Nuances of North American Fair Trade Agreements Act (NAFTA)

What Was the Primary Purposed of  NAFA North American Free Trade Agreement?

The North American Free Trade Agreements Act (NAFTA Act) is a very comprehensive trade agreement that sets the rules for trade practices and investments between the United States, Canada, and Mexico.

The agreement was executed in 1994. The NAFTA Act has, for the most part, eliminated a majority of tariff codes and non-tariff barriers to free trade and investment between the NAFTA countries.

What is The Trade Agreements Act (TAA)

The Trade Agreements Act was introduced to regulate trade agreements between the United States and certain foreign countries. One of the main reasons for the Act is to limit U.S. Government procurement to mainly US-made products or products manufactured in specified countries. As such, those products meeting the requirements are then referred to as “TAA compliant”.

If you are selling products through GSA Schedule Contracts, then those products are also subject to the Trade Agreements Act requirements. Making sure that your products BAA and TAA compliant is important to avoid fraud and false claims investigations.

What Does it Mean to be TAA Compliant? 

Under the rules, a product sold to the US government is TAA compliant if:

• At least 50% (55% depending on the date of sale) of its overall manufacture cost originates from the United States or statutorily designated countries.
• The product has undergone substantial transformation in the United States or its designated countries.

When is a Product Substantially Transformed to be TAA Compliant

The Trade Agreements Act, among other things demand that end products (including pharmaceuticals) may only be acquired by the Government from either the United States of America or a designated country under the statute . The legal the test that is utilized to decide whether an end product’s country of origin is substantial transformation.

Substantial transformation under the Act depends on whether your articles have been given a different character or use as a result of the process it underwent in either the United States or the designated country. See FAR 52.225-5. The United States Custom[s] and Border Protection (CBP) is the sole federal government entity with subject matter and legal authority to make country of origin determinations for Trade Agreement Act disputes.  See also 19 USC 2515(b)(1) (providing for the “prompt issuance of advisory rulings and final determinations on whether, under [the rule of origin set forth in] section 2518(4)(B) . . . , an article is or would be a product of a foreign country or instrumentality”); 19 C.F.R. pt. 177, subpt. B (2017) (“Government Procurement; Country-of-Origin Determinations”).

“Substantially transformed means that your product being sold to the federal government must undergo specified significant changes (manufacturing, assembly, processing etc.) that result in distinctive character, name or use of the emerged new product.  For purposes of being TAA compliant, the products must  be“substantially transformed” either in the United States or one of its designated countries.  Having the benefit of Trade Agreements Act Compliance attorneys can be worth the investment when considering the potential of being investigated for claims.  See information about the exceptions to the Trade Agreements Act.

When are your articles determined to be a product of a country?

The general rule is that your articles are considered  products of a country or instrumentality if:

• it is wholly the growth, product, or manufacture of that country or instrumentality, or
• (n the case of an article which consists in whole or in part of materials from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed.

Many government contractors find out quickly the importance of the relevant FAR clauses related to Free Trade Agreements, NAFTA certificate of origin, and how improper certification can present serious problems – both criminal and civil.

To highlight the importance of the North American Fair trade Agreements, the overall trade between three NAFTA partners — the U.S., Canada, and Mexico — has increased dramatically over the past years, from approximately $290 billion in 1993 to more than $1.1 trillion in 2016. Also, cross-border investment has also surged between 1993 and 2016 since the stock of U.S. foreign direct investment (FDI) in Mexico rose from $15 billion to more than $107.8 billion in 2014.

The goal of NAFTA Laws and North American FAR Trade Agreements Act – FAR 52.225-5

The primary goal of the North American Trade Agreements Act is to eliminate barriers to fair trade and investment between Canada, Mexico and the U.S. The implementation of the NAFTA Act was on January 1, 1994. The Federal Acquisition Regulations (FAR) is governed under FAR 52.225-5.

The North American Fair Trade Agreement Act focuses on improving investment and trade levels for consumer goods in  North America. The goal benefits job increase, consumer activities. Many industries benefit from this trade agreement.

NAFTA Act Process in Foreign Trade: The NAFTA Act establishes set rules of engagement for commercial activity between the three countries and how companies ultimately draft their NAFTA certificate of origin. The North American Free Trade Agreement Act is monitored by various institutions. The goal is to establish fair trade provisions and to allow for smooth operation and minimal violations.

Priority Trade Issues (PTIs) create high-risk areas that will create significant revenue loss, harm America’s economy, or threaten the safety and health of the U.S. people. See How Does the President’s View on Buy American Act and Buy America Impact Government Contractors?

How to Get a NAFTA Certificate of Origin? The process for putting forth a claim to each NAFTA partner is somewhat different. To certify that goods qualify for the preferential tariff treatment under North American Free Trade Agreement Act, the exporting company has to a certificate of origin.

A producer or manufacturer may also complete a certificate of origin to be used as a basis for an exporter’s NAFTA certificate of origin. To make a claim for NAFTA preference, the importer must possess a certificate of origin at the time the claim is made.

The North American Trade Agreement implements fair trade agreements to which the United States is a signatory. Under the TAA, contractors must provide either end products made in the United States or a designated country of origin. Countries designated under the Act include Caribbean Basin countries, World Trade Organization Agreement on Government Procurement countries and free trade agreement countries.

Avoid this. Note that for government contractors, India, China, Malaysia, and the Philippines are not TAA designated countries. Therefore, GSA schedule contractors must make sure that the end products sold to the federal government under such contracts are either made in the United States or one of the TAA designated countries. When you submit your proposal, you must also certify that your end products do comply with the TAA.

Companies Must Stay NAFTA Compliant or Face Harsh Penalties: There are a number of Informed Compliance Publications (ICPs) in the “What Every Member of the Trade Community Should Know About: …” series.

Staying NAFTA compliant is critical for each business involved in export controls. The can be some overlap of ITAR compliance when making sure that companies meet all NAFTA requirements.

Canada, Mexico, and the U.S. have harsh penalties including criminal, civil or administrative penalties for violations of NAFTA Act laws and customs procedures.

Producers and exporters must seek to avoid Foreign Trade Agreement Act penalties. They should consider prompt and voluntary disclosure if the information is incorrectly contained in the Certificate of Origin.

Import companies can also avoid penalties under the North American Fair Trade Agreements Act by also promptly disclosing information to the authorities. This includes information about their Certificate of Origin.

Export and import companies that incorrectly prepare Certificates of Origin can also be penalized for failing to retain their records as required by the NAFTA five-year requirement.

For help becoming compliant under the North American Fair Trade Agreements Act / NAFTA Act, call our FAR trade agreement attorneys at 1-866-601-5518.