The United States-Mexico-Canada Agreement (“USMCA”) and its predecessors, NAFTA and the Canada-United States Free Trade Agreement ("CUSFTA"), have been with us since 1989. One of the most contentious elections in Canadian history, in November 1988, was fought over whether the CUSFTA should be implemented. The basic terms of the Agreement are generally well understood by businesses who trade regularly among the three member countries. However, that is often not the case for the business community in general.

Unlike the European Union to which it is often compared, the USMCA is not a customs union. Each country maintains its own customs laws and tariff schedule. Goods traded between the member countries must be declared on importation.

Duty free treatment

The USMCA provides duty free treatment for substantially all goods traded between Canada, the United States and Mexico which originate among them. What does that term - “originate” - mean? We’ll start by describing two types of exports that do not or may not originate under the USMCA. We will then discuss how to identify those which do. First, a good does not originate simply because it is exported from one member country to another. For example, a television set manufactured in China, shipped to a warehouse in Mexico for storage, and then shipped to a retailer in the United States, is not entitled to duty free treatment under the USMCA. It will be subject to duties, if any, under the American tariff code that applies to television sets that originate in China.

Second, a good manufactured in the United States, Mexico or Canada does not automatically qualify as originating under the USMCA (although it often will) . This appears counter-intuitive. The confusion arises because there are two types of origin in international trade – non-preferential and preferential.

The concept of “non-preferential origin” applies broadly to all goods involved in international trade. Every good that crosses a border anywhere on Earth has a country of non-preferential origin, generally just referred to as the country of origin. In broad terms, the country of non-preferential origin is the country where the last "substantial transformation" in manufacture or production took place.

In contrast, the concept of “preferential origin” applies more narrowly to goods manufactured or produced within a free trade region, such as the USMCA, and traded between the member countries. It does not generally apply to goods manufactured or produced in a single country. Rather, it applies collectively to goods manufactured or produced in one or more of the countries which are parties to the free trade agreement .

The concepts behind these two types of origin, and the differences between them, are discussed in more depth in the article The Basics of Origin in International Trade.

The USMCA Rules of Origin

The rules of non-preferential origin under the USMCA are known simply as the "Rules of Origin". If a good is wholly composed of components or materials derived from one of Canada, the United States or Mexico, or from a combination of two or all three of those countries, it will “originate” under the USMCA and generally qualify for duty free treatment when exported from one of those countries to another. For example, a combination of wheat grown in Canada and the United States will originate under the USMCA when exported to Mexico, as will multigrain flour milled in Canada using only grains and other ingredients grown in Canada or the United States.

The USMCA Rules of Origin for goods containing components or materials originating outside the United States, Canada or Mexico are not based on the broad principle of substantial transformation. Rather, these rules are product specific, quite detailed and 208 pages long.  The Product-Specific Rules of Origin (“PSROs“) follow the Harmonized System (HS) of tariff classification used by almost all developed countries. There are two main criteria for qualifying under the PSROs:

• Tariff shift – a comparison of the tariff classification of the raw materials as they existed before production to the tariff classification of the finished good.

• Regional value content – in general terms, the ratio of the value of production within the United States, Canada and Mexico to the selling price or cost of the finished good.

For example, a television set is classified under subheading 8528.72, which forms part of heading 85.28. The PSRO for heading 85.28 provides that a finished good classified within it will qualify a originating if either (a) every non-originating component or material used to make it is classified outside heading 85.28 (tariff shift test), or (b) there is a regional value content of not less than 60% under the transaction value method or 50% under the net cost method.

The tariff shift test is generally easiest to apply. In addition to television sets, heading 85.28 includes monitors (8528.59) and reception apparatus for television without a monitor (8528.71). If either of these components originates in a country outside the United States, Canada or Mexico, the finished set will not qualify under the tariff shift test. However, it might qualify under the regional value content test, which involves some cost accounting.

Not all tariff codes in the PSROs provide an option between tariff shift and regional value content tests. Some specify one or the other and some require both. Further, there are four origin criteria under the USMCA, of which three relate to different circumstances where the good contains materials or components from outside North America.

Details of how the tariff shift and regional value content categories are applied are further described in an article entitled Determining Origin Under the USMCA available elsewhere on this website.

Documentation and Certification

If the goods you make meet the Rules of Origin, you need to document your conclusions. The basic document is a list of all the raw materials, organized into two categories: originating and non-originating. This is known as a Bill of Materials. You will generally need letters or certifications of origin from suppliers of originating materials indicating that they qualify. If a tariff shift test is being applied, the non-originating materials must be classified under the HS to demonstrate that all of them meet the test. If the regional value content test is being applied, you will need to value all the non-originating materials and calculate the transaction value or net cost.

This may involve a fair amount of work. There is no point in doing it if the goods are duty free in the country of import under general international trade rules (known as Most Favored Nation, or MFN). The work may also not be worthwhile if the rate of duty is nominal, say 2% or less.

An importer who claims duty free treatment under the USMCA must have a certification of origin in its possession. This certification is not provided with the import documents; however, it may be requested by the customs authority in the country of import. There is no prescribed form of certification (as there had been with NAFTA). However, a specified set of data elements must be set out on the invoice or other document.

The certification of origin may be prepared by the producer, exporter or importer. The documentation that each is requited to maintain is described in a separate article on this website.

Liability of the Importer

The responsibility for analyzing and documenting the fact that a good qualifies under the USMCA Rules of Origin usually lies with the producer or exporter. However, if this analysis is not done, or is faulty and reaches incorrect conclusions, the liability for duties otherwise payable, plus any penalty and interest, falls to the importer. A prudent importer who receives a certification of origin from a producer or exporter would be wise to enquire about the work done to back it up.

History

The USMCA, known as CUSMA in Canada, replaced the North American Free Trade Agreement ("NAFTA") effective July 1, 2020. This transition was largely a non-event for the the many goods where the Rules of Origin changed little, or not at all.  However, the Rules did change significantly for certain industries, including automobiles, textiles, steel, and chemicals. 

The USMCA is the third in a series of free trade agreements that began in 1989 with the Canada-United States Free Trade Agreement. The early success of that agreement prompted Mexico to ask to join, which led to the implementation of NAFTA in 1994. The scheduled reductions in tariffs that were in place at the outset of both former agreements have long since expired. The only remaining duties under the USMCA are on certain agricultural goods.

Related Articles: Determining Origin Certification Documentation