NAFTA Renegotiations: Time to Look at Rules of Origin

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NAFTA Renegotiations: Time to Look at Rules of Origin

It’s no news that the Trump administration isn’t crazy in love with the North American Free Trade Agreement (NAFTA), in fact it’s well-known that one of the first areas of interest for the administration is renegotiating the rules of origin found in the agreement. What are the rules of origin you ask? It’s essentially a technical rule found in the document that states that goods that originate from NAFTA countries are entitled to receive preferential NAFTA tariff rates as opposed to goods that do not originate from a NAFTA country which are required to pay duties at the MFN rate. Those unrecoverable costs are usually picked up by the consumer who ends up paying higher prices. The opposite is of course very possible whereas Canadian goods may end up drowning in unrecoverable duties and thus making them less attractive and competitive on the global market.

Trump’s idea behind attacking the rules of origin is quite simple: American manufacturers need to sell more to Canadian importers and one way of achieving that is through a duty-free treatment. If U.S. manufacturers sell more, they produce more, if they produce more, they need more workers on the lines and so turns the wheels of business according to President Trump. More work, more jobs will make America great again as the saying goes.

But there’s light at the end of the tunnel. It seems like Canadian importers could benefit from a win-win NAFTA rules of origin renegotiation. As some Canadian importers have had NAFTA preferential tariff treatment denied, changes to the rules may seem like a good opportunity just as long as Canadian manufacturers can also remain unharmed from the renegotiations.

When NAFTA was originally drafted, the policy makers who negotiated the rules of origin did so in a manner to limit the availability of the preferential duty-free tariff rate. As it happens, the world has changed quite a bit since the first early days of the agreement and today’s environment seems like a good time to get the rules amended.

There are many cases where the Canada Border Services Agency (CBSA) has applied the rules of origin and denied the NAFTA tariff treatment. As a result, items imported into Canada cost more and are often a risky venture for American merchandisers.

As an example, the CBSA denied NAFTA tariff treatment to a cookie made by an American player growing and taking up place on the cookie market. But because the agency determined that one single ingredient from the cookie didn’t meet the rule of origin and that the de minimis rule wasn’t any help – the business had no other choice but to pass on the cost onto Canadian customers and as anyone would expect, sales decreased in Canada by over 50%.

This is important for Canadian importers who have been denied NAFTA preferential tariff treatment by the CBSA, due to technicalities related to the rules of origin to come forward and make it known to the Government. Businesses shouldn’t assume that the Government knows what they truly need in order to strive. Negotiators need to understand the technical problem with the rule so that, when the time comes, the Canadian negotiators will keep in mind what’s best for Canadian businesses.