Customs Update: Will NAFTA tiffs ever end?
6/01
(Published in the Journal of Commerce on 6/12/01)


Like a serial novel, the controversy surrounding NAFTA and trading between the U.S., Canada and Mexico continues unabated.

For example, NAFTA Article 303 was designed to induce        manufacturing operations to return to North America. The method to accomplish this goal: luring suppliers to the region to make their products, thereby allowing manufacturers to use regionally made parts and components in making their finished goods. The benefit would be the end product becomes NAFTA-eligible, thereby enjoying duty free treatment. The final stage of implementation occurred in Mexico at the first of this year.

The Americans insisted on the inclusion of Article 303 in NAFTA out of concern that unless there was actual manufacturing taking place, non-NAFTA suppliers would use Mexico or Canada as a platform for gaining duty-free access to the U.S. market. Put bluntly by some of the negotiators at the time, the concern was Mexico, in particular, would be nothing more than a "screwdriver" operation, meaning the Americans insisted on rules of origin which rewarded manufacturing rather than assembly.

In reality, few suppliers relocated, although some of the largest corporations continue to insist they do so to this day. Until the NAFTA drawback provisions took effect on January 1, 2001, this was not much of an issue relative to Mexican production. However, now that goods imported into Mexico, which are intended for the U.S. and Canadian market, are subject to duty payment (with refund coming, if at all, through the application of the complicated and record intensive NAFTA drawback provisions), some Mexican products are becoming more expensive than those produced elsewhere. [Unlike Canada where the relevant duty rates have all dropped to zero, the duty phaseout continues in Mexico.]

While American labor unions might be elated at such a turn of events, the situation is problematic, especially for the many American companies which have invested heavily in Mexico. Simply put, Mexican produced goods are now subject to the limitations of the NAFTA drawback program while foreign made goods are not.

Another source of the problems Article 303 is causing is the lack of raw materials in North America. In the case of shortages, it is commonplace for the regional-made raw materials to be put into production in the U.S. while the foreign sourced raw materials end up in Mexico. The average duty rate into the U.S. is now somewhere around 3% whereas the average Mexican duty rate is considerably higher. Whether made in the U.S. or Mexico, often times the finished good ends up in the U.S. market with a resulting increase in consumer cost.

This increased cost may be attributed to the higher Mexican duty rate, but generally that is not the only cause.  Another element is the high cost of transportation when the company decides to redirect the originating raw materials to Mexico to reduce duty liabilities while moving the foreign raw materials to the U.S. for production purposes.

As a general rule, the non-NAFTA inputs used in Mexico are not available in North America either due to lack of production, insufficient capacity or noncompetitive pricing, quality or delivery times. These factors cause production costs to rise, an increase which is enhanced by the administrative burdens imposed to qualify for NAFTA and especially its drawback benefits. The net result is the beginnings of change. A few North American-based manufacturers are starting to look at relocating offshore in order to be quality and price competitive. The importance of this phenomenon is in the overall approach of the negotiations taking place regarding likely trade agreements between the U.S. and Chile, Singapore and the Free Trade Area of the Americas.

In a recent Federal Register publication, the U.S. Trade Representative announced he wanted input regarding the potential U.S.-Chile Trade Agreement and, in particular, sought comments about the NAFTA rules of origin. It seems clear, the existing NAFTA rules of origin will serve as a model for future trade agreements. The key question for all of us then is, should they? If so, should they be changed? If so, how? Traders are encouraged to make their views known. If you are having trouble qualifying for NAFTA because you cannot obtain sufficient regional inputs, let the U.S. Trade Representative know.

Elsewhere, the issue of opening the borders to Mexican trucks, on the other hand, has proven more difficult. A recent proposal by the Administration was to grant full access in early 2002. Feeling the U.S. is not moving quickly enough, Mexico has threatened to impose punitive sanctions. In other words, the Mexicans are threatening to impose 100% duty rates on selected American products. At the same time, a resolution has been introduced in the House of Representatives calling for delays in allowing Mexican trucks to operate in the U.S. until the Administration certifies to Congress that there are no dangers to the health, safety and welfare of Americans. A companion bill is expected to be introduced in the Senate shortly.

The House Bill lists a number of conditions, such as that sufficient permanent inspection facilities be built at all commercial border crossings, sufficient staffing to conduct meaningful inspections, sufficient staffing at all hours of operation, plus assurances that the Mexicans have in place and working an adequate safety rating process, domestic roadside safety programs, adequate drug and alcohol testing programs, hours of service regulations and accessible safety databases.

At the same time, the California Truckers Association (CTA) is said to be prepared to challenge opening the borders to Mexican operators focusing on environmental regulations, especially fuel standards. The Teamsters Union is reported to be working closely with the CTA in seeking a way to bring to out evidence that Mexico is violating its version of the Clean Air Act, coupled with the claimed lack of U.S. preparedness to inspect arriving vehicles for fuel standards compliance. [CTA has generally been supportive of NAFTA but states its concern in this context to be the California environment.] The CTA/Teamster complaint is expected to be filed with the North American Commission for Environmental Cooperation whose process carries with it no enforcement tools, only a final report with findings which the various governments are free to implement in any way they choose.

Another trouble spot in Mexican-American relations is the recent dumping complaint filed by a group of California table grape growers against Mexico and Chile. The basis of the complaint is that table grapes grown in the two countries and imported between April 1 and June 30 are being sold to the U.S. market at less than production costs. The complaint recently cleared its first hurdle when the International Trade Commission found petitioners represented a sufficient portion of U.S. domestic industry to be allowed to proceed, a finding made despite active opposition from several sectors within domestic industry.

Also causing concern, particularly with the Canadians, is the Byrd Amendment which was passed in the last session of Congress and requires Customs to refund the dumping duties collected to the domestic industry found to have been harmed. The Canadians have already indicated their displeasure (a concern which has been heightened by the softwood lumber case) and are threatening to file a complaint through the dispute resolution mechanism in NAFTA. Their argument, and that of the Europeans and Japanese who threaten a similar complaint before the World Trade Organization, is that refunds of dumping duties to domestic industry are not in accord with either the standards of NAFTA and/or the WTO. A particular concern is whether the net result will be to generate a lot of litigation, much of which is feared to be unfounded, simply because of the potential dollars at stake. Given the nature and complexity attendant to dumping cases, their resolution takes a long time, they are costly to defend (and prosecute) and, even in the face of a finding that dumping is not warranted, many companies end up going out of business. For proof of this result, one need look no further than the unsuccessful dumping case a few years ago which involved sweaters made in Hong Kong.

To comply with the Byrd Amendment, Customs must enact regulations which are still being worked on. The monies must be refunded no later than December 2001. It is unclear whether Customs has completed those regulations or whether Treasury is holding them up. In either case, they must still be published in the Federal Register for public comment.

Against this backdrop, it appears we are seeing that the lower the duty rates, the more room there is for disputes between trading partners in other areas. Canada remains the U.S.'s largest trading partner. Mexico has leapfrogged over Japan to be our second largest trading partner. Again, American importers and exporters are cautioned to keep a close eye on events in Washington. There are daily changes and being out of the loop can prove to be devastating.