By William Randolph Rucker and Mollie D. Sitkowski

On December 19, 2013, the U.S. International Trade Commission (USITC) released its report on the probable effects of proposed changes to the North American Free Trade Agreement (NAFTA) rules of origin. The USITC concluded that some of the proposed changes may have a significant effect on U.S. imports or exports from or to the other NAFTA countries. However, these effects are likely to have a negligible effect overall on U.S. industry. The USITC delivered its report at the request of the U.S. Trade Representative (USTR) and it is available here. The President may proclaim modifications to the rules of origin, subject to certain requirements, including that the President obtain the advice of the USITC. The President has previously modified the rules of origin as a result of similar investigations.

The NAFTA Free Trade Commission, which comprises representatives of the U.S., Canadian, and Mexican governments agreed on the proposed changes in April 2012. There are 212 proposed modifications to the rules of origin. The USITC found that the majority of those changes should have a negligible effect on U.S. trade. The USITC concluded that 20 of the proposed modifications could have a significant effect on imports and exports.

U.S. imports from NAFTA partners could increase significantly for certain products covered by eight of the proposed rules, including certain chemical products, diesel engines for marine propulsion, and smoking pipes. U.S. exports to NAFTA partners could increase significantly for products covered by 12 of the proposed rules, including sauces derived from fish, certain chemical products, plastics, articles of rubber, and certain electronic products.

The proposed changes could have a significant impact on the importation and exportation of a broad range of products, including products from the following chapters:

  • Chapter 29: Organic chemicals;
     
  • Chapter 30: Pharmaceutical products;
     
  • Chapter 39: Plastics;
     
  • Chapter 70: Glass and glassware;
     
  • Chapter 84: Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof;
     
  • Chapter 90: Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments or apparatus; parts and accessories thereof; and
     
  • Chapter 95: Toys, games and sports requisites; parts and accessories thereof.

While the full changes are summarized in the USITC report linked to above, below are some representative changes:

  • 3304.10-3305.90: Beauty or make-up preparations and preparations for hair: The existing rule of origin requires “(A) A change to subheadings 3304.10 through 3305.90 from any heading outside that group, except from headings 3306 through 3307; or (B) A change to subheadings 3304.10 through 3305.90 from any other subheading within that group or headings 3306 through 3307, whether or not there is also a change from any heading outside that group, provided there is a regional value content of not less than: (1) 60 percent where the transaction value method is used, or (2) 50 percent where the net cost method is used. The proposed modification would change the existing rule of origin to: “A change to subheading 3304.10 through 3305.90 from any other subheading, including another subheading within that group.” This will significantly broaden this rule of origin and eliminate the regional value content requirement.
     
  • 3901-3914: Polymers in primary forms; plastic resins; silicones; cellulose: The existing rule of origin requires “A change to headings 3901 through 3920 from any other heading, including another heading within that group, provided there is a regional value content of not less than: (A) 60 percent where the transaction value method is used, or (B) 50 percent where the net cost method is used.” The proposed modification would change the rule of origin to remove the regional value content requirement for these goods and require “a change to heading 39.01 through 39.14 from any other heading, including another heading within that group.”
     
  • 8408.10: Diesel engines for marine propulsion: The existing rule of origin requires “A change to headings 8407 through 8408 from any other heading, including another heading within that group, provided there is a regional value content of not less than: (A) 60 percent where the transaction value method is used, or (B) 50 percent where the net cost method is used.” The proposed modification would change the existing rule of origin to: “A change to subheading 8408.10 from any other subheading.” The proposed change would allow a wider-variety of non-originating inputs to be used in NAFTA-eligible diesel engines.

The changes that could have a significant effect on U.S. imports or exports generally liberalize the current rules of origin, including by removing regional value content requirements or allowing changes from other subheadings (rather than heading or chapter level changes). If you have any questions about the changes or how they may impact your company, please contact Randy Rucker, Mollie Sitkowski, or any other member of Drinker Biddles Customs and International Trade Team.

Source: Client Alert