Understanding Free Trade Agreements

1
Understanding Free Trade Agreements Effect of
the 2007 HTS Changes Smartmap ExpoOctober 4,
2007
J.L. Haggin Associates Co.
2
Customs Modernization ActMod Act

• Reasonable Care Standard
• Recordkeeping requirements
• Fines Penalties
• Applies to both Importers
• and FTA Exporters

3
Free Trade Agreements

• North American Free
• Trade Agreement (NAFTA)

• U.S. Israel Free Trade Area
• U.S. Jordan Free Trade Area
• U.S. Chile Free Trade Agreement
• U.S. Singapore Free Trade Agreement

4
Free Trade Agreements contd

• U.S. Australia Free Trade Agreement
• U.S. Morocco Free Trade Agreement
• U.S. Dominican Republic - Central America
  Free Trade Agreement (DR-CAFTA)
• U.S. Bahrain Free Trade Agreement

5
Free Trade AgreementsAreas of Concern

• Complex rules for qualification
• Accurate classification of products and materials
• Certificates of Origin
• Recordkeeping requirements BOM, production
  records
• Producer or exporter must have internal controls
  in place to validate claim (verifications) and be
  able to demonstrate that internal control has
  been tested on periodic basis

6
U.S.-Israel Free Trade Area (IFTA)
J.L. Haggin Associates Co.
7
US-ISRAEL FREE TRADE AREA(IFTA)

• To qualify for duty-free entry under the USIFTA,
  goods
• must be
• 1. Products of (i.e., originates in) Israel
• 2. Imported directly from the IFTA region and
• Able to satisfy the 35 minimum value
  requirement.
• IFTA region Israel, West Bank, Gaza
  Strip or
• Qualifying Industrial Zones (QIZs)

8
IFTA - ORIGINATING GOOD

• For a good to originate in Israel, it must be
• Made entirely of materials of Israeli origin or
• If made from imported materials, it must be
  substantially transformed into a new and
  different article of commerce in Israel

9
US-ISRAEL FREE TRADE AREA

• General Requirements for IFTA Eligibility
• Direct Shipment
• 35 Percent Criterion - cost or value of materials
  (actual costs of materials) freight, insurance,
  packing and related transportation costs to
  manufacturer waste/spoilage less scrap) plus
  direct costs of processing (actual labor and
  other production-related costs dyes, molds and
  tools RD and inspecting/testing costs) must
  equal more than 35 of the entered value of the
  merchandise. No profit/general expenses are
  allowed.

10
Allocation of Costs

• Domestic (IFTA)
• Components
• Labor
• Equipment (molds, tools, dies)
• Processing
• General Overhead
• General Expenses directly related to product

• Foreign
• Components

11
North American Free Trade Agreement (NAFTA)
J.L. Haggin Associates Co.
12
PreferentialRules of Origin

• Determine whether good originates in the
  territory of a party
• Whether entitled to preferential treatment

13
Territory

• Customs territory of Canada, Mexico or the
  United States

14
Material

• A good that is used in the production of another
  good, and includes a part or an ingredient
  (component).

15
Goods

• Domestic products as these are understood in the
  General Agreement on Tariffs and Trade or a
  finished item that is being shipped.

16
Originating

• Qualifies for NAFTA
• Applies to both components and finished goods

17
Road Map to Preferential Treatment

• Wholly obtained or produced
• Non-originating materials undergo tariff shift
• Produced entirely in the territory from
  originating materials

18
Rule A

• The good is wholly obtained or produced entirely
  in the territory of one or more of the Parties.

19
Goods Wholly Obtained

• Mineral goods extracted in the territory of one
  or more of the Parties
• Vegetable good, as such goods are defined in the
  Harmonized System, harvested in the territory of
  one or more of the Parties
• Live animals born and raised in the territory of
  one or more of the Parties

20
Goods Wholly Obtained

• d) Goods obtained from hunting, trapping, or
  fishing in the territory of one or more of the
  Parties
• e) Goods (fish, shellfish and other marine life)
  taken from the sea by vessels registered or
  recorded with a Party and flying its flag
• Goods produced on board factory ships from the
  goods referred to in subparagraph (e) provided
  such factory ships are registered or recorded
  with that Party and fly its flag

21
Goods Wholly Obtained

• Goods taken by a Party or a person of a Party
  from the seabed or beneath the seabed outside the
  territorial waters, provided that a Party has
  rights to exploit such seabed
• Goods taken from outer space, provided they are
  obtained by a Party or a person of a Party and
  not processed in a non-Party

22
Goods Wholly Obtained

• i) Waste and scrap derived from
• -production in the territory of one or more of
  the Parties, or
• -used goods collected in the territory of one or
  more of the Parties, provided such goods are fit
  only for the recovery of raw materials and

23
Goods Wholly Obtained

• j) Goods produced in the territory of one or more
  of the Parties exclusively from goods referred to
  in subparagraphs (a) through (i), or from their
  derivatives, at any stage of production.

24
Goods Wholly Obtained Or Produced
25
Rule B
Each non-originating material used in producing
the good undergoes either

• A change in tariff classification
• A change in tariff classification plus satisfies
  regional value content requirements or
• Satisfies regional value content requirements.
• As the rules require of that particular good.

26
(No Transcript)
27
(No Transcript)
28
Regional Value Content (RVC) Requirement

• Regional Value Content is the calculated
  percentage of the value of the product that
  represents its North American content.
• North American (regional) Content must be
  calculated using one of two methods
• Transaction Value 60
• or
• Net Cost 50

29
Allocation of Costs

• NAFTA Originating
• Components
• Labor
• Equipment (molds, tools, dies)
• Processing
• General Overhead
• General Expenses directly related to product

• Non-Originating
• Components

30
Rule C

• The good is produced entirely in the territory of
  one or more of the Parties exclusively from
  originating materials.

31
Wooden Desks - (9403.30)

• Made in Canada from wood (4407.10) grown in
  Canada
• And from metal legs (9403.90) made from imported
  steel (7212.50)
• And from metal drawer hardware (9403.90) made
  from imported steel (7212.50)

32
Core Rules Of Origin
Wholly obtained or produced
NAFTA QUALIFIED
Tariff change
Originating material
33
De Minimis - for tariff-shifts

• By Value for most Products
• By Weight for Textiles

• 7

Exceptions certain products of Ch. 1-27
certain Ch. 73, 84, 85 items
34
Customs Procedures under NAFTA
35
(No Transcript)
36
Basis for Completing the Certificate of Origin

• Knowledge of whether the good qualifies as an
  originating good OR
• Reasonable reliance on the producers written
  representation that the good qualifies as an
  originating good OR
• Completed and signed certificate provided by the
  producer

37
Recordkeeping - Exporter

• This Requirement Includes Records Associated
  With
• the purchase of, cost of, value of, and payment
  for, the good that was exported
• the purchase of, cost of, value of, and payment
  for, all materials, including indirect materials,
  used in the production of the good that was
  exported and
• the production of the good in the form in which
  the good was exported from its territory.

38
Record Keeping Penalties
Failure to maintain, store or retrieve demanded
information

• Willful
• 100,000 or
• 75 value (whichever is less)

• Negligence
• 10,000 or
• 40 value (whichever is less)

39
Origin Verification

• Origin verifications are
• The act of verifying the exporters claim that
  the imported good is an originating good under
  NAFTA
• Origin verifications are not
• Asking the importer of record routine questions
  about the imported goods
• Asking the importer of record questions about the
  NAFTA claim

40
Initiating an Origin Verification

• CO requested from the importer of record
• Informal inquiries directed to the exporter or
  producer
• conferences with the exporter
• correspondence
• telephone calls
• Formal inquiries directed to the exporter or
  producer
• written questionnaire
• visit to the exporters premises

41
Origin Determination Contents

• Reference to the Certificate of Origin.
• Description of the goods verified.
• Statement of the facts established.
• Statement as to the legal basis of the
  determination.
• Notification to the exporter or producer of
  review and appeal rights.

42
U.S.-Jordan Free Trade Area(JFTA)
J.L. Haggin Associates Co.
43
US - JORDAN FREE TRDE AREA (JFTA)

• To qualify for duty-free treatment upon entry
  under the JFTA, goods must be
• 1. Products of (i.e., originates in) Jordan
• 2. Imported directly from Jordan and
• Able to satisfy the 35 minimum value requirement.

44
U.S.-Singapore Free Trade Agreement(SFTA)
J.L. Haggin Associates Co.
45
US-Singapore Free Trade AgreementRoad Map to
Preferential Treatment

• Wholly obtained or produced
• Good is listed in GN 25(m) Integrated Sourcing
  Initiative and goods are imported direct from
  Singapore
• Non-originating materials undergo tariff shift or
  goods meet Regional Value Content (RVC) same as
  NAFTA Rule B Rules found in GN25(o)

46
US-Singapore Free Trade AgreementIntegrated
Sourcing Initiative

• Provides for limited amount of technology,
  equipment and medical devices that already face
  zero duties into the U.S. and Singapore.
• Good are listed in GN 25(m)
• Goods can be of any country of origin, but must
  be imported direct from Singapore
• All ISI qualifying products are exempt from MPF
• Goods must be marked with actual country of origin

47
SFTA - Regional Value Content

• RVC is the calculated percentage of the value of
  the product that represents its SFTA (Singapore
  US) content.
• SFTA content must be calculated using one of two
  methods
• Build-up Method 35
• OR
• Build-down Method 45

48
SFTA Certificate of Origin

• No specified format of certificate
• Required data elements
• Can be produced by importer, exporter or producer
• Must be provided to CBP upon request
• Importer is 100 responsible for claim!

49
C/O Data Elements

• Name and address of the importer
• Name and address of the exporter
• Name and address of the producer
• Description of good
• HTS classification number
• Preference criterion or Preference Rule

50
C/O Data Elements contd

• Single shipment provide commercial invoice
  number
• Multiple shipments of identical goods provide
  blanket period
• Authorized signature, company, title, telephone,
  fax, e-mail and certification date
• Certification of accuracy of information,
  agreement to maintain records and definitive
  statement of eligibility of product

51
Recordkeeping - Importer

• The exporter is required to support the SFTA
  Certificate of Origin or Statement of Eligibility
  with records associated with
• The manufacturing in a US-SFTA country
• The purchase of, cost of, and payment for all
  materials, including indirect materials, used in
  the production of the good
• The purchase of, cost of, and payment for the
  good that was exported.
• However, the importer is responsible for
  providing the supporting documentation required
  to substantiate claim.

52
U.S.-Chile Free Trade Agreement(UCFTA)
J.L. Haggin Associates Co.
53
US-Chile Free Trade AgreementRoad Map to
Preferential Treatment

• Wholly obtained or produced
• Non-originating materials undergo tariff shift or
  goods meet Regional Value Content (RVC) same as
  NAFTA Rule B Rules found in GN26(n)
• Good are produced entirely from originating
  materials

54
UCFTA - Regional Value Content

• RVC is the calculated percentage of the value of
  the product that represents its UCFTA (Chile
  U.S.) content.
• UCFTA content must be calculated using one of two
  methods
• Build-up Method 35
• OR
• Build-down Method 45

55
UCFTA Certificate of Origin

• No specified format of certificate
• Required data elements
• May be in English or Spanish
• Can be produced by importer, exporter or producer
• Must be provided to CBP upon request
• Importer is 100 responsible for claim!

56
Recordkeeping - Importer

• The exporter is required to support the UCFTA
  Certificate of Origin or Statement of Eligibility
  with records associated with
• The manufacturing in a UCFTA country
• The purchase of, cost of, and payment for all
  materials, including indirect materials, used in
  the production of the good
• The purchase of, cost of, and payment for the
  good that was exported.
• However, the importer is responsible for
  providing the supporting documentation required
  to substantiate claim.

57
U.S. AustraliaFree Trade Agreement(AFTA)
J.L. Haggin Associates Co.
58
US-Australia Free Trade Agreement (AFTA)

• Effective 1/1/2005
• Rules found in HTS General Note 28
• AU as prefix to HTS classification
• Regulations in 19 CFR written, not published yet

59
US-Australia Free Trade AgreementRoad Map to
Preferential Treatment

• Wholly obtained or produced
• Non-originating materials undergo tariff shift or
  goods meet Regional Value Content (RVC) same as
  NAFTA Rule B Rules found in GN28(n)
• Good are produced entirely from originating
  materials
• Good otherwise qualifies as an originating good
  pursuant to Agreement (textile provisions)

60
AFTA RVC Requirement

• RVC is the calculated percentage of the value of
  the product that represents its AFTA (Australia
  U.S.) content.
• AFTA content must be calculated using one of two
  methods
• Build-up Method 35
• OR
• Build-down Method 45
• Certain automotive goods must use net cost and
  satisfy 50 RVC

61
AFTA Certificate of Origin

• No specified format of certificate
• Required data elements
• Must be in English
• Can be produced by importer, exporter or producer
• Must be provided to CBP upon request
• Importer is 100 responsible for claim!

62
Recordkeeping - Importer

• The exporter is required to support the AFTA
  Certificate of Origin or Statement of Eligibility
  with records associated with
• The manufacturing in the U.S. or Australia
• The purchase of, cost of, and payment for all
  materials, including indirect materials, used in
  the production of the good
• The purchase of, cost of, and payment for the
  good that was exported.
• However, the importer is responsible for
  providing the supporting documentation required
  to substantiate claim.

63
U.S. MoroccoFree Trade Agreement(MFTA)
J.L. Haggin Associates Co.
64
US-Morocco Free Trade Agreement (MFTA)

• Effective 1/1/2006
• Rules found in HTS General Note 27
• MA as prefix to HTS classification
• Regulations in 19 CFR written, not published yet

65
US-Morocco Free Trade AgreementRoad Map to
Preferential Treatment

• Wholly obtained or produced in Morocco or U.S
• Unless specified in GN27(h), must be
  substantially transformed into a new and
  different article of commerce in Morocco and must
  meet the 35 RVC requirement
• For goods specified in GN27(h), non-originating
  materials must undergo a tariff shift

66
Recordkeeping - Importer

• The exporter is required to support the MFTA
  Certificate of Origin or Statement of Eligibility
  with records associated with
• The manufacturing in the U.S. or Morocco
• The purchase of, cost of, and payment for all
  materials, including indirect materials, used in
  the production of the good
• The purchase of, cost of, and payment for the
  good that was exported.
• However, the importer is responsible for
  providing the supporting documentation required
  to substantiate claim.

67
Dominican Republic - Central America U.S. Free
Trade Agreement(DR-CAFTA)
J.L. Haggin Associates Co.
68
U.S. Dominican Republic - Central America Free
Trade Agreement

• Effective 3/1/2006
• Implemented by country Costa Rica last
  remaining non-signatory country
• Rules found in HTS General Note 29
• P or P as prefix to HTS classification
• Regulations (19 CFR 10.699) written not
  published yet
• Retroactive to 1/1/04 for textile and apparel
  goods

69
DR-CAFTA Countries

• United States Costa Rica
• El Salvador Guatemala
• Honduras Nicaragua
• Dominican Republic
• Costa Rica is the only country not yet eligible
  to receive benefits at this time.

70
DR-CAFTA Free Trade AgreementRoad Map to
Preferential Treatment

• Wholly obtained or produced
• Non-originating materials undergo tariff shift or
  goods meet Regional Value Content (RVC) same as
  NAFTA Rule B
• Good are produced entirely from originating
  materials

71
CAFTA RVC Requirement

• RVC is the calculated percentage of the value of
  the product that represents its CAFTA content.
• CAFTA content must be calculated using one of two
  methods
• Build-up Method 35
• OR
• Build-down Method 45
• Certain automotive goods must use net cost and
  satisfy 50 RVC

72
DR-CAFTA Certificate of Origin

• No specified format of certificate
• Required data elements
• May be in any language of a CAFTA party
• Can be produced by importer, exporter or producer
• Must be provided to CBP upon request
• Importer is 100 responsible for claim!

73
Recordkeeping - Importer

• The exporter is required to support the CAFTA
  Certificate of Origin or Statement of Eligibility
  with records associated with
• The manufacturing in a CAFTA country
• The purchase of, cost of, and payment for all
  materials, including indirect materials, used in
  the production of the good
• The purchase of, cost of, and payment for the
  good that was exported.
• However, the importer is responsible for
  providing the supporting documentation required
  to substantiate claim.

74
U.S. Bahrain Free Trade Agreement(BFTA)
J.L. Haggin Associates Co.
75
US-Bahrain Free Trade Agreement (BFTA)

• Effective Date August 1, 2006
• Rules found in HTS General Note 30
• BH as prefix to HTS classification
• Regulations in 19 CFR written, not published yet

76
US-Bahrain Free Trade AgreementRoad Map to
Preferential Treatment

• Wholly obtained or produced in Bahrain or U.S
• Unless specified in Annex 3-A or 4-A, must be
  substantially transformed into a new and
  different article of commerce in Bahrain and must
  meet the 35 RVC requirement
• For goods specified in Annex 3-A (textile) or 4-A
  (agriculture), non-originating materials must
  undergo a tariff shift (no RVC strict tariff
  shift rules)

77
BFTA Certificate of Origin

• No specified format of certificate
• Required data elements
• Must be in English
• Can be produced by importer, exporter or producer
• Must be provided to CBP upon request
• Importer is 100 responsible for claim!

78
Recordkeeping - Importer

• The exporter is required to support the BFTA
  Certificate of Origin or Statement of Eligibility
  with records associated with
• The manufacturing in the U.S. or Bahrain
• The purchase of, cost of, and payment for all
  materials, including indirect materials, used in
  the production of the good
• The purchase of, cost of, and payment for the
  good that was exported.
• However, the importer is responsible for
  providing the supporting documentation required
  to substantiate claim.

79
Importers Obligations Liabilities
J.L. Haggin Associates Co.
80
Importers Obligations

• Must have required certificates and/or
  declarations at the time of entry
• Do not have to submit with entry must submit
  upon request by CBP
• Must have internal controls in place to validate
  claim with producer or exporter (factory
  verifications)
• Must be able to demonstrate that internal control
  has been tested on periodic basis
• Importer must be able to submit source records
  and documentation from producer to support
  eligibility and claim, upon request from CBP

81
Validation of Claim

• Importer must be able to submit source records
  and documentation from producer to support
  eligibility and claim, upon request from CBP
• GSP/ATPA/CBERA/IFTA/JFTA/BFTA/MFTA Records
  include producers Bill of Materials, invoices
  for all materials, affidavits of origin for
  domestic materials, production records of
  finished goods, cost breakdown of all expenses
  related to the production of the good must
  substantiate that good meets 35 content

82
Validation of Claim (contd)

• NAFTA/SFTA/UCFTA/CBTPA/AFTA/CAFTA
• Tariff shift qualification records include
  producers Bill of Materials, affidavits of
  origin for originating materials, production
  records of finished goods, classification of all
  non-originating materials demonstration of
  tariff shift.
• RVC qualification - records include producers
  Bill of Materials, invoices for all materials,
  affidavits of origin for originating materials,
  production records of finished goods, cost
  breakdown of all expenses related to the
  production of the good, sales invoice must
  substantiate that good meets RVC of agreement.
• Both tariff shift RVC all of the above
  records.

83
Validation of Claim - Textile

• Records include yarn mill affidavits fabric mill
  affidavits thread producer affidavits (where
  applicable) affidavits for findings, trim and
  interlinings (where applicable) producers Bill
  of Materials inventory receipts cutting
  tickets sewing records employee records other
  production records of finished goods.

84
Importers Liabilities

• Denial of claim duty consequences
• Lack of internal control high risk designation
  during Focused Assessment
• CBP may disqualify all entry claims for five (5)
  years
• Importer 1592 penalties may apply
• Recordkeeping penalties for failure to have
  required certificates or declarations a(1)(A)
  records at the time of entry
• Negligence up to 10,000.00 per shipment
• Willful up to 100,000.00 per shipment

85
Current FTA Negotiations
J.L. Haggin Associates Co.
86
Pending Free Trade Agreements

• Peru
• Panama
• South Korea
• Columbia

87
Peru Trade Promotion Agreement

• Signed on April 12, 2006
• Protocol of Amendment June 25, 2007
• Senate Finance Committee approved draft
  legislation Sept. 21, 2007
• House Ways Means Committee approved draft
  legislation Sept. 25, 2007
• Awaiting Congressional approval

88
Panama Trade Promotion Agreement

• Concluded negotiations December 19, 2006
• Signed on June 28, 2007
• Awaiting Congressional approval

89
Columbia Trade Promotion Agreement

• Signed on November 22, 2006
• Protocol of Amendment May 10, 2007
• Colombia must address violence against unions
  issue before Congress will consider

90
Korea- U.S. Free Trade Agreement

• Signed on June 30, 2007
• U.S. still has issues with beef, rice and auto
  tariff issues must be resolved prior to
  consideration by Congress
• Last FTA to be signed under the Trade Promotion
  Authority

91
Agreement Highlights

• Based on tariff shift RVC rules of origin
• Build up build down method (35/45)
• Importer responsible programs
• Penalties for exporter same as importer
  accuracy and recordkeeping

92
Trade Policy Provisions

• Must apply to all future FTAs
• Labor adopted five 1998 ILO principles
• Freedom of association
• Right to collective bargaining
• Elimination of forced or compulsory labor
• Abolition of child labor
• Elimination of discrimination in employment
• IPR allows generic drugs to enter markets more
  quickly

93
Trade Policy Provisions contd

• Environment must adopt following agreements
• Convention on Intl Trade in Endangered Species
• Montreal Protocol on Ozone-Depleting Substances
• Convention on Marine Pollution
• Inter-American Tropical Tuna Convention
• Rasmar Convention on Wetlands
• Intl Convention for Regulation of Whaling
• Conservation of Antarctic Marine Living Resources

94
Trade Policy Provisions contd

• Port Security U.S. retains right to prevent
  foreign companies from operating domestic ports
• Strategic Worker Assistance Training Initiative
  no longer optional
• Foreign Investment - foreign investors in the
  U.S. will not be accorded greater substantive
  rights regarding investment protections than U.S.
  investors in the U.S.

95
Harmonized Tariff Schedule Classification of
Merchandise
J.L. Haggin Associates Co.
96
Harmonized Tariff Schedule (HTS)

• World Trade Organization (WTO)
• World Customs Organization (WCO) aka Customs
  Cooperation Council
• Harmonized System Committee (HSC) comprised of
  WTO country representatives
• Review Subcommittee (RSC) reviews the HTS
  on regular basis to keep current with changes in
  technology and trade patterns.

97
Harmonized Tariff Schedule (HTS)

• Result of Customs Cooperation Council (WCO)- 1988
• U.S. International Trade Commission (USITC)
• Tasked with continuous review of HTS for U.S.
• Solicits, collects and considers comments from
  CBP and public regarding modifications
• Recommends WCO modifications to HTS to President
• Preliminary report submitted to USTR and posted
  on USITCs website
• House Ways Means and Senate
• Finance Committee must approve before
• President issues proclamation
• Proclamation is published in Federal Register

98
Changes in the 2007 HTSUS
J.L. Haggin Associates Co.
99
2007 HTS Updates

• HTS in effect on February 3, 2007
• Most changes are based upon HSC decisions and
  comments received from trade and Customs to
  clarify products subject to interpretation
• Several hundred amendments
• 83 chapters affected
• 240 headings affected
• Chapter Notes affected
• Consolidations and expansions of subheadings
• Substantially rate neutral

100
Primary Industries Affected

• High-technology
• Chemicals and pharmaceuticals
• Lumber and wood products (e.g. flooring)
• Jewelry
• Metal products
• Machinery and mechanical apparatus
• Toys and festive articles

101
Effects on Free Trade Agreements
J.L. Haggin Associates Co.
102
2007 HTS Changes

• FTA product specific rules are being amended to
  reflect the 2007 HTS
• Not ready to be implemented on February 3, 2007
  with 2007 HTS
• Certificates of Origin completed using the 2006
  rules of origin will be valid for 2007- only
  pertains to importations into the U.S
• COs completed prior to implementation will need
  to continue to reference the 2006 HTS numbers
  because the product specific rules are directly
  related to those HTS numbers
• Caution should be taken where product HTS number
  has changed substantially (i.e. chapters or
  headings) rule may be different!

103
Tariff Specific Rules of Origin for FTAs
Each non-originating material used in producing
the good undergoes either

• A change in tariff classification
• A change in tariff classification plus satisfies
  regional value content requirements or
• Satisfies regional value content requirements.
• As the rules require of that particular good.

104
(No Transcript)