Since negotiations for the North American Free Trade Agreement (NAFTA) 2.0 commenced in August 2017, a lot of attention has been placed on specific disciplines (e.g., rules of origin, investment disputes, antidumping, etc.) and sectors (e.g., automotive, textiles, dairy products, etc.). This has overlooked the relevance of other chapters and specific disciplines contained therein, other than the practical economic consequences for the day-to-day core activity of international trade: the import and export of goods.
If NAFTA parties are to improve and guarantee fair market access through more stringent rules of origin (higher national/regional content or value), verifications of compliance with such rules will become crucial to achieve and guarantee the results expected from the negotiations.
NAFTA Origin Verification Overview
Since 1994, NAFTA Chapter 5 (Customs Procedures) have allowed each country's customs administration to request information from the exporter or producer of the other party to confirm whether goods qualify as originating from that country as certified by the certificate of origin. If origin cannot be verified, the consequences can be substantial. The same is true for all trade preferential agreements signed by Mexico, where the certificate of origin is not enough to demonstrate the origin of a product after it has received such benefit. Unfortunately, most regulations regarding origin are not international but have been left to domestic law statutes.
It's important to keep in mind that statements like "Made in the USA", "Manufactured in the USA" and "Built in America" are not necessarily the same as "NAFTA originating", so it is important to evaluate production processes (inputs origin and transformation) for determining if a good can be considered as NAFTA originating to obtain the preferential tariff treatment granted by the treaty.
Based on NAFTA Article 505, Mexican authorities may request information from the past five years of exports to a specific Mexican importer. The problem is that many longstanding "traditional" exporters have not ensured that their exports still comply with NAFTA rules of origin, particularly those that manufacture their products in the U.S. After a number of years, those suppliers may not be producing their goods in the U.S. anymore (or even in the NAFTA region). It may also happen that exporters may not have kept their export files with supportive information on each material (which they are required to do) and have not taken the time to confirm if the inputs of their products add up to satisfy the applicable rules of origin. Complying with all authority requests (many times with wide discretionary interpretations of scarce local regulation) within a short window of opportunity makes it almost impossible for exporters to demonstrate that all products merit preferential treatment (lower or no tariff). The consequences of not complying with the origin goes beyond paying tariffs, and in certain cases all future exports could be denied the preferential tariff.
Origin verifications are mainly conducted through written questionnaires (telephone and e-mail communication with the administrative authority is acceptable), and even if a selective approach is agreed upon by the authority the process is document-intensive. In many cases, thousands of documents are required to demonstrate the origin, and appeal procedures after the administrative authority has denied the origin are also burdensome and often require expert translations of all or most evidence cited at the administrative stage.
Conclusion and Considerations
Similar to rules of origin, rules of verification differ among trade agreements. NAFTA 2.0 will most likely implement more streamlined rules for verification, which should be of concern to both U.S. exporters and Mexican importers.