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The National Law Center is a non-profit 501(c)(3) Research and Educational Corporation. © Copyright, 1996
Baker & McKenzie
Carol S Osmond (Toronto/Ciudad Juarez)
Claire Wright (San Diego)
(1-619)236-1441
The United States requires, under its customs legislation, that virtually all goods imported into the United States be marked as to their country of origin, to ensure that the ultimate purchaser of the goods is informed of the foreign country where the goods were manufactured. Under Canadian customs legislation only certain classes of imported goods are required to have an origin marking. For its part, México also requires that almost all imported products be labeled with their place of origin under product labeling legislation and regulations. The key issue in attempting to satisfy these origin marking requirements is how to determine which country is the country of origin, or country of manufacture, particularly as manufacturing processes have become increasingly globalized.
During the negotiation of the North American Free Trade Agreement ("NAFTA") among the United States, Canada and México, Canada was inclined to eliminate marking requirements entirely for goods traded within the free trade area. Instead, NAFTA provides in Annex 311 for each country to adopt "Marking Rules" for purposes of determining the country of origin for marking purposes of goods imported from another NAFTA country. The intention was that such rules though promulgated in each NAFTA country separately, would be based upon consultations among the 3 NAFTA countries. Therefore, they would be more transparent and certain than existing rules and consequently less susceptible to administrative discretion.
Each of the 3 NAFTA countries applies its NAFTA Marking Rules only to goods imported into their territories from another NAFTA country. For goods imported from non-NAFTA countries, each NAFTA country applies different rules for purposes of determining the country of origin for marking purposes. The United States is proposing, however, to use its NAFTA Marking Rules to govern the marking of all goods imported into its territory. Moreover, both the United States and Canada will be proposing that the approach used under NAFTA be adopted multilaterally in the context of the negotiations at the World Trade Organization (the "WTO") to harmonize rules of origin for non-tariff preference purposes. Therefore, the NAFTA Marking Rules should be of interest not just for exporters/manufacturers in North America, but for exporters/manufacturers everywhere. First, because they may in the near future be subject to such rules if they are exporting to the United States, and secondly, because similar rules may in the longer term be adopted multilaterally as a result of the negotiations at the WTO.
In addition to the Marking Rules, the NAFTA contains rules of origin for tariff preference purposes. The Marking Rules must be distinguished from these tariff preference rules of origin. Both sets of rules are used to determine the origin of a product, but for different purposes.
The NAFTA tariff preference rules of origin determine whether a good "originates" in the NAFTA territory, that is whether a good has undergone sufficient production within the entire North American free trade area to qualify for preferential duty rates. A good which meets the rules of origin for tariff preference purposes may be manufactured in just one or in all 3 of the NAFTA countries. The NAFTA tariff preference rules of origin do not determine the specific country of origin.
The Marking Rules on the other hand determine the specific country (or sometimes countries) of origin to be marked on a good entering a NAFTA country from another NAFTA country, but does not determine whether a good qualifies for NAFTA preferential tariff treatment. Therefore, for example, where a good meets the NAFTA tariff preference rules of origin, the Marking Rules will determine which of the 3 NAFTA countries may be marked on the product as the country of manufacture. However, a good marked as made in the United States, Canada or México will not necessarily qualify for the preferential duty rates under NAFTA as it would have to meet the tariff preference rules of origin to qualify for such treatment. Finally, it should be noted that under the Marking Rules, the country of origin for marking purposes may be determined to be a non-NAFTA country, since the Marking Rules apply to all goods imported from another NAFTA country, regardless of the degree of production which has taken place in that NAFTA country.
This article deals specifically with the Marking Rules adopted by the United States, Canada and México pursuant to NAFTA for goods entering each of those countries from another NAFTA country. It does not address the NAFTA rules of origin for tariff preference purposes.
Generally, each of the 3 NAFTA countries applies different NAFTA preferential duty rates to the same goods from the other 2 NAFTA countries, as the tariff phase-out schedules among the 3 countries are different. (The United States and Canada had already been phasing out their tariffs for five years under the Canada-United States Free Trade Agreement before NAFTA came into effect.) The United States, for example, has two different preferential tariff rates for goods which meet the NAFTA tariff preference rules of origin, a México rate for Mexican goods and a Canada rate for Canadian goods. Since the tariff preference rules of origin only determine whether a good has undergone sufficient production in the NAFTA territory to qualify for preferential duty rates, and not the specific country of origin, it was necessary for the United States to adopt rules to determine when the Canada rate or the México rate would apply, since a good could be manufactured partially in Canada and partially in México. The United States chose to use the Marking Rules for purposes of making this determination. Therefore, the tariff preference rules of origin will determine whether a good imported into the United States will qualify for a NAFTA preferential duty rate, but the Marking Rules determine which specific rate (the Canada rate or the México rate) will apply to the good in question.
México also uses the Marking Rules for this purpose. However, Canada only uses the Marking Rules to determine which NAFTA preferential duty rate applies, the United States Tariff rate or the Mexican Tariff rate, for certain textile and apparel goods and agricultural products. (For other types of goods, Canada applies different rules and there is in fact in Canada a third NAFTA preferential duty rate, the México-United States Tariff rate, which applies to goods which are of joint México and United States production.)
The Marking Rules are contained in the domestic regulations of each of the 3 NAFTA countries and came into effect on 1 January 1994 (hereinafter referred to as the "Marking Rules Regulations").1 Although in general terms the Marking Rules Regulations currently in effect in the United States, Canada and México are very similar, it should be noted that the 3 countries are not required to have uniform regulations. It should further be noted that the Marking Rules Regulations are now at different stages of revision in the 3 countries, further complicating the interpretation and application of the rules.2 Consequently, the following is simply a brief overview of the general Marking Rules which is applicable to all 3 countries. These general rules are not likely to be significantly changed as a result of any amendments. However, the amendments will significantly affect those rules which apply to determine the origin for marking purposes, if the origin cannot be determined under these general rules. Obviously, to fully appreciate the interpretation and application of the Marking Rules in any one of the NAFTA countries, the regulations and administrative policies of that particular country would have to be consulted.
The first general Marking Rule provides that goods which are "wholly obtained or produced" in a country must be marked as the product of that country. "Wholly obtained or produced" is a narrowly defined term and therefore, it cannot be assumed that because all of the materials used to manufacture a finished good are sourced or manufactured in the country of production of the finished good, that the finished good is "wholly obtained or produced" in that country.
The definition of goods "wholly obtained or produced" for NAFTA marking purposes is similar to the definition of "wholly obtained or produced" for NAFTA tariff preference purposes, and generally refers to such goods as minerals extracted or plants harvested from the earth of a particular country, as well as goods manufactured exclusively from such raw materials. Under this first general rule the good may not contain any foreign content.
The second general Marking Rule provides that the country of origin for marking purposes is the country in which the goods are produced exclusively of "domestic" materials. A "domestic material" is defined in the Marking Rules as any material which originates (as determined under the Marking Rules) in the country of production of the finished good. For example, if a finished product which is imported into Canada were manufactured in México, its country of origin for marking purposes would be México, if each material incorporated into the good were itself produced in México and determined to originate in México under the Marking Rules. This second general Marking Rule differs from the first in that, under this second rule the finished good may have some foreign content, since a material, even though it has foreign content, will qualify as a domestic material if it has undergone sufficient production in the country to satisfy the applicable Marking Rule.
In order for a good to meet the third general Marking Rule, each of the "foreign materials" incorporated into the good must undergo a prescribed change in tariff classification and satisfy any other applicable requirements. Section 102.20 of the current United States Marking Rules Regulations, Schedule III to the Canadian Marking Rules Regulations and the Annex of Specific Rules to the Mexican Marking Rules Regulations prescribe the degree of change in tariff classification (or "tariff shift") necessary, as well as any other requirements which must be met. These rules are referred to as the "specific" Marking Rules because the rules differ depending upon the tariff classification of the good in question. It is under this third general Marking Rule, or these specific Marking Rules, that the country of origin for marking purposes is most often determined.
To apply the tariff shift requirement prescribed in a specific Marking Rule to a finished good, the tariff classification of each "foreign material" contained in the finished good is compared with the tariff classification of the finished good. If each of the foreign materials undergoes sufficient processing in the country of production of the finished good to meet the specific tariff shift requirement (and any other applicable requirements set forth in the specific Marking Rule), that country will be the country of origin for marking purposes. For example, if a good is assembled in México exclusively from Taiwanese materials, the country of origin for marking purposes upon importation of the good into Canada will be México, if each of the materials satisfied the tariff shift requirement set forth in the specific Marking Rule and any other applicable requirements were also met.
As is the case with the specific NAFTA rules of origin for tariff preference purposes, "domestic materials" need not meet the tariff shift requirement set forth in the specific Marking Rule. This is the case because such materials contain sufficient local content by definition. In addition, as a general rule, the tariff shifts required by the specific Marking Rules are less onerous than the tariff shifts required by the specific NAFTA rules of origin for tariff preference purposes. Finally, the specific Marking Rules generally do not contain a percentage local content requirement additional to the tariff shift requirement. However, some specific Marking Rules do require that certain specified processes occur in the country in order for a good to be considered to originate in that country.
Unlike the regulations adopted by the NAFTA countries for purposes of the tariff preference rules of origin, as noted above, the United States, Canada and México are not required under NAFTA to have uniform regulations for purposes of the Marking Rules. This difference is particularly evident in respect of the specific Marking Rules. While most of the specific Marking Rules are the same in each country, there are differences, particularly in the area of textiles and apparel.
If the country of origin for marking purposes cannot be determined through application of the first 3 general Marking Rules described above, the country of origin of the finished good will be the country of origin of the single material that imparts the essential character to the good (provided the good in question is not a set). There is no similar rule of origin for tariff preference purposes, because if the tariff preference rules of origin are not met, the good simply does not qualify for preferential tariff treatment. For marking purposes, however, a country of origin must always be determined.
In determining the material which imparts the essential character to a good, only materials classified in a tariff provision from which a change in tariff classification is not permitted under the specific Marking Rule for that good may be considered. However, both domestic and foreign materials are taken into account.
If more than one material does not meet the tariff shift requirement, the factors to consider in determining which one of these materials imparts the essential character to the product are the nature of each such material, such as the bulk, the quantity, the weight and the value of the material and the role of the material with regard to the use of the finished product.
Once the single material that imparts the essential character to the good is determined, the country of origin of that material must be determined applying the Marking Rules. If the material which imparts the essential character is a domestic material, the country of origin of the finished good for marking purposes will be the country in which the finished good is produced. However, if the material is a foreign material, the country of origin for marking purposes of the finished good will be the country of origin of that foreign material. For example, assume a good is assembled in México using both materials from México and materials from Taiwan and the first 3 general Marking Rules cannot be met. The country of origin of the finished good when imported from México into Canada will be determined based upon the origin of the single material which gives the good its essential character. If that material is determined to be a Mexican material, the finished good will be marked "Made in México." However, if that material is determined to be a Taiwanese material, it will be marked "Made in Taiwan."
It is the determination of which material imparts the essential character to a good which is likely to create the most difficulties in applying the NAFTA Marking Rules. It also leaves a degree of discretion to customs officials, something which the NAFTA negotiators had attempted to avoid.
If the country of origin cannot be determined based upon the general Marking Rules described above, the Marking Rules contain further provisions in order to determine the origin for marking purposes. (As noted above, these are the provisions which are currently undergoing significant revisions.) In addition, there are other rules such as a "tariff preference override" rule which applies to goods which meet the rules of origin for tariff preference purposes but for which a single NAFTA country of origin is not determined under the Marking Rules. There is also a special "returned goods" provision which in the case of the United States provides that a good which undergoes further production outside the United States cannot be marked "Made in the U.S.A." if it is subsequently returned to the United States. The United States is considering removing this provision from its regulations as it is considered redundant given other provisions of the Harmonized Tariff System of the United States. Canada and México have a similar provision, but such provision allows a good to undergo "minor processing" outside Canada or México , as the case may be, and still be marked as a good of Canada or México.
In summary, the NAFTA Marking Rules are a special set of rules for the determination of the country of origin for marking purposes of goods imported from one NAFTA country into another NAFTA country. However, the United States is considering extending the application of its NAFTA Marking Rules to determine the country of origin for marking purposes for all imported products. Furthermore, both Canada and the United States will be proposing that the NAFTA Marking Rules model be adopted for purposes of harmonizing rules of origin for non-tariff preference purposes at the multilateral level. Therefore, the NAFTA Marking Rules should be of interest not only to North American exporters/manufacturers but to exporters/manufacturers outside North America as well.
As should be evident from the discussion above, the NAFTA Marking Rules are complex. The NAFTA tariff preference rules of origin simply involve a "yes" or "no" assessment of whether the goods in question qualify as originating. However, under the Marking Rules a specific country of origin must be determined and if the general Marking Rules do not initially provide an answer, further analysis is required. Interpretation and application of the Marking Rules is made more difficult because government officials, legal practitioners and exporters and manufacturers have had little experience with the NAFTA Marking Rules and because in each of the 3 NAFTA countries, the domestic regulations which incorporate the NAFTA Marking Rules have not yet been finalized in all 3 NAFTA countries.
Footnotes:
1 The United States published interim regulations as the "Rules for Determining the Country of Origin of a Good for Purposes of Annex 311 of the North American Free Trade Agreement" Federal Register, Vol. 59, No. 1, 3 January 1994, p. 110; Canada's original regulations were published as "Determination of Country of Origin for the Purpose of Marking Goods (NAFTA Countries) Regulations," SDR/94-23, 1994, Canada Gazette, Part II, p. 471 (12 January 1994) and México published the "Accord which establishes country of origin marking rules for determining when a product imported into the national territory may be considered a U.S. or Canadian product in conformity with the North American Free Trade Agreement" in the Diario Oficial dated 7 January 1994, First Section, page 2.
2 On 5 May 1995 and 5 September 1995, the United States published for comment proposed amendments to its interim regulations in the Federal Register, Vol. 60, No. 87, p. 22312 and Vol. 60, No. 171, p. 46188, respectively. The latter set of proposed amendments primarily addresses textile articles and apparel items and, in particular, it sets forth new specific Marking Rules for textiles and apparel articles. However, neither set of amendments has yet been finalized or adopted. Canada published an amended Schedule III to its Marking Rules Regulations containing the Tariff Shift Rules or Specific Marking Rules (discussed below) at SOR/95-146, 1995 Canada Gazette, Part II, p. 692 (5 April 1995), as well as amendments to Schedule I which contains a list of the classes of products required to be marked upon importation into Canada at SOR/95-348, 1995 Canada Gazette Part II, p. 2109 (9 August 1995), and SOR/96-106, 1996 Canada Gazette Part II, p. 845 (6 February 1996). Most significantly Canada published its amendments to the main body of its Marking Rules Regulations at SOR/95-447, 1995 Canada Gazette, Part II, p. 2699 (4 October 1995). While we understand that México intends to make amendments to the Annex of Specific Rules to its regulations, México's intentions are not clear at the time of writing as to whether it will amend the main body of its regulations consistent with the changes made by Canada in October 1995 and those being proposed by the United States.
The information contained in this article should not form the basis of any decision as to a particular course of action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases.
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