With relative ease, you can benefit from free trade. Free Trade Agreements allow you to import certain goods duty-free or at a reduced customs duty rate with participating countries. To determine if you can benefit from one, let’s first take a look at the definition of a Free Trade Agreement (FTA).
What is a Free Trade Agreement?
Free Trade Agreements are agreements made between countries who want to reduce trade barriers on goods manufactured in their respective countries. Canada has entered into agreements with several countries including Colombia, Peru, Panama, Chile and most recently the European Union to name a few.
Free Trade Examples
Now that we understand the definition, let’s take a look at some examples. A popular agreement is the North American Free Trade Agreement (NAFTA) which includes Canada, the United States, and Mexico. A more recent example is the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union.
4 Considerations When Evaluating Free Trade Benefits
Now that we understand what a trade agreement is and examples of how they are used, lets take a closer look at the responsibilities you would be assuming.
In the case of NAFTA, eligible goods must be:
- Manufactured in one of the respective countries (Canada, the U.S. or Mexico)
- Qualify under the Rules of Origin
- Shipped directly from the foreign country to the importing country (Canada, the U.S. or Mexico)
The following 4 areas require additional consideration:
1. Ensuring the items are shipped directly from a foreign country
In some instances, it is necessary to move the goods through a third country. A transportation scenario like this can still fall within the Free Trade Agreement rules by meeting certain conditions. In these instances, if the importer wishes to claim reduced or duty-free benefits, they will need to have proof that the goods were moved “in bond” through another foreign country and were never entered into the commerce of that country.
2. Accurate application of the tariff classification
Also of note is the common assumption that all Free Trade Agreements imported goods are all duty-free. This unfortunately, is incorrect.
Although some goods are entirely duty free, others are not. Establishing the rate of duty for an imported good depends in part on determining the proper H.S. Tariff Classification. This classification must be accurate. Furthermore, Tariff classification can be very complex and speaks to the essential character of the imported article including the following:
- End use
Additional questions about the product will need to be answered once the essential character has been determined.
To learn more about The Harmonized Commodity Description and Coding System sign up for our next H.S. Tariff Classification Workshop.
3. Comply with rules of origin
Another vital aspect of compliance are the Rules of Origin. For example, if the product you are importing has any foreign content you must ensure it complies with NAFTA’s Rules of Origin to be eligible. Some goods containing foreign materials may qualify depending on the rules for those tariffs or the Regional Value Content (RVC).
4. The party completing the documentation has sufficient knowledge
A further area of consideration relates to the party responsible for completing the shipment documentation. It is imperative that your foreign supplier has sufficient knowledge of the goods to support the completion of the Free Trade Agreement you will be using. Using the example of NAFTA, the person completing and signing the NAFTA Certificate of Origin is declaring that all statements are true and accurate. In other words, this person is attesting to due process and confirms that the goods listed qualify.
Additionally, while the foreign supplier is responsible for supplying the respective FTA Certificate of Origin, the importer of record is ultimately responsible for the payment of duties, taxes and penalties if at a later date the goods are discovered not to qualify.
If you have reservations regarding the validity of a free trade certificate, you may better choose to pay the regular rate of duty.
In conclusion, not all Free Trade Agreements are the same. They provide importers and exporters advantages such as duty-free or reduced customs duties. The best way to maximize the financial benefits of using an FTA is to ensure you understand your responsibilities.
Looking to learn more about how your company can benefit from free trade? Sign up below to be notified of our complimentary NAFTA for Beginners webinar.