There’s no such thing as a free lunch. For trade compliance managers, there’s no such thing as a truly free trade, either.
In the case of the North American Free Trade Agreement, the greatest cost comes in maintaining records showing that products qualify for NAFTA’s preferential tariff treatment. Compliance is enforced by the customs services of the three signatory nations: Canada, Mexico, and the United States. When they decide to audit, they generally start by asking to review certificates and supporting documents showing where claimed products originated.
McClure
“Sometimes these things are just not worth the time and trouble,” says Joel McClure, director of customs and international trade compliance at furniture retailer Restoration Hardware. “The moment you start using a free trade program, the customs people are going to come in and audit you. It’s not that we’re afraid to be audited, but I have a small staff and I can’t be tied up for a year with an audit.”
An importer who makes a claim for NAFTA benefits must be able to support it with a Certificate of Origin completed by the exporter. The burden of proving NAFTA origin historically has been on the exporter, but the importer is required to exercise reasonable care that the certificate is valid.
Restoration Hardware, which has $713 million annual sales, spends little time claiming NAFTA benefits because it imports only a small percentage of goods from Canada or Mexico, McClure says. To make NAFTA benefits worth the cost of compliance, it must be obvious that a product qualifies, he adds.
“If there’s any risk associated with claiming a product or any lack of information, then we won’t claim it,” McClure says. “We take the easy products—easy meaning that there’s an ROI on them.”
Companies that do want to claim NAFTA benefits need the expertise to know what records must be kept and a system to maintain them, trade compliance experts say. Careful documentation is seen as increasingly critical in light of recent penalties imposed by U.S. Customs and Border Protection, including a $41 million fine against Ford Motor Co. in a protracted recordkeeping case that’s still under dispute in the courts.
Customs and Border Protection “is calling upon importers to come up with a dizzying pile of bills of materials, detailed time records for production line workers, records of utilities expenses, and the like,” says Mark Neville, an attorney with the law firm DLA Piper.
What importers must remember, trade experts caution, is that by definition customs officials are revenue collectors. While politicians may be trying to promote free trade, customs officials historically have cast a critical eye on what they refer to as give-away or give-back programs, Neville says.
“They’re losing revenue, as they see it,” he says. “They’re really going to be holding the importers’ feet closer to the fire.
Working With Suppliers
Contrary to what experts say is a widespread misunderstanding, exporters can’t sign a NAFTA Certificate of Origin for a product just because they purchased it from a warehouse in North America. If all of a product’s component parts were made in NAFTA territory, the product can be certified. If not, exporters must collect origination documents from their suppliers for each component part, and then conduct an analysis based on a series of complex rules to determine whether the product as a whole qualifies for certification.
“I think our biggest challenge might be our suppliers—constantly keeping them aware of what forms they’re signing and what information they’re providing,” says Stella Wolf, customs compliance manager for Black & Decker’s Hardware and Home Improvement (HHI) group.
HHI uses technology from PSI Software, called NAFTAssistant, to help gather and maintain the massive volume of documents it collects from suppliers. The technology facilitates product certification, and it simplifies the work when the customs service comes calling.
“We’ve gone through several audits and have come out very well because of our recordkeeping,” Wolf says. “The software is great in that it makes us have a very clear and concise paper trail.”
For many of PSI Software’s clients, securing proper documentation from suppliers is the most difficult challenge, says Lalo Solorzano, vice president of sales at PSI. The software automates communications with suppliers by submitting annual requests for updated documentation.
“The biggest problem is that at the point [exporters] are trying to qualify their own product, they find out they never got an origination document from their supplier,” Solorzano says. “Often times that is an overlooked step in NAFTA compliance.”
“Our biggest challenge might be our suppliers, keeping them aware of what forms they’re signing and what information they’re providing.”
— Stella Wolf,
Customs Compliance Manager,
Black & Decker
Once an exporter has origination documents from its suppliers, it determines whether a product as a whole qualifies for certification by applying specific rules for that product, which are found in a massive directory known as Annex 401 Rules of Origin. Products and their specific rules are listed according to numbers that correspond to the Harmonized Tariff Schedule negotiated by the three countries.
One rule, known as “tariff shift,” gives some products preferential treatment as long as they are substantially transformed in North America into something different than the foreign-originated components. Another rule, known as Regional Value Content, allows some products with foreign content to qualify as long as the foreign content doesn’t exceed a specified level. Finally, the de minimus rule might apply if less than 7 percent of a product’s overall value is from foreign-made parts.
Sorting through these complex rules not only aids NAFTA compliance, resulting in reduced tariffs, it can also provide strategic benefits to trading companies. At HHI, the compliance software assists in making more efficient sourcing decisions, Wolf says.
A dedicated customs compliance department at HHI is responsible for navigating the complexities of the qualification rules, and the only individuals signing NAFTA Certificates of Origin are Wolf and her director, who are both licensed customs brokers, Wolf says. For any company interested in pursuing NAFTA benefits, dedicated compliance personnel are vital, she adds.
Badgering the Shipping Department
Goodrich
It is not uncommon at other companies, however, for untrained personnel—often in the shipping department—to be assigned certification responsibility, says John Goodrich, founder of JD Goodrich & Associates, a consulting firm specializing in import-export logistics and regulatory compliance.
“Often the transportation people just fill out [the certificate], and they do so without any understanding,” Goodrich says. “Salesmen call the shipping department and badger them into issuing one of these documents.”
Goodrich, who conducts trade compliance training, says that employees asked to sign certificates often realize there’s more to it than they’re aware of, but their complaints go unanswered in their workplaces.
“I have more people in near tears because they feel they’re being strong-armed by their companies to do these things,” Goodrich says. “My NAFTA courses often become therapy sessions.”
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