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Practical challenges with free trade agreements

Practical challenges with free trade agreements . Armando F. Beteta. Free Trade Agreements (Current Environment). Increased supply change, coupled with increasing FTA activity

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Practical challenges with free trade agreements

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  1. Practical challenges with free trade agreements Armando F. Beteta

  2. Free Trade Agreements (Current Environment) • Increased supply change, coupled with increasing FTA activity • The WTO currently reports notifications of 380 active FTAs (not including unilateral preferences); each agreement has distinct rules of origin • Complexity of managing multiple sets of rules: • each manufacturing process must be evaluated based on the FTA applicable to the destination country; • products destined for multiple FTA locations require multiple evaluations. • Significant focus on establishing common procedures to verify origin, establish processes to confirm audit trail- recognizing requirements of each FTA must be separately considered. • Both automation combined with non-automated controls are key • (from how claims are made to contractual requirements for suppliers) • Extensive training

  3. Free Trade Agreements (Current Environment) • Consensus – Enforcement increasing. • Companies are spending more time and effort with FTAs, expect trend to increase. • Business pressure is being commonly experienced to be more competitive via FTAs but the complexity of rules is not appreciated. • Opportunity for strategic involvement – adding/changing manufacturing • Cost –benefit analysis (FTAs are not self executing and are costly to maintain)

  4. Rules of Origin (Complexity and Challenges) • TOO MANY RULE SETS • No global harmonization of ‘general origin’ • Each FTA has its own ‘preferential origin’ rules which are different • Clients (and their IT systems) often don’t understand, or can’t cope with, the difference! • PRIOR ANALYSIS/COMPLIANCE PROCESSES OFTEN WEAK (OR NON-EXISTENT) UNTIL ‘PROBLEM’ • Often person responsible at export has little appreciation of consequences

  5. Rules of Origin (Complexities and Challenges) DifferentTypes of Specific Rules • Tariff Shift and/or RVC (i.e. NAFTA, CAFTA, G-2, Northern Triangle) • Strict rules in some cases (constant amendments) • Sufficient Working or Processing (EU-Mexico) • Ex-Works • Excessive importance on originating raw materials • Not to be misunderstood with substantial transformation • Heading shift or RVC percentage (ALADI) • Simple but strict rules

  6. Certification (Diverse Processes) WHO CERTIFIES? • Exporter • Knowledge/ Written Declaration/ Producer’s Certification • Advantages/Disadvantages • Simple to prepare and issue • Flexible timingforissuance • Usually does not include back-up information or in depth analysis upon submission • Exporter usually lacks of sufficient information to confirm origin • Authority may rely on formality to deny origin • Authority • Questionnaire submitted by exporter • Advantages/Disadvantages • Time consuming process • Should include back-up information and analysis • May still be questioned or disallowed by importer country’s authority • Formalities are usually not questioned

  7. Certification (Leading Practices) Whatpracticesshouldbefollowed? • Review certificates or declarations of origin for accuracy and completeness • Periodic testing of records to ensure compliance is maintained • Periodically check with suppliers that sourcing has not changed • Immediately report any errors found on certification documentation

  8. What if the incorrect origin qualification is determined? • Potential Impact trade community • Unnecessary delays • Unbudgeted duty costs • Monetary penalties, fines and sanctions • Criminal prosecution if wilfully or negligently declared • Loss of customs privileges or increased scrutiny • Correction costs • Lost opportunities • Failing to claim Preferences under FTAs • Failing to factor duty or preferences into sourcing or selling decisions based on landed cost

  9. What is audited? • Importer and exporter obligations that entitle the import of goods at a preferential rate of duty • Importer obligations • Possession of an FTA certificate of origin, stating that the imported goods qualify as originating • The FTA certificate is complete, information matches import documentation and appears accurate on its face • Evidence that the goods were not “transshipped” outside of the FTA territories • Exporter obligations • Copies of the FTA certificates provided to importers • Documentation supporting the determination that products meet the FTA rules of origin

  10. Audit candidates and targets • Candidates • Any importer claiming a preference • Any exporter who signed a certificate • Any producer whose good was exported with a certificate • Targets • Often industry focus • Products with complicated origin requirements • Five-year audit period

  11. Auditors mechanics and focus • Review of certificate • Request additional import information (invoice, pedimento, etc.) • Likely to further look at records kept by Exporter/Producer that will prove origin qualification(rule of origin analysis, tariff classification of finished goods and components, BOM, purchase orders, etc).

  12. Auditors mechanics and focus • Common certification errors • Wrong criteria listed • Classification does not match entry document • Wrong period • Inconsistency in producer’s information

  13. Auditors mechanics and focus (continued) • Production records • Tariff shift support • RVC calculation • Intermediate material determination • Accounting methods • Common errors • No support for origin of a component/assumption that a component purchased in a Party is originating • RVC calculation errors • Failure to adhere to an FTA authorized accounting method

  14. FTA Compliance - Challenges • Imports • Suppliers unfamiliar with or don’t understand FTA requirements • Difficulty obtaining supplier certificates on a timely basis • Optimizing FTA content to satisfy origin rules for the same products marketed in different FTA countries while striving to maintain the lowest manufacturing cost • Mastering different rules of origin and other criteria for each FTA • Exports • Managing internal sales team who promises certificates to customers without confirmation of FTA eligibility • Customers unfamiliar with or don’t understand FTA requirements • Using multi-sourced parts makes determination of FTA eligibility difficult

  15. Using Reasonable Care When Claiming FTA Benefits • Imports • Maintain written policies, procedures and other internal controls • Provide training package to suppliers to improve compliance • Provide instructions to customs brokers to ensure accurate FTA declarations • Obtain supplier certificates prior to making FTA claims • Review supplier certificates to confirm their validity • Exports • Solicit and audit supplier certificates or similar information prior to issuing final FTA certificate • Obtain updated Bills of Material on regular basis

  16. Optimizing use of FTAs • Transshipment provisions • Is there a direct shipment exception under the FTA? • Interaction of Customs Procedures and FTA benefits • Can a company get duty relief on materials used in manufacture AND claim FTA benefits when the resulting products are exported? • Trade Agreement Parity • Are there any concessions so that a manufacturer in the destination country is not at a disadvantage to a manufacturer exporting from a remote FTA partner country?

  17. Optimizinguse of FTA’s: TransshipmentOption • Transshipment provisions in FTA’s are an exception to the direct shipment requirement between the originating country and the destination country: • Allows goods to beshippedthrough the territory of a non-party and maintain their originating status. • Generally, require that goods must remain under the control or supervision of the customs authorities. • Generally, require that goods do not undergo any operations other than unloading, reloading or those necessary to preserve them in good condition.

  18. Optimizinguse of FTA’s: TransshipmentOption • Specific transshipment provisions may be more restrictive than others: • Article 3-17 of the Mexico-Israel FTA allows goods originating in either party to maintain originating status even if they are transshipped through Canada, the EFTA, the EU and the U.S. without being under the control or supervision of customs authorities. • The General Origin Regime of the Latin American Integration Association (“ALADI”) requires that transit through the territory of a non party be justified due to geographic considerations or transportation requirements of the products

  19. Optimizinguse of FTA’s: TransshipmentOption • Consolidation of inventories destined to diverse countries in a single distribution would allow the reduction of delivery times and freight costs and optimizing the customs flow of products • Thetransshipment provisions would allow originating products to maintain their preferential tariffs upon importation into the final destination country even if they were previously consolidated in the territory of a non-party

  20. Optimizing use of FTAs: Inward-Outward Processing • FTAs may provide imported components with a beneficial duty rate (tariff elimination or reduction) (Inbound) • Rules of Origin (Preference Criteria). • Certification of origin. • Trade Program (i.e. IMMEX, PROSEC, etc.) • Qualifying finished goods will receive duty preferences in several destination countries (Outbound)

  21. Optimizing use of FTAs: Tradeparity • A Mexican provision allows goods manufactured in Mexico to receive the same preferential duty treatment as a foreign made good imported from a country that has an FTA with Mexico. • Originatinggoodsmanufacturedunder a specificcustomsprograms(IMMEX, maquila or PROSEC) permanentlyimportedbyanotherentitywithan IMMEX, maquila or PROSEC Programshallbesubjecttothepreferentialtarifftreatmentunder a specific FTA.

  22. Optimizing use of FTAs: Tradeparity • Goodsmustcomplywiththecorresponding rule of origin of any FTA signedbyMexico and thepreferentialdutyfromthat FTA shallbeapplied. • For this purposes, goods originating in Mexico should be classified under new HTS code: 9807.00.01 “merchandise produced in national territory that returned in the same state as exported or returned to national territory, according to the guidelines established by the Secretary of Economy.” • Origin certification for the Mexican originating good being imported into Mexico may be issued by Mexican producer, exporter or even the Mexican authority.

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