While the 2,000 page NAFTA text covers a wide variety of important subjects, perhaps none of its provisions will have a more significant impact on both regional and third country manufacturing than the rules of origin specified in chapter 4, and the annexes thereto. For it is these rules, along with the duty reduction schedules and the termination of duty drawback that will largely determine which goods benefit from the major feature of NAFTA, duty-free intra-regional trade.
This chapter analyzes the uniquely complex and extensive rules of origin specified under NAFTA and their likely impact on North American and third country manufacturers of goods to be sold in the lucrative North American market. It also discusses the interrelationship of rules of origin, intra-regional tariffs, "most favored nation" ("MFN") tariffs, duty drawback and other preferential tariff programs, using as examples four highly competitive sectors: textiles; consumer electronics; footwear; and, automobiles and auto parts.
The rules of origin, which comprise more than 190 pages of NAFTA text, are vitally important because they determine what goods are to be eligible for reduced or duty-free tariffs on trade within the region. A product that is considered as originating in North America enjoys these preferential benefits. A product that does not qualify as "originating goods" under art. 401, even if produced in North America, remains subject to each country's external or "MFN" tariffs if it is imported by one NAFTA member country from another. These MFN tariffs are the same tariffs that would be applicable if the product were produced outside North America. Several fundamental considerations are important when analyzing the impact of NAFTA's rules of origin on trade within and outside the region:
1. Article 101 of NAFTA states that "The parties to this Agreement, consistent with Article XXIV of the General Agreement on Tariffs and Trade, hereby establish a free trade area." NAFTA is thus intended to be consistent with GATT, and in particular with article XXIV. Article XXIV(8) defines a free trade area as, "a group of two or more customs territories in which the duties and other restrictive regulations of commerce... are eliminated on substantially all the trade between the constituent territories in products originating in those territories."
Article XXIV(5) states in pertinent part that the duties and other regulations imposed by a free trade area on third party members of GATT "shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union." Finally, the article requires that the schedule for forming a free trade area be implemented "within a reasonable length of time." The inclusiveness of the NAFTA tariff schedules, the phase-out provisions and the avoidance of any increases in MFN tariffs all reflect these article XXIV constraints.
2. NAFTA is explicitly designed, through the rules of origin, to assure "that the benefits of tariff reductions will accrue principally to the NAFTA parties and to provide incentives for North American production and sourcing". It will benefit regional producers of finished goods and those companies that produce parts and components, and discourage the creation of "export platforms" in one NAFTA country to serve the markets of another, assembly-type plants that rely extensively on parts and components imported from third countries. For this, among other, reasons some commentators have pointed out that NAFTA restricts rather than encourages global trade, and is in reality a "preferential" rather than a "free" trade arrangement, because of its highly restrictive rules of origin.
3. In many highly competitive industries, the tariff paid (or not paid) upon importation into the United States can make the difference between profit and loss. For example, if a color television set produced by a Japanese-owned factory in Mexico qualifies as being of North American origin, and is thus exempt from the five-percent ad valorem U.S. MFN import duty, this five-percent cost savings is likely to exceed the current net profit on the unit. Or, a "Caterpillar" tractor made in Illinois and exported to Mexico duty free will gain a competitive advantage over a Japanese made "Komatsu" unit that is subject to a 15 percent Mexican MFN duty.
4. In other industries, particularly those where the U.S. MFN tariff is relatively low-- 2.5 percent for automobiles, for example--the benefit of duty-free trade is only one of the factors that must be weighed in investment decisions. With autos and many other products, U.S. tariffs, which average only 4 percent ad valorem, are not sufficiently high to be the sole consideration for an investment decision. For example, many third-country firms, particularly in Korea, Japan, Taiwan, Hong Kong and Singapore, may invest in labor-intensive operations in China, Indonesia, Malaysia, North Korea or Vietnam rather than in Mexico. In many instances, production in those countries for export to the United States or even to Mexico, will remain cost-effective despite the applicability of MFN tariffs, particularly if the "Uruguay Round" of GATT negotiations is successful in reducing worldwide MFN tariffs generally.
5. The impact of the rules of origin on United States and Canadian manufacturers, and on third country manufacturers in Europe and Asia, when seeking lower cost sources of labor, may differ considerably. Many developed countries' firms, particularly those in Japan, Korea and Taiwan, prefer to supply overseas manufacturing facilities with key parts and components made in home country factories, due to existing investments, economies of scale, concerns over the protection of intellectual property and the like. Obviously, U.S. and Canadian firms will be able to establish NAFTA-qualifying Mexican manufacturing subsidiaries more easily than their third-country competitors, because incorporation of their existing U.S. or Canadian produced components in their Mexican finished products will assist the finished products in qualifying for NAFTA duty-free treatment, while Asian or European produced components will not.
6. The impact of the rules of origin in specific cases cannot be fully analyzed without reference to the MFN tariffs applicable to third country exports to the United States, Mexico and Canada. Foreign producers of parts and components, and their customers, particularly in the automotive and electronics industries, will be affected by the relatively high current Mexican MFN import duties on such parts and components. This will be particularly true after January 1, 2001, when Mexican manufacturers will no longer receive duty drawback, a refund of duties on imported parts and components used in products manufactured in Mexico that are exported to the United States.
7. Concerns over meeting NAFTA rules of origin may be largely irrelevant for manufacturers that are solely or primarily interested in selling in the country in which they are located. As a result of NAFTA, many firms both within and outside the region will be focusing on Mexico's 90 million inhabitants, and the likelihood that their standard of living and buying power will increase substantially over the next ten years. Also, foreign owned "maquiladora" plants in Mexico will have free access to the Mexican internal market after January 1, 2001. There will undoubtedly be firms which today are oriented solely toward exports that in the future will refocus their efforts on the Mexican domestic market.
NAFTA is designed to make it difficult for third country manufacturers located in Mexico to enjoy preferential tariff treatment under NAFTA for products that have a high non-North American content. The impact of these complex rules varies considerably on a product-by-product basis, but the thrust and objective are the same. As one would expect, the most stringent rules reflect the strength of powerful U.S. industries, including textiles, automobiles, footwear and electronics, discussed in Part IV, below.
A. Basic Principles
Readers familiar with U.S. customs law will recall the concept of "substantial transformation". United States customs authorities, in determining the country of origin of a particular product where all materials and manufacturing do not originate in a single country, normally look to the locale in which the manufacturing process constituted a "substantial transformation" of the materials and components into the finished product. Such a substantial transformation confers origin for U.S. tariff purposes in most normal circumstances.
NAFTA does not incorporate the concept of substantial transformation per se, but in many circumstances reaches the same result. NAFTA uses a series of separate origin rules, or combinations thereof, which are similar to the detailed rules of origin found in the Canada-U.S. Free Trade Agreement ("FTA"):
1. NAFTA origin is conferred when a good is wholly obtained or produced in the territory of one or several of the parties from materials originating in the region.
2. In the majority of instances where all materials and components are not obtained in the region, NAFTA uses the international Harmonized Tariff System ("HTS") rule of origin. Under this approach, origin is conferred by a change in tariff category, as from a raw material or component category to a finished product category. In many instances this is not conceptually different from the "substantial transformation" approach. To be considered as originating in the region, the finished product seeking NAFTA origin status must be produced from materials or components that entered the region under a different tariff classification from the finished product. For example, ceramic products classified under chapter 69, headings 6901-6914, of the HTS (e.g., bathtubs, classified under heading 6910), qualify as having regional origin if all the material inputs entered the region under a different chapter, e.g., Kaolin under heading 2507. The tariff change rule has been relaxed compared to the FTA, which required that all of the parts and components used in manufacturing a product be imported under a different tariff category than the category in which the final product would be classified. In NAFTA, there is a de minimis exception, in which components comprising up to seven percent of the total value of the product need not experience a tariff category change. This permits the use of minor third country inputs without causing the finished product to lose NAFTA benefits.
3. If a product cannot meet this change in tariff classification standard, it may nevertheless qualify for regional origin if the applicable tariff heading (four digit category) provides for both the product and its parts without further subdivision, and the regional value (value attributable to materials or manufacturing operations in any of the NAFTA countries) is not less than 60 percent of the total value by the transaction value method and 50 percent of the total cost by the net cost method, as described below.
4. In some instances, products must demonstrate that they contain a specific percentage of regional value (e.g., 60 percent or 50 percent) in order to qualify for NAFTA tariff preferences. For example, with footwear (HTS headings 6401-6406), there must be a change of tariff heading, plus a showing that there is a "regional value content" of not less than 55 percent under the net cost method. Rail locomotives (HTS headings 8601-8606) must show a change in tariff classification from any other heading or a regional value content of 60 percent where the transaction value method is used or 50 percent where the net cost method is used.
As is apparent from the preceding description, the regional content may in most circumstances be calculated using one of two methods, the "net cost" method which traces the costs of the various inputs, or the "transaction value" method, which begins with the customs or transaction value of the finished products, subtracting out the non-regional inputs. Since the latter usually results in a higher regional content, different minimum percentages are normally specified. Where both are specified the exporter may use the methodology most favorable to it.
For example, assume that the net cost (NC) of a widget is 100, the transaction value (TV) (usually the export or selling price) is 120 and the value of the non-originating materials imported from outside the region (VNM) is 60. Under the transaction value method, the regional value content (RVC) is 50 percent (120-60/120 x 100). Under the net cost method, the RVC is 40 percent (100- 60/100 x 100). As in most instances, the transaction value method produces here a larger RVC content.
The "net cost" calculations include most normal manufacturing costs (materials, labor, overhead) but exclude some items which would be included in calculating fully allocated costs of production in most accounting systems. The exclusions include sales promotion, marketing and after- sales service costs, royalties, shipping and packing costs, and non-allowable interest costs that are included in total costs. "Transaction value" is "the price of a good actually paid or payable for a good or material" to the producer, adjusted in accordance with the GATT Customs Valuation Code.
5. In still other instances, regional origin is conferred only by the inclusion of a specific regionally produced component in the final product. For example, a color television receiver with a screen size of more than 14 inches will be treated as originating in the NAFTA region only if the color picture tube is of North American origin. For a color television receiver with a screen size of 14 inches or less, all of the printed circuit boards and the tuner must be of regional origin. Of course, where a specific component must be of North American origin, that component in turn must meet the rule of origin specified for it in annex 401.
B. Exceptions and Exclusions.
Special rules for the net value calculations apply to trade in automotive goods. Where the net cost method is used for automotive goods, non-regional originating goods must use the customs value as the basis of the calculations, to prevent distortions resulting from transfer prices that do not reflect arms-length purchases. Also, when major components such as an engine are assembled within the region, the parts used in that component enter into the net value calculations for the completed automobile. Auto manufacturers, in calculating regional value, are permitted to average their calculations over their fiscal/accounting years. This rule permits them to deal with changes in the sources of major parts and materials, which could affect the regional content calculations, or with situations in which they use multiple sources (both within and outside North America) for the same parts and components.
In making regional value calculations, fungible materials may be assigned a country of origin based on any acceptable inventory management methodology, as specified in the yet-to-be-published Uniform Regulations. Packing materials and containers for sale, as well as spare parts or tools delivered with the goods, are generally exempt from the restrictions requiring all components to undergo a change in tariff classification, but may be included in regional value calculations. Containers for shipment are excluded in both instances.
There are four other elements directly relevant to analyzing the impact of the rules of origin in specific instances: the NAFTA tariff reduction and elimination schedules; current MFN duties and prospects for further reductions; NAFTA phaseout of duty drawback and similar programs; and the impact of the U.S. generalized special preference ("GSP") program and the Canadian General Preferential Tariff (GPT) program. Each is discussed below.
A. Regional Tariff Reduction and Elimination.
NAFTA is, first of all, a free trade area agreement. It provides for the elimination of all intra- regional tariffs over no more than 15 years. Most tariffs, particularly those on manufactured goods, will be eliminated much more quickly, many immediately upon NAFTA's intended entry into force on January 1, 1994. In article 301, NAFTA also requires each party to provide "national treatment"-- the same treatment as goods produced locally -- to the goods of another party, (i.e., those goods which meet NAFTA rules of origin).
The tariff reduction schedules of NAFTA are much more varied and complex than those under the FTA, where essentially all products either became duty-free immediately, or proportionally over 5 years or 10 years. NAFTA contains more than 15 separate tariff reduction schedules, ranging from immediate elimination of all intra-regional tariffs on January 1, 1994 ("A" Schedule), to reduction of the existing tariffs by 6.67 percent each year for 15 years ("C+" Schedule). For example, under NAFTA, some Mexican duties on U.S. and Canadian products qualifying for preferential treatment are reduced by 50 percent immediately, with only the remaining tariffs subject to a multi-year phaseout, and some U.S. duties are subject to an accelerated phaseout in the early years. The schedules applicable to the same product may differ, depending on whether it is being imported by the United States or by Mexico.
The U.S. government asserts that approximately 65 percent of total U.S. industrial and agricultural exports to Mexico in the aggregate, will be duty-free immediately upon entry into force of NAFTA or within five years thereafter. For example, the "A" schedule includes computers, most telecommunications products, aerospace equipment and medical products.
The tariff phaseout schedule for trade between the United States and Canada provided under the FTA in most respects will continue to determine the tariffs applicable to U.S.-Canada Trade. (Automobile and textile trade are among the exceptions). This approach was taken for obvious reasons. The FTA entered into force on January 1, 1989. As of January 1, 1993, under the FTA, duties on the products subject to a five-year tariff phaseout had been reduced to zero, and duties on the products subject to a 10-year duty phaseout had been reduced to 50 percent of their original rates. To subject such trade to the NAFTA duty reduction schedules discussed above would have raised tariffs on U.S.-Canada trade in many instances, a result that would have been inconsistent with the objectives of NAFTA as well as the FTA.
B. MFN Tariffs and Reduction Prospects.
In most instances, NAFTA does not affect the MFN duties assessed by each of the three parties on goods originating in countries outside the region. However, there are several important exceptions. Under NAFTA, Art. 302, no party may increase its existing MFN tariffs, or impose duties where none currently exist. This is significant for Mexico, since many of its current MFN tariffs -- averaging about 10 percent -- are not "bound" under GATT, which means they could otherwise be legally raised to the earlier, near 50 percent levels.
Also, Mexico and Canada have agreed to lower their external tariffs on computers and computer parts either in 1994, or during a five-year period beginning in 1999, effectively establishing a common external tariff for those items. Conversely, in one instance, that of color picture tubes, NAFTA effectively precludes any of the NAFTA parties from lowering the current MFN tariff without the consent of the others. Any increase in MFN tariffs generally as a result of NAFTA would probably cause NAFTA to be declared inconsistent with GATT.
U.S. MFN tariffs, particularly those on manufactured goods, are already quite low, averaging about 4 percent ad valorem. However, there are many exceptions including such items as textiles (normally 20 percent), footwear (8.5-70 percent), color picture tubes (15 percent), certain organic chemicals (15-20 percent) and small trucks (25 percent). Mexican tariffs, on the other hand, average about 10 percent ad valorem, with many items in the 15-20 percent range, down from an average of nearly 50 percent just five years ago.
The comparative advantage provided to regional producers by duty-free intra-regional trade under NAFTA will be significantly affected by the success or failure of ongoing global tariff reduction negotiations under the "Uruguay Round" of GATT negotiations, and Mexico's continuing obligations to reduce tariffs as a condition of GATT membership. If the Uruguay Round reaches a successful conclusion in 1993 or 1994, U.S., Mexican and Canadian external (MFN) tariffs on a wide range of products are likely to be reduced or eliminated over the next five years or less, probably even more rapidly in some instances than the agreed upon NAFTA reductions. In some sectors, such as steel, multilateral arrangements such as the multilateral Steel Agreement may eventually result in additional tariff reductions or elimination. Thus, for some products the preferential NAFTA tariff advantages for North American producers may eventually be reduced or disappear.
C. Duty Drawback.
Companies in the United States, Canada and Mexico (as in most other nations) which manufacture goods for export currently enjoy duty drawbacks or similar duty exemptions or deferral programs on parts and components imported from other countries. The import duties assessed by the country of manufacture on those parts and components are remitted upon exportation of the finished product. Thus, for example, if a Mexican producer today pays $100.00 in Mexican MFN import duties on auto parts imported from Korea, uses those parts to build a car, and exports that car to the United States, the producer will receive a refund of the full $100 from Mexican customs authorities upon exportation of the finished vehicle.
Under NAFTA rules, such refunds or duty drawbacks will be eliminated generally after seven years, except for parts and components originating in the region. This means, for example, that as of 2001, the Mexican auto manufacturer will no longer receive a refund of the Mexican import duties on the Korean auto parts incorporated in the vehicle when that vehicle is exported. It is evident that the lack of duty drawback treatment could be a powerful incentive for the Mexican auto producer to seek alternative sources of parts in the future from North American rather than third country sources, because the former will be duty-free, or not subject to the phaseout, while those from third countries will be subject to duties that are no longer refundable upon export of the finished product. This could result in a significant diversion of trade from third countries (e.g., Korea, Taiwan, Japan, India) to regional suppliers.
There are exceptions to this seven-year grace period, for such products as color picture tubes ("CPTs") and for "same condition substitution" drawback, which is to be eliminated on January 1, 1994. However, NAFTA also includes provisions against "double taxation" which will allow the Mexican (or other regional) manufacturer to continue to collect drawbacks on the duties actually paid to the manufacturing country (e.g., Mexico) on third country parts and components, up to the amount of any U.S. duties paid. Thus, if the finished goods fail to qualify for duty-free treatment under NAFTA, and thus remain subject to duties when entering the United States or Canada, they will still receive drawbacks up to the amount of duties paid on the finished products when entering the United States or Canada. For example, if the duty on a non-qualifying television receiver entering the U.S. is $6.00, and the Mexican duties on the parts and components imported from third countries were a total of $8.00, the Mexican manufacturer would receive drawback of $6.00 rather than the full $8.00 as in the past.
The FTA originally provided for a phase-out of drawbacks on U.S.-Canada trade as of January 1, 1994. However, under NAFTA, drawbacks for U.S.-Canada trade will be extended for two more years.
The elimination of duty drawback must be considered along with the new rules of origin and the presumed benefits from reduced or zero duty on the finished products. For some products which are eligible to receive duty-free treatment immediately, the initial seven years under the agreement could be highly profitable, since duty drawbacks will continue during that time. For example, small screen color televisions should qualify for duty-free entry into the U.S. market as soon as NAFTA enters into force, but the current duty drawbacks received on foreign parts will continue for another seven years. For others, such as third country auto parts, the impact will be unfavorable from the point of view of those foreign manufacturers, as noted above.
D. Generalized Special Preferences ("GSP)".
Manufacturers in Mexico who currently enjoy duty-free access to the U.S. market under the so-called "Generalized Special Preference" system ("GSP") should in general continue to do so under NAFTA, preserving benefits which in 1991 applied to $3.8 billion worth of U.S. imports from Mexico. Mexico is to continue to enjoy duty-free access to the U.S. market for all products under which GSP was available in 1991, avoiding possible "graduation" of Mexico as occurred with Korea, Taiwan, Singapore and Hong Kong several years ago. Mexican exports to Canada are likely to enjoy these tariff preferences until tariffs are eliminated under NAFTA. However, the current U.S. GSP program expires September 30, 1994, and there is no guarantee that the eligibility criteria will remain the same for the 15 years required to eliminate all intra-regional tariffs under the NAFTA.
However, the new NAFTA rules of origin will apply in lieu of the GSP rules of origin. GSP rules of origin generally provide for duty-free entry to the United States if 35 percent or more of the appraised value of the article (materials cost plus "direct cost of processing") originates in the GSP beneficiary country. In general, the GSP rules have been liberally construed. The NAFTA rules of origin, as discussed above, are different. Some provide for a higher percentage of regional value added; others depend on the production of specific components in Mexico or a tariff change under the Harmonized Tariff System. Inevitably, there will be some cases in which GSP is lost as a result of the change in rules of origin, unless the manufacturers alter their materials and component procurement policies. For example, it may be possible to demonstrate that a particular product has a 35 percent Mexican content, which would be sufficient for GSP, but would not qualify under a NAFTA requirement of 50 percent regional value under the net cost method, or 60 percent under the transaction value method.
As indicated earlier, the effects of NAFTA on the competitive position of specific firms and industry sectors will vary considerably, although in almost all instances the rules of origin are designed to favor U.S., Mexican or Canadian manufacturers who produce goods with a high regional value added. This section discusses as examples the impact of the rules of origin (and related tariff and drawback provisions) on four industries that are highly competitive world-wide: consumer electronics, footwear, automobiles and auto parts, and textiles and clothing. A similar analysis could be made of any other industry or product line covered by the NAFTA.
A. Consumer Electronics.
NAFTA will eliminate most U.S. tariffs on finished electronics products and electronic components as of January 1, 1994. Most U.S. duties are low (3-5 percent) except for color picture tubes ("CPTs") (15 percent). However, current Mexican duties, which in most instances are to be eliminated over five years, are higher: 10 percent on VCRs, 20 percent on color television receivers ("CTVs"), 10 percent on most components except picture tubes (15 percent).
The rules of origin on consumer electronic products are complex and strict, and are designed to protect the U.S. color picture tube ("CPT") industry and discourage assembly type operations owned by non-North American sources. CTVs with screens of over 14 inches must use a North American CPT to qualify for duty free entry into the United States, for the first five years of the agreement. After January 1, 1999, they must also incorporate various additional systems (intermediate frequency amplifier, video amplification, detection, tuners, and power supply) that are of regional origin.
VCRs will receive the tariff benefits if the circuit board is made in the region. Small screen CTVs which incorporate printed circuit boards and a tuner that are all regionally produced will similarly receive duty-free treatment beginning in 1994. For the next seven years, qualifying small screen CTV production in Mexico should be more cost effective, since duty drawbacks on all imported parts, including CPTs (which are no longer produced in sizes below 20 inches in North America) will continue until 2001. During that period, the duties on exports to the United States will fall from 5 percent to zero, resulting in a duty cost savings of $6.25 for a unit with a customs value of $125, presumably without any increase in manufacturing costs or duties on imported parts and components.
As of 1999, special rules will also apply to high definition CTVs ("HDTV") and flat panel CTVs. Manufacturers must incorporate a regionally produced CPT and demonstrate that at least fifty percent of the unit's integrated circuits are of regional origin, or use a regional CPT plus demonstrate that 60 percent/50 percent of transaction value/net cost, respectively, is of North American origin. For flat panel units, the flat panel displays must be of North American origin.
While duty drawbacks on parts and components imported from outside the region are generally eliminated only after seven years, duty drawbacks on CPTs exceeding 14 inches in diagonal measurement above are phased out under a strict schedule, with only a limited number of third country CPTs eligible for duty drawbacks. Moreover, the parties agree not to reduce their external (15 percent) tariffs on CPTs without consulting the others, giving the United States an effective veto over any Mexican efforts to do so. This means, for example, that large screen Korean and Singaporean CPT exports to Mexico for use in U.S. destination CTVs will begin to decrease immediately in 1994, and are likely to disappear almost entirely by January 1, 2001.
Even if Mexican duties on other parts and components are reduced over the next seven years, it will probably be necessary for Mexican color television receiver producers to establish North American sourcing for some other major components, such as tuners and semiconductors, intermediate frequency amplifiers, video amplifiers, synchronization and deflection circuitry, etc., in order to meet the more stringent rules of origin applicable beginning in 1999.
The intra-regional duties on microwave ovens ("MWOs"), 4.0 percent, 20 percent and 12.6 percent for the U.S., Mexico and Canada, respectively, will be eliminated immediately. MWOs will qualify for NAFTA benefits only if all of the major parts except the magnetron are produced in the region. U.S. duties on magnetrons are zero, but Mexico and Canada's are 15 percent and 9.2 percent, respectively, both of which will disappear immediately for regionally produced (U.S.) magnetrons.
Computers are subject to a 3.9 percent duty in the United States, 20 percent in Mexico and 3.9 percent in Canada. U.S. and Canadian internal duties will disappear in 1994. Mexican duties on NAFTA computer products will be phased out over five years, and Mexico will reduce its MFN tariff to 3.9 percent from 1999 to 2003, creating a common external tariff applicable to computers. Computers generally are subject to a simple tariff category change for establishing rules of origin, provided that the "motherboard" is of regional origin. Thus, computers using a regionally-produced motherboard will be freely traded, regardless of where other components are sourced.
U.S. duties on most computer parts and components (3.9 percent or free) and Canadian duties of 3.9 percent will be eliminated on January 1, 1994. Mexican duties of 20 percent will be eliminated over five years in most categories, although some will be eliminated immediately. Many major components have more strict rules of origin. A color computer monitor, for example, must incorporate a regionally produced CPT. Intra-regional duties of 6 percent for the U.S., 15 percent for Mexico and 9.2 percent for Canada, will be phased out immediately. The special restrictions applicable to CPTs for CTVs are not applicable here.
Unique rules apply to semiconductors. Such products which meet the usual change of tariff category rule of origin may undergo processing outside the region without losing NAFTA origin, provided that the further processing does not result in a change in subheading out of the semiconductor tariff groupings. This means that U.S. semiconductor producers who currently assemble their products in Asia may still receive NAFTA treatment of the semiconductors, and that such semiconductors will be treated as originating within NAFTA for calculation of the regional content of electronic products that use them.
The rules of origin for the consumer electronics industry tend to favor large, vertically- integrated producers that are already well-established in North America, e.g., those firms such as Zenith Electronics Corp., North American Phillips, Thomson AB, Sony and Matsushita, all of which currently manufacture CPTs and many components as well as finished CTVs in North America. Smaller, less vertically integrated Japanese and Korean owned competitors in Mexico will be forced to locate regional parts and components sources, foregoing existing supply linkages with affiliates in the home country, if they expect to enjoy the tariff benefits of NAFTA.
B. Footwear.
U.S. tariffs on "rubber" footwear are among the highest in the world, ranging from 20 percent to approximately 67 percent ad valorem. U.S. tariffs on "nonrubber" footwear generally range from 6 to 12.5 percent, still well above normal U.S. tariffs on manufactured goods, which average about four percent. Most Mexican footwear tariffs are 20 percent.
Under the NAFTA, most U.S. tariffs on rubber footwear are phased out over 15 years; most nonrubber footwear tariffs will be phased out over 10 years, although there are some exceptions in which the tariffs are eliminated immediately. Most Mexican footwear tariffs are to be phased out over five or ten years, but the volume of U.S. footwear exports to Mexico is small, and will probably not increase substantially regardless of Mexican tariff levels.
Under the footwear rules of origin, Mexican manufacturers could not qualify for NAFTA tariff preferences by importing third country footwear parts and assembling the footwear in Mexico, except when the parts are made elsewhere in North America; for almost all footwear (HTS subheadings 6401.10-6406.10), there is a 55 percent regional content requirement. Thus, 55 percent of the net cost of the footwear must be traceable to North American sources.
Mexico currently accounts for less than one percent of total U.S. nonrubber footwear imports and about 7.5 percent of rubber footwear imports. The Mexican footwear industry has been characterized by high profit, low volume, low export production. It has been protected by relatively high tariff walls from third country competition.
Mexican footwear production for export to the United States is likely to increase somewhat under NAFTA, in part through the transfer of factories tied to U.S. producers (using U.S. origin components) from the Caribbean countries to Mexico. However, major increases in footwear production by non-U.S. companies would require very substantial investment and worker training, not only in footwear manufacture per se, but in leather finishing and production of the many components required in footwear manufacture. Leather athletic footwear production, for example, is a complex, highly mechanized process requiring significant capital equipment and high-volume production.
Such investment would be feasible if Mexican labor were low in cost compared to the major alternatives. Today those alternatives are China and Indonesia, with North Korea and Vietnam as possibilities in the future. However, with Mexican wages already several times those in such countries as China, and expected to increase significantly over the next decade, extensive long term foreign investment in Mexican footwear seems problematic. This is particularly true given the fact that U.S. tariffs are being phased out only over 10 or even 15 years in most instances, and the need to produce most of the parts in Mexico or the United States in order to meet the NAFTA rules of origin.
C. Automobiles and Auto Parts.
Passenger vehicle imports into the United States are subject to a 2.5 percent import duty, which would be eliminated for NAFTA products on January 1, 1994. Mexican duties of 20 percent will be reduced to 10 percent in 1994, with the remainder phased out through 2003. Current U.S. duties on light trucks of 25 percent will be reduced to 10 percent in 1994, with the balance phased out over four years. Mexican duties of 20 percent on autos will be halved in 1994, with the rest phased out over four years, with light truck duties reduced to 10 percent in 1994 and the balance phased out after four years.
Most U.S. auto parts are subject to a 3.1 percent duty, which will be eliminated for regional trade in 1994. Mexican duties on auto parts are currently 10-15 percent, and will be phased out for NAFTA purposes over five or ten years, depending on the part.
While the NAFTA rules of origin for autos and auto parts will apply to U.S.- Canada auto trade, that trade in most respects will remain governed by relevant provisions of the FTA, under which most automotive goods already are traded duty free if a 50 percent Canadian or U.S. content can be demonstrated.
Automobiles (and auto engines) will not enjoy NAFTA benefits unless 62.5 percent of the total value is of North American origin. Auto parts in most instances must meet a 60 percent regional value standard, 50 percent initially, rising to 55 percent in 1998 and 60 percent in 2002. The calculations must use the "net cost" method as described above.
Some smaller non-vertically integrated auto producers have been unable to benefit from the FTA provisions because the vehicles they produce in Canada or the United States do not meet the 50 percent regional value added requirement of that accord. The 62.5 percent standard may be difficult to meet in the short term except for the major U.S., Japanese and European integrated auto producers. The potential benefits of light truck production in Mexico for the lucrative U.S. market are greater, but the 62.5 percent rule of origin is again likely to make such operations impractical for any smaller, non-vertically integrated firm, at least in the foreseeable future.
The impact of NAFTA on the foreign auto parts industry is likely to be significant because of the reductions in intra-regional tariffs, and the elimination of duty drawback after seven years. Currently, a Mexican automobile manufacturer, such as Chrysler, is eligible for a refund of import duties (duty drawback) on third country parts and components incorporated in vehicles exported to the United States. Thus, any foreign parts -- including those made in the United States are currently price-competitive with Mexican origin parts for export vehicles, even though Mexican MFN duties on the parts are generally 10-15 percent. After seven years, the refund of duties will no longer be allowed. If third country auto parts remain subject to 10-15 percent Mexican MFN duties, third country vendors will have difficulty competing with Mexican and U.S. auto parts producers. Moreover, parts imported from outside the region cannot be included in the all-important local content calculations, a factor that will encourage their substitution with regionally produced parts. Under these circumstances, the medium and long term viability of the North American market for Korean, Taiwanese, Indian and other third country auto parts may depend on two alternatives: 1) convincing Mexico to lower its MFN tariffs on auto parts, or 2) investing in local production facilities, with the auto parts produced therein meeting NAFTA rules of origin.
Trade in automobiles and auto parts between Mexico and the United States is expected to increase significantly under NAFTA, to some extent at the expense of third countries, but principally because of increased demand in the Mexican market and the reduction and eventual elimination of the current stringent Mexican restrictions on the importation of autos and auto parts. It is estimated that two way trade in autos and auto parts between the United States and Mexico could increase from $8.3 billion in 1990 to $20-$25 billion by the end of 1995, and Mexican demand for autos is expected to increase from 900,000 units in 1992 to 1.5 million units in 1995.
D. Textiles and Clothing.
Under NAFTA's complex rules, intra-regional tariffs on textiles and apparel will be eliminated in most instances over a six year period, either by 20 percent a year, or "front-loaded", with 49-50 percent of the reduction to occur in the first two years. In some instances, there is a 10-year phaseout. In most instances, however, tariffs on intra-regional textiles and apparel trade may not exceed 20 percent after 1998.
NAFTA contains highly restrictive rules of origin for textile products, designed to discourage foreign firms from setting up factories that are dependent on yarns or cloth imported from abroad. In most instances, a textile product qualifies for NAFTA benefits only if the yarn used to produce the fabric is made in North America -- the "yarn forward" concept. For some cotton and man-made fiber yarns, the fiber itself must be of North American origin. While NAFTA provides for a review of these rules after five years, U.S. textile interests are seeking to include in the implementing legislation a prohibition against such review. Also, during the period of transition to zero tariffs, U.S. manufacturers may seek reimposition of tariffs or quotas based on a showing of injury. Given the strength of the U.S. textile lobby, this must be considered a significant risk.
It should be noted that it is not tariffs per se, but various bilateral quota agreements concluded by the United States, that are most effective in limiting textile imports to the United States, and Mexico and Canada will receive an immediate advantage under NAFTA through decreased quotas. Moreover, even Mexican and Canadian textiles that do not meet the rules of origin will no longer be subject to U.S. quotas after 10 years. Apparel assembled in Mexico from fabric made and cut in the United States will enter the United States duty-free after January 1, 1994.
There are probably a few "niche" product areas in which Asian and European textile manufacturers will be able to establish integrated operations which would produce textiles and clothing from yarns spun in North America, thus qualifying for preferential access to the U.S. market. In the longer term the extent to which this occurs depends largely on whether the Uruguay Round negotiations result in a 10 year or other phaseout of multilateral textile quotas. If this occurs, the incentive for third country firms to invest in textile production in Mexico would be significantly decreased. In any event, U.S. concerns are likely to continue investing in "sister" operations in Mexico, utilizing lower Mexican manufacturing costs for production of textiles and apparel made from yarn and fabric produced in the U.S.
NAFTA with its strict rules of origin is likely to encourage firms that sell in the North American market to review their manufacturing and investment strategies, with the objective of maintaining or increasing their competitiveness in the markets of the region. In fact, this result is consistent with one of the major objectives of NAFTA, which is to "increase substantially investment opportunities in the territories of the Parties".
A. Principal Considerations for U.S. and Canadian Firms.
For most U.S. and Canadian firms that currently produce finished products in their home countries, the rules of origin will be significant only if major parts and components are currently sourced in third countries, as is more likely in Canada with its smaller manufacturing base. Where U.S. and Canadian exports of both parts and finished products are currently price competitive on the world market, they will enjoy a significant competitive advantage in Mexico, due to preferential tariff treatment compared to European and Asian competitors, that did not exist prior to NAFTA. Among those U.S. manufacturers expected to benefit most from NAFTA are producers of automotive parts, machine tools, bearings, industrial machinery, textiles and cotton, steel mill products, wood products and pharmaceuticals. As one pleased U.S. executive has recently observed:
Does this agreement provide a level playing field that everyone is allegedly seeking? Not by a long shot. From where I sit, it tilts the playing field -- in our favor! Think of it. Caterpillar is going to be able to sell Illinois-produced mining equipment in Mexico duty free. Foreign-produced products will be subject to the normal -- and still fully legal -- 10 to 20 percent [Mexican MFN] duties. That differential will provide American companies with a competitive edge in Mexico." T
hose firms that are concerned with labor costs in the United States or Canada have an option under NAFTA that is not usually available to their foreign competitors: they may shift their labor intensive operations to Mexico, while continuing to rely on existing U.S. or Canadian sources for materials, parts and components, since Mexican duties on regionally sourced parts and components will disappear under NAFTA. They may also discover that with the elimination of Mexican duties on finished U.S. products, it remains economical to continue producing for the U.S. market, and for a growing Mexican market, in the United States.
B. Considerations for Third Country Firms.
The outlook for many third country firms that currently export finished products to the United States, Canada or Mexico is less clear. Many foreign firms, particularly those in Korea, Taiwan, Singapore and Hong Kong, currently export extensively to the United States. Their firms, as well as firms located in developed countries such as Japan, Germany, etc. that are facing increased labor and other costs, will need to analyze various lower labor cost options for manufacturing to serve the North American market, if the tariff disadvantage compared to regional producers makes their products uncompetitive. As noted earlier, the impact of NAFTA on those firms depends in significant part on whether MFN tariffs on their products are reduced or eliminated in the Uruguay Round of GATT negotiations, thereby reducing or eliminating the NAFTA tariff preference for products of regional origin.
In many instances, these firms' normal patterns of offshore investment and production are designed to assure that much or most of the value incorporated in third country produced finished products is created in the home country through manufacture of parts and components there, much as U.S. firms use maquiladora operations in Mexico. Because of the importance of the North American market, particularly the United States, for some foreign producers, and because of NAFTA, Mexico as a manufacturing base is an option that must be considered. In any event, in some cases, Mexico or elsewhere in North America will not be the best choice for third country firms.
The initial choice for such third country firms may well be a "Catch-22":
In the final analysis, factors other than rules of origin and tariff levels must be considered. These include, but are not limited to, the investment climate and protection of investment; level of infrastructure development; cultural factors, including language; length of supply lines and difficulty of management oversight; labor costs currently and as projected in five or ten years; applicable environmental regulations; non-tariff barriers to access to the North American market ; and exchange rates. Each of these or a combination of several, could have a more significant impact on competitiveness than tariffs alone.
In terms of long-range planning, foreign investors must necessarily consider the possibility of a NAFTA expanded to encompass other nations of the hemisphere, and perhaps elsewhere. However, it is reasonable to assume that if NAFTA is expanded, the expanded group will be governed by rules of origin similar or identical to those in NAFTA. A successful conclusion to the Uruguay Round of GATT negotiations, as noted earlier, is likely to result in a general reduction of MFN tariffs and elimination of some; for products receiving very low tariffs, the need for North American production to assure competitive access to the North American market could be largely alleviated.
Whether one considers NAFTA an instrument for more liberal trade, or more restricted trade, the ultimate impact on producers both within and outside the region will be governed to a substantial degree by the applicable rules of origin and the ability of such manufacturers to adapt to them. At this writing, it appears that the U.S. and Mexican (and to a much lesser extent, Canadian) textile, automobile and auto parts, footwear, color picture tube and consumer electronics industries, among others, have been remarkably successful in the NAFTA negotiations in assuring that regional industries will obtain the lion's share of the trade benefits of NAFTA, generally at the expense of competitors located outside the region. In time, as Mexico becomes more industrialized, with additional investment from both within and outside North America, the advantages may be reduced, and the general expansion of Mexican buying power will have a beneficial impact on all those who export to or manufacture in Mexico. In the meantime, the NAFTA rules of origin will function as an opportunity for the knowledgeable and creative, and a trap for the unwary.
The author wishes to thank Bruce Pascoe, Esq. and R. Vincent Russo, Jr., Esq. for their editorial assistance.
Such as market access and tariff reduction; rules of origin; trade in automobiles and auto parts; energy; government procurement; trade in agricultural products; trade in textiles and apparel; financial and other services; transportation; protection of intellectual property; telecommunications; anti-dumping and countervailing duties and safeguards; settlement of trade, investment and other disputes; environmental protection; sanitary and phytosanitary measures; technical standards; competition policy; temporary entry of business visitors; general exceptions; and institutional arrangements. NAFTA references are to the December 17, 1992 text, the second, but probably not the last "final text", unless otherwise noted. 32 I.L.M. 289 (1993).
See infra part II(A).
See infra part II(C).
The "MFN" tariffs are the tariff rates the United States, Mexico and Canada each grant most of their non- regional trading partners, either through their membership in the General Agreement on Tariffs and Trade (1948), 1 Stat. 5 (1948), T.I.A.S. 1700, 55 U.N.T.S. 187 [hereinafter "GATT"], or through various bilateral trade agreements.
Duty drawback is the practice of refunding the duties originally assessed by the authorities of the country of manufacture on imported parts and components that are incorporated in finished products, once the finished products are exported. See generally NAFTA art. 303.
The rules of origin specified in chapter 3 of the Canada-U.S. Free Trade Agreement, Jan. 2, 1988, U.S.- Can., 27 I.LM. 293 [hereinafter "FTA"] and its annexes, which are similar but not identical to those in NAFTA, would be replaced with the rules of origin in chapter 4 of NAFTA.
See infra part II.
A free trade area as defined in GATT, may be contrasted with a customs union, also defined in art. XXIV, in which internal duties are removed and a common tariff is established applicable to products imported from outside the region. Members of a free trade area are free to maintain their individual external tariffs, subject to any constraints in GATT.
U.S INTERNATIONAL TRADE COMMISSION, POTENTIAL IMPACT ON THE U.S. ECONOMY AND SELECTED INDUSTRIES OF THE NORTH AMERICAN FREE TRADE AGREEMENT IX ( 1993) [hereinafter "ITC REPORT"].
Id. This objective serves U.S. interests by discouraging "indirect" imports of third-country parts and components free of duty, and Mexican interests by encouraging manufacturers to go beyond final production and assembly to manufacture of major parts and components as well.
See D.V. Fites (Chairman of Caterpillar, Inc.) "U.S. Trade Debate: The Good, The Bad and The (Un)forgotten," 2, Remarks before the American Mining Congress (Oct. 21, 1992); GARY CLYDE HUFBAUER & JEFFERY J. SCHOTT, NAFTA -- AN ASSESSMENT 5 (1993).
The "Uruguay Round" of negotiations under the auspices of GATT, is the eighth such series of multilateral trade negotiations convened since 1947. Launched in September 1986 in Punta del Este, Uruguay, the Uruguay Round negotiations address not only market opening measures (including tariff reductions and rules of origin) but antidumping and countervailing duties; agricultural subsidies; trade-related investment measures; protection of intellectual property; trade in services; safeguards; and dispute settlement, among others. The negotiations were originally scheduled to be completed in four years, but now seem destined to continue at least through 1993. See INTERNATIONAL TRADE ADMINISTRATION, U.S. DEPT. OF COMMERCE, "URUGUAY ROUND UPDATE" (Feb. 1991, Apr. 1992) [hereinafter "URUGUAY ROUND UPDATE"].
Mexican per capita GNP is approximately $3,111, compared to more than $22,000 in the U.S. and Canada. National Trade Databank, Bureau of the Census (1991). In 1990, 70 percent of total sales of Mexican affiliates of U.S. firms was to the Mexican market, and anecdotal evidence from firms such as General Electric, Pepsico and Pacar, Inc. suggests that major U.S. firms now investing in Mexico anticipate increasing Mexican demand for their products. For example, the Department of Commerce predicts that Mexican automobile sales will increase from about 900,000 units in 1992 to 1.5 million units in 1995. Paul London and Jonathan White, INVESTMENT, TRADE AND U.S. GAINS IN THE NAFTA 39-40. (1992).
U.S. Customs Service Regulations, 19 C.F.R. 134.1(b) (1992).
See DAVID SERKO, IMPORT PRACTICE: CUSTOMS AND INTERNATIONAL TRADE LAW 432-33 (Practicing Law Institute) (2d ed. 1991). Origin may affect the applicable duty rate, e.g., eligibility for MFN duty rates, and the applicability of quotas, antidumping or countervailing duties, etc. Exceptions to the substantial transformation approach for ascertaining origin include, in addition to NAFTA, the FTA, the U.S.-Israel Free Trade Agreement, the GSP program, (see part II(D) infra) and the Caribbean Basin Initiative program (see infra note 129).
FTA, ch. 3 and annexes.
NAFTA art. 401(a), (c).
The Harmonized Tariff System is a uniform system for classification of products for customs purposes that was adopted by the United States and most of the world's major trading nations by 1989. Correct classification of merchandise is necessary for assessment of import duties, application of import quotas, compilation of accurate international trade statistics and a variety of other purposes. It is self-evident that the use of a single classification system world-wide rather than different systems on a country-by-country basis, facilitates international trade by eliminating uncertainties as to duty rates and simplifying the classification of merchandise traded among nations. The United States, Canada and Mexico have all adopted the HTS. However, the United States, as noted in the text, does not use the HTS rules of origin, except to the extent those rules have been incorporated in the NAFTA rules or in the earlier FTA rules of origin, and then only with respect to trade with Mexico and Canada. See SERKO, supra note 15, at 70-74. The HTS consists of 98 chapters (first two digits) covering every conceivable product. Headings (first four digits) and subheadings (first six digits) are also governed by international agreement. Breakouts beyond the six digits are governed by national law, but must be consistent with subheadings, headings and chapters. For example, chapter 84 consists of "machinery and mechanical appliances; electrical equipment; parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles." Heading 8471 consists of "automatic data processing machines and units thereof..." Subheading 8471.10 consists of "analog or hybrid automatic data processing machines or units thereof...."
NAFTA art. 401(b); annex 401. For example, under the U.S. tariff schedules, Harmonized Tariff Schedules of the United States (1993), promulgated by the U.S. International Trade Commission under 19 U.S.C. 3007 ("HTSUS"), prepared meat products classified under Chapter 16 are considered of North American origin if the meat or fish enters the region classified in any other HTSUS chapter (e.g., Chapter 2, covering "Meat and Meat Offal").
NAFTA annex 401, at 401-53.
NAFTA art. 405.
NAFTA art. 401(d).
NAFTA annex 401.
"The regional value content of a good, where calculated on the basis of the net cost method shall be determined as follows: RVC = NC-VNM/NC x 100 where RVC is the regional value content, expressed as a percentage; NC is the net cost of the good; and VNM is the value of non-originating materials used by the producer in the production of the goods." NAFTA art. 402(3).
"The regional value content of a good, where calculated on the basis of the transaction value method, shall be determined as follows: RVC = TV-VNM/TV x 100 where: RVC is the regional value content expressed as a percentage; TV is the transaction value of the good; and VNM is the value of non-originating materials used by the producer in the production of the good." NAFTA, art. 402(2).
NAFTA art. 402(1).
NAFTA art. 415; GATT Customs Valuation Code, art. 8, paras. 1, 3 and 4.
Id.
NAFTA annex 401, item 8528.10bb, at 401-115.
NAFTA annex 401, item 8528.10aa, at 401-115.
NAFTA art. 403.
For example, if Volkswagen of Mexico imports an automobile transmission from Germany with a declared customs value of $1,000, then $1,000 must be used in calculating the regional value content of the completed automobile using the net cost method.
For example, if Volkswagen manufactures an automobile transmission in Mexico, with a net cost of $1,000, of which $500 represents regional parts, components and manufacturing costs, and $500 represents parts and components from outside the region, $500 must be included in the non-originating materials content of the finished automobile. NAFTA art. 403(1); annex 403.1 (listing more than 60 major automotive components and subassemblies subject to this treatment).
Also, a special averaging exception is established for General Motors, so that the regional content of Canadian production of a joint venture between GM and Suzuki may be averaged with other North American production of the same class of vehicles. NAFTA annex 403.3.
NAFTA art. 406(a). For example, if Volkswagen sources identical brake shoes from Korea (non- originating) and Mexico (originating), they may prepare regional value calculations using normal inventory accounting methods, e.g., first in first out (FIFO) or last in last out (LIFO) rather than physically tracing a particular shipment of brake shoes to a particular group of finished automobiles.
NAFTA art. 409.
NAFTA art. 410.
NAFTA annex 302.2.(1).
FTA annex 401.2.
NAFTA annex 302.2; NAFTA Tariff Schedules, "Phase-out Schedule," passim.
OFFICE OF THE U.S. TRADE REPRESENTATIVE, "MARKET ACCESS: GOODS-- THE NORTH AMERICAN FREE TRADE AGREEMENT" (Aug. 12, 1992) [hereinafter "MARKET ACCESS"].
FTA art. 401(2); see HTSUS.
MARKET ACCESS, supra note 41, at 1.
NAFTA annex 308.1 provides for equalization of the MFN tariffs on computers, display units and parts either immediately, or during a five year period beginning in 1999.
NAFTA annex 308.2.
See supra note 8 and related discussion of Art. XXIV of GATT..
HTSUS, passim.
MARKET ACCESS, supra note 41, at 1.
For example, the United States has proposed that all GATT members totally eliminate tariffs in several key sectors, including distilled spirits, beer, pharmaceuticals, paper, wood, non-ferrous metals, steel, electronics, scientific equipment, construction and agricultural equipment. See URUGUAY ROUND UPDATE, supra note 12, at 2. Additional tariff reductions are being proposed by the Clinton Administration in the "market opening" negotiations that resumed in mid-1993. Bureau of National Affairs, 10 Int'l Trade Reporter Current Reports 527 (March 31, 1993).
NAFTA art. 303, annex 303.7.
CPTs in excess of 14 inches benefit from no grace period, but are subject to a seven year phase out program in which 1.2 million units will be subject to drawbacks the first year, declining 200,000 each year thereafter, to zero after six years. NAFTA annex 303.8. The parties are prohibited from offering duty drawbacks on such CPTs, except consistent with this annex. NAFTA art. 303(8).
NAFTA art. 303(2)(d); 303(7). Under normal duty drawback provisions, a good imported into the United States and then exported in its same condition within three years is subject to refund of 99 percent of the applicable duties 19 U.S.C. 1313(a)(1989). Under U.S. law (and the law of many other jurisdictions), if a fungible good made in the United States is substituted for the imported good and exported, drawback is still available 19 U.S.C. 1313(b)(1989). This provision is an advantage for companies that source from both within and outside the United States, since they need not keep track of the origin of particular shipments in inventory.
NAFTA art. 303(1).
NAFTA annex 303.7.
Under 19 U.S.C. 2461 (1989), the United States provides duty-free entry to an extensive list of manufactured articles produced in developing countries, including Mexico. Canada provides similar benefits under its GPT system.
JOURNAL OF COMMERCE, Oct. 22, 1992, at 1A, 3A.
A decision was made by the U.S. government that the products of Asia's "Four Tigers" were sufficiently competitive in world markets, including the United States, that they no longer required GSP benefits upon importation, and they were "graduated" from the program, i.e., all GSP benefits were eliminated for U.S. imports from those nations. See HTSUS, General Note 3(c)(ii) (1993).
19 U.S.C. 2463(c)(1989); see H.R. 2264 13603, 103rd Cong., 1st Sess. (1993). The inapplicability of GSP to most import sensitive consumer electronics products, textiles and footwear, among others, is likely to continue in any event.
19 U.S.C. 2463(b)(1989).
See Madison Galleries, Ltd. v. United States, 870 F.2d 627, 628 (Fed. Cir. 1989) (if the direct cost of processing operations in a beneficiary developing country [eligible for GSP] are not less than 35 percent of the appraised value of the imported article, the article is eligible for duty free entry into the United States, notwithstanding the fact that the product is not the "growth, product or manufacture" of the beneficiary developing country).
NAFTA Tariff Schedules (U.S.), heading 8471, ch. 85.
HTSUS heading 8471; ch. 85, subheading 8540.11 (1993).
NAFTA Tariff Schedules (Mex.), subheadings 8528.10, 8529.10, 8540.11.
NAFTA annex 401, item 8528.10bb, at 401-115.
NAFTA annex 401, item 8528.10bb, at 401-116.
NAFTA annex 401, item 8528.10aa, at 401-115.
NAFTA annex 401, subheading 8528.dd, at 401-116.
NAFTA, annex 401, item 8528.10ff, at 401-117.
For 1994, a quota of 1.2 million units, a rollback of about one third over current levels, is established. The quota is reduced by 200,000 units in each subsequent year. NAFTA annex 303.8.
NAFTA annex 308.2.
See supra note 65 and accompanying text.
NAFTA Tariff Schedules (Can./Mex.), subheading 8540.41.
NAFTA Tariff Schedules (Can./Mex.), subheadings 8471.20-92.
NAFTA annex 308.1(A), (B) NAFTA annex 401, subheadings 8471.20-91, at 401-93. Most parts enter under a separate category, heading 8473.30 and its subheadings.
NAFTA Tariff Schedules (Can./U.S.), subheadings 8471.20-.92.
NAFTA Tariff Schedules (Mex.), subheadings 8471.20 -.92.
NAFTA annex 401, item 8471.92.aa, at 401-93.
NAFTA Tariff Schedules (Can./Mex./U.S.), subheading 8540.30.
See supra notes 69, 70.
NAFTA annex 401, headings 8541-8542.90, at 401-124.
HTSUS headings 6401-6402, passim.
NAFTA Tariff Schedules (Mex.), subheadings 6401.10-6406.10.
NAFTA Tariff Schedules (U.S.), headings 6401-06.
NAFTA Tariff Schedules (Mex.), headings 6401-06.
NAFTA annex 401.1, subheadings 6401.10-6406.10. The usual change in tariff category is also required.
BUREAU OF THE CENSUS, U.S. DEPT. OF COMMERCE, SUMMARY OF FOOTWEAR STATISTICS (1992).
Discussions with officials of the Footwear Retailers and Distributors Association, in Washington, D.C. (Oct.-Nov. 1992).
MELVIN P. CHESKIN, THE COMPLETE HANDBOOK OF ATHLETIC FOOTWEAR 128-58 (Fairchild, New York, 1987).
Id. at 161-63.
Mexican manufacturing wages in 1991 are estimated at approximately seven times those in China or Sri Lanka. BUREAU OF LABOR STATISTICS, U.S. DEPT. OF LABOR, INTERNATIONAL COMPARISONS OF HOURLY COMPENSATION COSTS FOR PRODUCTION WORKERS IN MANUFACTURING, 1991 (June 1992), [hereinafter "HOURLY COMPENSATION"]; INTERNATIONAL LABOR ORGANIZATION, WAGES IN MANUFACTURING, tbl.17 (1992).
"The duty-free benefits of the NAFTA have largely been made irrelevant by the 15-year (duty) phaseout that was negotiated by the U.S. shoe manufacturing industry to protect itself." Peter Mangione, President, Footwear Distributors and Retailers Association, quoted in FOOTWEAR NEWS, Feb. 22, 1993, at 36.
NAFTA Tariff Schedules (U.S.), heading 8703. Autos exported from Canada to the U.S. are already duty- free under the FTA. See HTSUS heading 8703.
NAFTA Tariff Schedules (Mex.), heading 8703.
NAFTA Tariff Schedules (U.S.), subheading 8704.21 See HTSUS, subheading 9903.87 ("temporarily" increasing the normal 8.5 percent U.S. duty on light trucks to 25 percent).
NAFTA Tariff Schedules (Mex.), headings 8703, 8704.31
NAFTA Tariff Schedules (U.S.), heading 8708.
NAFTA Tariff Schedules (Mex.), heading 8708.
FTA ch. 10.
Fifty percent initially, rising to the 56 percent level in the producer's fiscal year beginning nearest to January 1, 1998, and to the 62.5 percent level four years later. NAFTA art. 403(5).
NAFTA annex 401, subheading 8703.10, at 401-128; art. 403(5). In these calculations, the foreign source materials incorporated in all major auto components are excluded from regional content. For example, the cost of foreign source pistons incorporated in a U.S.-made engine would not count as regional value in determining whether the finished vehicle met the 62.5 percent standard. NAFTA annex 403(1).
Discussions with Hyundai Motor Company officials indicate that the firm's Quebec factory has not been able to meet the current 50 percent regional value standard under the FTA; however, Hyundai is currently exporting the "Sonata" model to the United States, and paying the 2.5 percent MFN duty.
Mexican auto and auto parts producers under NAFTA selling in the Mexican market will remain subject to a variety of Mexican restrictions, including minimum local content requirements, for an extended period. See NAFTA annex 300-A, app.-A.2.
However, BMW has asserted that the vehicles produced at its new South Carolina plant will have 80 percent North American content, despite the fact that engines, transmissions, and front axles will be imported from Germany. WALL ST. J. Aug. 5, 1992, at A2.
"New" automobile producers (those not established in the region at the time NAFTA enters into force) receive different, slightly more favorable treatment under art. 403(6), which provides a grace period on achieving the normal regional content requirements.
NAFTA art. 303; see ITC Report, supra note 9.
NAFTA Tariff Schedules (Mex.), heading 8708.
NAFTA art. 303; annex 303.7(B).
Most Mexican duties on U.S. and Canadian auto parts will be reduced to zero in no more than five years. NAFTA Tariff Schedules (Mex.), heading 8707.
Also, to the extent U.S. auto production is gradually shifted to Mexico, as seems likely over time, the manufacturers there would be required to pay higher duties to import the same third country parts they are now using. For example, brakes for motor vehicles currently enter the U.S. duty free; for Mexico, brakes and brake parts are subject to 10-15 percent duties, which after seven years would not be subject to drawbacks for vehicles made in Mexico and exported to the United States. NAFTA art. 303, annex 303.7; Tariff Schedules (Mex.), subheading 8708.39.
ITC REPORT, supra note 9, at 4-10.
NAFTA annex 300A, app. 300-A.2.
Hufbauer & Schott, supra note 11.
See London and White supra note 13 .
See NAFTA Tariff Schedules (Can./Mex./U.S.), chs. 50-63; annex 300-B.
See NAFTA Tariff Schedules (Can./Mex./U.S.), headings 3921-6310; 6310; 6405-06 passim; 6501-6505; 7019; 9404.90; 9612.10; 7019.20; 9612.10.
NAFTA annex 300-B, app. 2.1(B)(d).
U.S. CHAMBER OF COMMERCE, A GUIDE TO THE NORTH AMERICAN FREE TRADE AGREEMENT 29 (1992).
Id. This contrasts to the rule under the FTA, which generally provided only for "fabric forward" as a rule of origin. FTA Tariff Schedules, chs. 50-63.
NAFTA annex 300-B, sec. 5.
See, for example, Agreement of February 13, 1988, Concerning Trade in Cotton, Wool, and Man-Made Fiber Textiles and Textile Products (United States-Mexico), K.A.V. 1388; Agreement of December 4, 1986, Concerning Trade in Certain Textiles and Textile Products, With Annexes (U.S.-Korea), K.A.V.1188; Agreement of February 2, 1988, Concerning Trade in Textiles and Textile Products, With Annexes (United States-China), K.A.V. 1328; These and similar bilateral agreements are concluded under authority of the Agreement Regarding International Trade in Textiles, With Annexes of December 20, 1973, 25 U.S.T. 1001, T.I.A.S. 7840, as extended by the Protocol of July 31, 1986, K.A.V. 2419.
NAFTA annex 300-B, app. 6(B).
Id. Currently, such apparel is dutiable only on the value added to the product in Mexico. See HTSUS, heading 9802.00.80.
The United States is the most competitive producer of yarns in North America. ITC REPORT, supra note 9, at 8-2.
Id.
Id. Thus, U.S. yarn and textile fabric producers are likely to benefit, while apparel production will probably continue its shift to lower wage countries such as Mexico.
NAFTA art. 102(1)(c).
ITC REPORT, supra note 9, at 2-5.
Remarks by D. V. Fites, supra note 11, at 2.
Even for those firms, NAFTA will not be the only choice. For example, the Caribbean Basin Economic Recovery Act "CBERA" 19 U.S.C. 2401 offers most Central American and Caribbean nations, except Cuba, duty- free access to the U.S. market for most manufactured products that meet a 35-percent local or regional value standard, of which 15 percent may be of U.S. origin. See also HTSUS, General Note 3(c)(v).
The United States, for example, is Korea's largest single trading partner, taking almost a third of Korea's exports; two way trade amounted to nearly $40 billion in 1991. U.S. DEPT. OF COMMERCE, U.S.-KOREA TRADE RELATIONS" (Nov. 1992).
For example, about 75 percent of the value of "Chinese" footwear produced in Taiwanese owned and operated factories in Southern China originates in Taiwan, and perhaps 60-70 percent of the value of "Mexican" color television receivers produced in Japanese or Korean owned "maquiladora" factories in Mexico is of Japanese (or Japanese-Malaysian) or Korean origin. Where a U.S. picture tube is used, the regional value added increases substantially. Id.
For some high-tech products, Japanese or European firms are likely to give further consideration to manufacturing investment in the United States, since wage costs there are similar or lower than at home. However, in most instances, this is not a viable option for producers in Korean, Taiwan, Singapore, etc., where even with recent increases manufacturing wages remain at only 28-29 percent of U.S. levels. In 1991, Japanese wages were 93 percent of U.S. wages; German wages were 143 percent. HOURLY COMPENSATION supra note 91.
The U.S. GSP program currently includes Indonesia and Malaysia among eligible countries, but not China. HTSUS, General Note 3(c)(ii). See supra note 129, for a discussion of the CBERA.
(a) NAFTA does not modify the anti-dumping and countervailing duty laws of the United States or Canada, but will require Mexico to make its trade laws more transparent and procedurally fair before they are enforced. NAFTA ch. 19. Establishment of a factory in Mexico is thus no guarantee that the product will be immune from U.S. trade actions.
(b) As noted earlier, Mexico and Canada will gain some relief from U.S. textile quotas under the NAFTA.
(c) The U.S. "Trading with the Enemy Act", 50 U.S.C. App. 5, prevents virtually all financial and commercial interchange, including imports from, North Korea and Vietnam. See 31 C.F.R. 500.201. However, restrictions on Vietnam are likely to be rescinded shortly.
(d) China has been regularly threatened with a loss of MFN status by proposed legislation tying that status to trade restrictions, human rights violations and controls on nuclear and missile technology proliferation. See, for example, U.S. House of Representatives, Conference Report on the United States- China Act of 1991 H.R. 2212, REP. NO. 102-392, 102nd Cong., 1st Sess. (1991), passim.
Many experts predict that Mexico will devalue the peso in 1994, after NAFTA enters into force, increasing the competitiveness of Mexican exports but discouraging imports of both finished products and parts and components. JOURNAL OF COMMERCE, Mar. 2, 1993, at 1.
A network of free trade agreements with other nations in the hemisphere-- part of the "Enterprise for the Americas"-- was a feature of Bush Administration trade policy. Commerce Department officials under the Bush Administration suggested that free trade agreements might someday be concluded between NAFTA countries and nations in Asia such as Australia, New Zealand, Taiwan, Hong Kong and Singapore. President-elect Clinton, on November 17, 1992, in a news conference in Little Rock, suggested Chile and Argentina as likely candidates for free trade agreements with the U.S. or NAFTA nations. Should the ASEAN Free Trade Area, created on January 1, 1993, successfully implement its ambitious plans for a free trade area, it too might become a candidate for early action. See ASIAN WALL STREET JOURNAL, Dec. 7, 1992, at 1; JOURNAL OF COMMERCE, Dec. 24, 1992, at 3.
Thus, unless the membership includes countries that are principal additional sources of major parts and components, the expansion will at best provide North American and foreign manufacturers with broader sourcing options, without eliminating the primacy of rules of origin considerations.
Among other things, the U.S. has proposed elimination of all tariffs on most electronic products, alcoholic beverages, pharmaceutical products, wood and paper products, non-ferrous metals, steel and construction equipment. URUGUAY ROUND UPDATE, supra note 12, at 2.