Canada NAFTA Tariff Benefits: Claiming Duty Exemption for Mexican-Origin Chinese Parts

The United States-Mexico-Canada Agreement (USMCA), formerly known as NAFTA, offers significant tariff benefits for merchants importing goods from Mexico. For Montreal-based merchants shipping Chinese parts assembled in Mexico to Lisbon, understanding and leveraging USMCA’s rules of origin can help achieve duty exemption. Below is a detailed guide:

Understanding USMCA Rules of Origin

USMCA’s rules of origin determine whether a product qualifies for duty-free treatment. The key rules include:

• Criterion A: The product is wholly obtained or produced entirely within the territory of one or more USMCA member countries (United States, Mexico, Canada). Examples include minerals, agricultural products, and seafood extracted or cultivated within the territories of the member countries. Certain items directly derived from these goods, such as animal hides, also qualify.
• Criterion B: The product is manufactured entirely within the territories of one or more USMCA member countries using non-originating materials and meets the applicable requirements outlined in Annex 4-B of the USMCA. For instance, if a ceramic wine set assembled in Mexico incorporates Chinese parts, the finished product must comply with the specific rule of origin for ceramic wine sets in Annex 4-B. This may require non-originating materials to undergo a tariff shift or meet regional value content requirements. If the criteria are satisfied, the product qualifies as originating.
• Criterion C: The product is manufactured entirely within the territories of one or more USMCA member countries using materials that themselves qualify as originating under the USMCA. For example, if a ceramic wine set assembled in Mexico uses materials such as ceramic blanks and glazes sourced from the United States or Canada, it meets the requirements of Criterion C.

Key Rules of Origin Clauses and Their Applications

• Tariff Shift Rule: If non-originating materials used in the production process are classified under a different tariff category than the finished product after processing in a USMCA member country, the product qualifies as originating. For example, ceramic blanks imported from China into Mexico are classified under a specific tariff code. After assembly and glazing in Mexico, the finished ceramic wine set is classified under a different tariff code. If the tariff shift meets the requirements of Annex 4-B, the ceramic wine set qualifies as originating.
• Regional Value Content Requirement: A certain percentage of the product’s value must originate from the USMCA region. The regional value content can be calculated using the following formula: Regional Value Content = (Value of Materials Originating in the USMCA Region + Direct Costs of Processing in the USMCA Region) / FOB Price of the Finished Product. If the regional value content reaches the threshold specified for the product under Annex 4-B, the product qualifies as originating. For example, if the regional value content of a ceramic wine set assembled in Mexico reaches 60%, and the threshold specified in Annex 4-B is 55%, the product qualifies as originating.
• De Minimis Rule: If the value of non-originating materials that do not undergo a tariff shift does not exceed 10% of the transaction value of the finished product or its total cost, the product is still considered originating. For instance, if the value of Chinese parts in a ceramic wine set assembled in Mexico accounts for 8% of the transaction value, the de minimis rule can be applied to qualify the product as originating.

Practical Guidance for Montreal Merchants on Classifying “Chinese Assembly + North American Parts” Products

• Determine the HS Code for the Finished Product: Accurately classify the HS code for the ceramic wine set assembled in Mexico. For example, if the HS code for a ceramic wine set is 7016.90.00, refer to Annex 4-B of the USMCA to identify the applicable rule of origin.
• Analyze the Origin of Parts: Review the origin of each part in the ceramic wine set. If the ceramic blanks are produced in China, glazes are sourced from the United States, and decorations are from Canada, evaluate whether these materials meet the USMCA’s rules of origin. For instance, if the ceramic blanks undergo substantial transformation during assembly and glazing in Mexico, they may qualify as originating materials. Glazes and decorations from the United States and Canada inherently qualify as originating materials.
• Calculate Regional Value Content: Calculate the value of materials from the USMCA region and processing costs in Mexico. If these values meet the regional value content requirement for the ceramic wine set under Annex 4-B, the product qualifies as originating. For example, if the value of USMCA-originating materials and processing costs in Mexico accounts for 65% of the FOB price of the ceramic wine set, and the threshold specified in Annex 4-B is 60%, the product qualifies as originating.
• Apply the De Minimis Rule: If the value of non-originating materials in the ceramic wine set does not exceed 10% of the transaction value or total cost, the de minimis rule can be applied to qualify the product as originating. For instance, if the value of non-originating materials (e.g., small metal components) in the ceramic wine set accounts for 7% of the transaction value, the de minimis rule can be invoked.

Steps for Claiming Duty Exemption

• Obtain a Certificate of Origin: While the USMCA no longer requires a specific certificate of origin, the importer, exporter, or producer must submit a certification containing the required data elements. The certification must include information such as the certifier’s name, title, address, email, phone number; the exporter’s name, address, and contact information; the producer’s name, address, and contact information; and the importer’s name, address, and contact information.
• Prepare Supporting Documentation: Documentation must demonstrate that the product meets the USMCA rules of origin, such as production records, sourcing records, value records, processing records for non-originating materials, and proof of direct shipment between USMCA member countries. These records must be retained for five years.
• Declare During Customs Clearance: When clearing customs in Canada, provide the certification of origin and supporting documents to the customs authorities and declare that the product qualifies for USMCA duty-free treatment.

HS Code Query for Ceramic Wine Sets

The HS code for ceramic wine sets is typically 7016.90.00. To verify the specific HS code for your product, you can refer to the Harmonized Tariff Schedule of Canada or consult a customs broker.