Overview Of The North American Free Trade Agreement
Jon Fee, Diego Marquez And Bj Shannon, Alston & Bird LLP

September 2, 2014

Introduction

President Clinton signed legislation implementing the North American Free Trade Agreement (NAFTA) on December 8, 1993, and the agreement went into effect on January 1, 1994.  It is the oldest existing U.S. free trade agreement to provide tariff shift origin rules.  With exceptions and variations, all subsequent U.S. free trade agreements have followed this tariff shift model.

Initially, some NAFTA originating goods became duty-free immediately, while duty rates for other goods were reduced in annual stages over periods of five, ten or 15 years.  Today, all originating goods, including apparel, are duty-free.

Each of the three NAFTA countries – Canada, Mexico and the United States – affords similar preferential treatment for originating goods imported from each of the others. This paper focuses on the NAFTA treatment of apparel imported into the United States from Canada and Mexico.

Origin Rules

Goods wholly obtained or produced entirely in one or more of the NAFTA countries are always considered originating.  But most apparel goods are made with at least some nonoriginating (i.e., non-NAFTA) materials and are therefore subject to apparel tariff shift rules.  The most common type of tariff shift rule for apparel is known as yarn forward.  Under yarn forward, the component determining tariff classification must be woven or knit in one or more of the NAFTA countries from yarn spun or extruded in one or more of the NAFTA countries, and the apparel good must be cut or knit to shape and sewn or otherwise assembled in one or more of the NAFTA countries.  The effect of yarn forward is that the only nonoriginating material that is allowed in the component of the apparel good that determines its classification is staple fiber.  For apparel of man-made filaments, the filaments must be extruded in one or more of the NAFTA countries so that no nonoriginating material is allowed in the component determining classification.

Yarn forward is mostly applicable to apparel of cotton, wool or man-made fibers.  Sometimes the origin rules are either more strict or more relaxed than yarn forward.  For sweaters of man-made fibers from Mexico (not Canada), even the staple fibers must originate in one or more of the NAFTA countries.  This rule for man-made fiber sweaters is known as a fiber forward rule.

Some apparel goods need only be cut and sewn in one or more of the NAFTA countries to be originating.  Nonoriginating fabric for such goods can be imported into NAFTA countries for production into apparel goods and the finished goods will still be originating and duty free when imported into one NAFTA country from another.  These apparel goods include the following:

  • Silk and linen (flax) apparel.
  • Men’s or boys’ nightshirts and pajamas, provided that the good, exclusive of collar, cuffs, waistband or elastic, is wholly of circular knit fabric made wholly of cotton yarns exceeding 100 metric number per single yarn.
  • Women’s or girls’ panties and briefs, provided that the good, exclusive of waistband, elastic or lace, is wholly of circular knit fabric made wholly of cotton yarns exceeding 100 metric number per single yarn.
  • Women’s or girls’ nightdresses and pajamas, provided that the good, exclusive of collar, cuffs, waistband, elastic or lace, is wholly of circular knit fabric made wholly of cotton yarns exceeding 100 metric number per single yarn.
  • Woven apparel goods, if the fabric of the outer shell, exclusive of collars or cuffs, is wholly of one or more of certain specially designated fabrics, listed at Harmonized Tariff Schedule of the United States (HTSUS) General Note 12(t)/62.CR2, which include certain cotton velveteen, cotton corduroy of more than 7.5 wales per centimeter, Harris tweed, blends of wool and man-made fiber and polyester batiste.
  • Men’s or boys’ woven shirts of cotton or of man-made fibers made wholly of one or more of 12 specially designated fabrics listed at HTSUS General Note 12(t)/62.SR30.
  • Men’s or boys’ woven boxer shorts of cotton made wholly of one or more of ten specially designated fabrics listed at HTSUS General Note 12(t)/62.SR32A.
  • Brassieres.

Special chapter rules impose an additional requirement on apparel goods with visible linings, such as coats, suits, jackets and skirts, if the visible linings are made from certain fabrics listed at HTSUS General Note 12(t)/61.CR1 and 62.CR1.  These rules only apply to the visible lining fabric in the main body of the apparel good, excluding sleeves, which covers the largest surface area, and do not apply to removable linings.  For such goods, the visible lining fabrics must be woven or knit in one or more of the NAFTA countries.  This rule is in addition to any other rule, such as yarn forward, that otherwise applies to the apparel good.
Another special rule, called the de minimis rule, allows fibers or yarns of up to seven percent of the weight of the component determining classification to be disregarded in the application of yarn forward or any other tariff shift rule.  Unlike the de minimis rule under CAFTA-DR and some of the other U.S. free trade agreements, the NAFTA de minimis rule does not exclude elastomeric yarns from its coverage.

Tariff Preference Levels

Duty-free treatment is available under NAFTA for limited annual quantities of nonoriginating apparel goods that are both cut or knit to shape and sewn or otherwise assembled in one or more of the NAFTA countries from fabric or yarn produced or obtained outside the territory of a NAFTA country.  The annual limits on these apparel goods are called tariff preference levels (TPLs).  The TPL quantities are expressed as square meter equivalents (SME).
The annual TPLs for apparel are as follows:


Imports into Canada:

Cotton or Man-Made Fiber Apparel

Wool Apparel

From Mexico

6,000,000 SME

 

250,000 SME

From the United States

9,000,000 SME

 

919,740 SME

Imports into Mexico:

Cotton or Man-Made Fiber Apparel

Wool Apparel

From Canada

6,000,000 SME

 

250,000 SME

From the United States

12,000,000 SME

 

1,000,000 SME

Imports into the United States:

Cotton or Man-Made Fiber Apparel

Wool Apparel

From Canada

 

88,326,464 SME

 

5,325,413 SME

From Mexico

 

45,000,000 SME

 

1,500,000 SME

The following apparel goods are ineligible for the TPL otherwise available for cotton or man-made fiber apparel imported into the United States from Mexico:

  • Woven apparel of cotton or man-made fiber blue denim fabric.
  • Woven apparel of cotton or man-made fiber oxford cloth of average yarn number less than 135 metric number.
  • Sweaters of man-made fibers.
  • Men’s underpants and briefs, men’s and women’s t-shits and tank tops, and women’s briefs and panties of cotton or man-made fiber if such goods are composed chiefly of circular knit fabric of yarn number equal to or less than 100 metric number.

The TPLs for apparel imported into the United States from Mexico fill relatively early in every calendar year.

Special Regime

Under NAFTA, the United States added subheading 9802.00.9000 to the HTSUS to provide duty-free treatment for Special Regime apparel and other made up textile goods.  The Special Regime covers goods assembled in Mexico from fabric components that were wholly formed and cut in the United States, provided that such components, in whole or in part:

  • Were exported in condition ready for assembly without further fabrication,
  • Have not lost their physical identity by change in form, shape or otherwise, and
  • Have not been advanced in value or improved in condition abroad excpt by being assembled and except by operations incidental to the assembly process; provided that apparel goods may have been subject to bleaching, garment dyeing, stone-washing, acid-washing or perma-pressing after assembly.

Special regime was popular before duties on originating apparel goods were reduced in annual stages to Free.  It is less popular today, especially because the yarn forward rules covering most apparel goods only apply to the component determining classification, while the Special Regime requires that all of the components in the finished good must be woven or knit in the United States.  Nevertheless, special regime still offers a slight advantage over yarn forward because the yarn in the components good can be of foreign origin; that is, it can be spun or extruded in a non-NAFTA country.

Duty Deferral

NAFTA includes a duty deferral provision that is not present in most of the subsequent U.S. free trade agreements that otherwise followed the NAFTA model.  Duty deferral refers to any program in a NAFTA country (such as the Mexican IMMEX program and its predecessors, the Mexican Pitex and Maquiladora programs) allowing the temporary, duty-free importation of components or materials for manufacture into finished goods for export.  The NAFTA duty deferral provision also affects goods produced in NAFTA countries with the benefit of temporary importation bonds and foreign trade zones.  If nonoriginating materials are processed in a duty deferral program into originating goods that are then exported to another NAFTA country, the exporter must pay duty in his country upon the exportation as though the nonoriginating materials were consumed in his country without the benefit of duty deferral.  The exporter can claim a credit for any duties paid in the NAFTA country to which the originating goods are exported; but the credit is zero for apparel goods because all originating apparel goods are duty-free.  A similar NAFTA feature limits the availability of manufacturing drawback for originating goods exported from one NAFTA country to another.

Certification and Recordkeeping

The importer of NAFTA originating goods must obtain a certificate of origin.  Unlike other free trade agreements, NAFTA requires the use of a specific form for this purpose.  The U.S. form is on Customs and Border Protection Form 434.  Mexico and Canada publish nearly identical certificate of origin forms.  Among other features, the certificate of origin must include identification of the goods by tariff classification and the criteria supporting the goods’ NAFTA originating status.  Also unlike other free trade agreements, NAFTA permits only exporters (not importers) to sign certificates of origin.
Exporters of NAFTA originating goods must maintain records supporting the NAFTA originating status of the goods.  NAFTA permits the customs authorities of each of the NAFTA countries to conduct origin verifications at the premises of exporters in other NAFTA countries for the purpose of verifying the claimed originating status of goods.  Failure to maintain supporting records can result in the denial of NAFTA treatment and the assessment of duties and penalties.

Antex Knitting Buhler Quality Yarns Corp.Cap Yarns, Inc.Carolina Cotton Works, Inc. - CCWCentral Textiles/Cotswold IndustriesContempora FabricsFrontier Spinning Mills, Inc.Hamrick Mills, Inc.Keer America CorporationMilliken & CompanyParkdaleSwisstex DirectZagis USA