Chapter 14 - NAFTA & USMCA

nafta & usmca

nafta is different from gatt & wto agreements and different from the eu

free trade area

a free trade area consists of two or more countries agreeing to eliminate or phase out trade barriers. it does not control relationships with third countries and needs a good dispute settlement process

economic integration

there are different levels of economic integration:

• no integration (wto)

• free trade area

• customs union

• common market

• economic/political union (economic & monetary union)

• federal system (usa)

canadian ftas

canada currently has 14 free trade agreements in place with the u.s., nafta, israel, chile, costa rica, european union, peru, colombia, jordan, panama, honduras, south korea, and ukraine

mexican ftas

mexico currently has a total of 13 free trade agreements with the u.s., canada, chile, colombia, costa rica, nicaragua, peru, guatemala, el salvador, israel, japan, and the european union

u.s.a. ftas

the u.s. currently has free trade agreements in place with 20 countries: australia, bahrain, canada, chile, colombia, cafta (costa rica, dominican republic, el salvador, guatemala, honduras, nicaragua), israel, jordan, korea, mexico, morocco, oman, panama, peru, and singapore

nafta

nafta eliminates tariffs and ntbs to trade in north american products sold in north america. it is one of the largest ftas in the world. by 2020, the nafta area gdp was estimated to be over c$24 trillion with a market encompassing more than 500 million people

customs union and free trade area

a customs union has a common external tariff while an fta does not. the eu is a customs union, but nafta/usmca is not. nafta does more than just lower tariffs and includes a dispute settlement process

art xxiv gatt

article xxiv of gatt allows wto members to create customs unions or ftas

nafta: beyond free trade

nafta started in 1994 and liberalized trade in goods and services. it includes additional rules for protecting ip beyond wto trips requirements, cross-border investment provisions, easier business travel, and cooperation in areas such as worker safety, child labor, unfair competition, and environmental protection

trade and tariff provisions

trade and tariff provisions include:

• national treatment

• tariff elimination

• elimination of non-tariff barriers

• health & safety inspections

• geographic indications (ca-eu fta)

• mfn between countries

• trucking case (services)

• rules of origin

nafta 2.0 some background

on may 23, 2017, ustr published a notice soliciting comments from the public on nafta modernization, seeking input on direction and content of negotiations on topics such as negotiating objectives, rules of origin, investment, competition-related matters, and labor

rules of origin

rules of origin determine the nationality of a product and are important because they determine:

• normal tariff rate

• preferential or increased rate

• antidumping or countervailing duties

• whether the product is subject to quota or embargo

• whether government procurement rules apply

• proper marking and labeling

nafta rules of origin

• article 415 - produced or obtained entirely within north america (NOT purchased)

  • minerals mined

  • vegetables/crops grown

  • live animals (born & raised)

  • fish/fish products

  • waste/scrap derived from NA production

  • goods produced from these materials

  • De Minimis Rule - if a discount is less than 0.25% of the face value for each full year from the date of purchase to maturity, then it is too small (that is, de minimis) to be considered a market discount for tax purposes. Instead, the accretion should be treated as a capital gain

NAFTA rules of origin

rules of origin are central to NAFTA

• rule - use tariff classification shift test rather than substantial transformation test to determine whether item is from one of the three countries (each component must have undergone a tariff classification change too)

• regional value content requirement

• only certified regional goods cross borders freely

requirements

• goods wholly produced or obtained in
NAFTA

  • NAFTA Article 415 

• regional value content usually requires 50 (net value) - 60% (transaction value) regional content

• minimal amount of non-north-american materials - de minimis rule

  • if non- north American material is less than 7% of total cost may still be eligible for
NAFTA rates

nafta – certificate of origin

to obtain a nafta certificate of origin, specific requirements must be met. if a commercial shipment does not have a nafta certificate of origin, there are consequences. it is required for commercial shipments unless the value is under $2500 us, $1000 mexico, or $1600 cad. marking and labeling rules are found in annex 311

marking & labeling rules annex 311

the country of origin marking (such as "made in u.s.a.") is not necessarily the same as the country of origin for tariff purposes. an example is skippy peanut butter, which is made from peanut slurry imported from canada. skippy argued that the peanut slurry was "substantially transformed" into a new product, but the ruling was that it was not transformed into a us product. mexico has complex rules regarding this

dispute settlement

the fair trade commission supervises agreement implementation and consists of one minister per country.

arbitral panels are used when an issue falls under both gatt and nafta. if the countries cannot decide which dispute settlement system to use, the nafta fair trade commission makes the decision. the panel issues a recommendation, and if no action is taken within 30 days, retaliation is permitted. however, the panel has no authority to order changes in laws.

extraordinary challenge committees hear appeals of panel decisions and check if a panelist was biased or exceeded their powers or jurisdiction

trade in services

trade in services includes financial services and transportation. one key case is "in the matter of cross-border trucking"

in the matter of cross-border trucking

mexico agreed that their trucks, while in the u.s., were subject to u.s. standards. mexico claimed that the u.s. was trying to force mexico to adopt these standards within their borders, and that the u.s. treated mexican trucks less favorably than those from the u.s. and canada. the u.s. says that canada’s truck safety rules and regulations are equal to or more demanding than those of the u.s., while the mexican rules are less so or non-existent

the issue was whether the u.s. was justified in imposing such restrictions on the mexican trucking industry. the outcome was that the nafta arbitral panel unanimously held that u.s. restrictions on the trucking industry violated nafta

production sharing at offshore assembly plants & free trade zones

assembly plants can be owned by foreign nationals. a plant in mexico assembling automobiles from parts sources around the world may be owned by a non-mexican national. maquiladora plants in mexico

assembly plant tax rules

section 9802 of us hts (not part of nafta):

1. imports assembled in foreign plants from u.s. made components

2. exported for assembly without further fabrication

3. no processing except incidental to assembly

   • doesn’t lose physical identity

   • assembly allowed but fabrication not allowed

section 9802

tariff assessed on:

• value of new product – value of u.s. parts = tariff value

• assembled anywhere in the world