. In order for manufacturers to receive preferential tariff status for their goods, these goods must qualify under the NAFTA Rules of Origin. This ensures that NAFTA’s benefits are not extended to goods imported from non-NAFTA countries that have undergone only minimal processing in North America.
When products meet the NAFTA Rules of Origin, and therefore qualify for NAFTA tariff benefits, they are said to “originate.” These rules are of little concern in the rare instance when 100% of inputs and labor are from within the free trade zone (North America), but when the inputs are mixed, there are a few ways to determine if, or to what extent, certain goods qualify. To certify that goods qualify for the preferential tariff treatment under NAFTA, the exporter must complete a NAFTA Certificate of Origin.
Goods made from non-originating materials may qualify as long as each non-NAFTA input undergoes a tariff classification change (or “tariff shift”) as specified in Originating Goods (Article 401) and meets other requirements if applicable. If the imported article contains or was made with non-originating materials, then the importer will need to show that the tariff status of those “third country” materials has changed headings (or classifications/categories) before the finished article is considered eligible. Mark Neville provides an example in “Tariff Shift Rule – What It Does and How It Works:”
To show a differing tariff shift rule, consider the case of pasta imported into the United States from Singapore. Wheat flour, classified under heading 1101, was exported from Canada to make the pasta in Singapore. The pasta would be classifiable under heading 1902, HTS, when entered into the United States. This heading carries the tariff shift rule: “A change to headings 1902 through 1905 from any other chapter.” Because heading 1101 is in a different chapter (chapter 11) than heading 1902 (chapter 19), the pasta would qualify for the SFTA benefits.
In other words, if the products are to qualify for preferential tariff status, the inputs coming from non-NAFTA countries must be categorized under a different chapter heading. Nevertheless, there is an exception to this rule, known as the De Minimis Rule. According to this rule, a good may still qualify as originating, if the value of the non-originating inputs that do not meet the tariff shift do not exceed 7% of the adjusted value of the good. So a product may qualify for preferential tariff status if its inputs are wholly made in the free trade region, or if its non-NAFTA inputs are far enough removed from the end product, and if its non-NAFTA inputs that aren’t far removed make up a minimal percentage of the product’s final value.
This is a brief overview of NAFTA’s Rules of Origin. Manufacturers seeking more comprehensive information on this topic can consult Chapter 4 of the NAFTA.