Maria: Hi. Welcome, everyone. Thank you for joining us for our webinar, Navigating Trade Agreements: The Legal Considerations for Your Business Customs Compliance. I'm Maria Vanikiotis and my colleagues and I are really glad you're able to join us today. We've prepared material on topics that we hope will be of use to you and your trade compliance teams. In the next hour we will aim to provide guidance on free trade agreement fundamentals by discussing some of the common traits that are seen across different ... and we'll use the recently implemented United States, Mexico, Canada Agreement, the USMCA, or the new NAFTA. We'll be using that as a case study. We will also highlight some of the practical compliance challenges, the business risks and opportunities that general counsel often face regarding FTA related issues in their own organizations and across our various jurisdictions. So essentially our goal will be to equip you with the kind of foundational knowledge to help you ask the right questions of your compliance teams and your suppliers and helping ensure that you're properly claiming FTA benefits. Before diving into the substantive material we'll do a few quick introductions.
Again, I'm Maria Vanikiotis and I'm an associate in the International Trade group at Crowell & Moring. I'm based in Crowell's New York office and my practice focuses on the US import side of trade. So that can involve addressing custom compliance issues, duty savings opportunities, risks, government submissions and all the rest. Joining me are my colleagues from Sanchez Devanny in Mexico and Gowling in Canada. Turenna, I think I'll pass it to you for the next set of introductions.
Turenna: Thank you, Maria. Thank you all of you to be here with us today. My name is Turenna Ramirez. I am head of the International Trade and Customs Practice group at Sanchez Devanny in Mexico. We advise a lot of multi-national companies who have business in Mexico and in the region within a number of operations, including the setting up via expansion, all matters related to the export controls and ... they need to take into consideration to have a cost effective operation, not only in our country but in the United States, Canada and all over the world. Thank you very much. Wendy.
Wendy: Hi, everyone. Thanks for joining us. Wendy Wagner, I practice out of Gowling's Ottawa office. Gowlings is a global law firm. We're principally based in Canada but also in the UK and have various offices around the world. My practice is very similar to Maria and Turenna's, trade and customs including import and export matters. So export controls and sanctions among other things. I'm going to pass it over to my colleague, Hunter, who's also from Gowlings.
Hunter: Thanks, Wendy. Hi, everyone. Yes, I'm Hunter Fox. I'm an associate in Gowlings Ottawa office working on international trade, customs compliance and the interpretation of free trade and investment agreements. So happy to be here with you today. Back over to you, Maria.
Maria: Thanks. Okay. Next slide, please. Great. So diving right into our first module, Understanding Free Trade Agreements. Again, our goal here is to discuss some of the fundamental rules to give you a flavour of the kinds of analysis that apply so that your compliance and supply teams are able to support any FTA claims. Next slide, please. Starting at the very highest level, what is a Free Trade Agreement? So broadly speaking it's an agreement between two or more countries where each country agrees to certain obligations that affect trade, certain protections for investors, certain rights and other related topics. So essentially it creates a framework for trade between the two countries where, if certain requirements are met, trading partners within those countries can benefit from preferential treatment. It's important to take time to learn about FTAs for two reasons. First, you might discover opportunities for FTA related duty savings and duty savings are always a good thing. Second, if your company is already claiming FTA duty savings you can confirm whether those claims are supportable and that the company is not unknowingly at risk of non-compliance or false claims. This is important for companies assessing their operational risks as well as companies that are considering sale or acquisition. A company that doesn't have a robust compliance program or a fundamental understanding of its own FTA claims can really open itself up to material risks. Finally, how do you know whether your products are eligible? Every FTA is different but they often have the same underlying structure or the same bones. When it comes to determining whether your products qualify for preferential treatment, understanding the details of each FTA and how your specific facts fit within those rules will really win the day. It's highly fact specific and FTA specific analysis so we're going to give you the kind of knowledge and tools to understand where to begin. Next slide, please.
Great. From an imports perspective, probably the most important concept to understand is how to apply the rules of origin. The rules of origin determine whether a product's eligible for preferential treatment under an FTA, or to use a term of art, it determines whether the product will be considered originating. Rules can be pretty simple if a product is, for example, wholly grown or assembled in one country but, of course, the realities of modern supply chains and sourcing patterns means that a product often includes components that originate in many countries. Processing often occurs across borders. So in those cases determining origin can be much more complex. And again, the specific rules will differ according to the specific FTA but they generally follow a similar structure. For instance, one rule that's pretty typical to see across FTAs is the rule covering goods that are wholly obtained or produced entirely. The rules of origin will most likely provide a definition for what exactly falls under this category but its fairly straightforward and used to cover goods that are produced entirely in a party territory. Generally this is a good that's grown or mined or caught in a party territory. It can even be waste or scrap that derives from production in an FTA territory. One important distinction is that buying something from a producer in a party territory does not necessarily mean that it's entirely produced there. It could be made using non-originating materials. So that's a subtle but it's an important distinction for importers. Second, some FTAs also provide a separate rule describing goods that are produced exclusively from originating materials. In that scenario some of the materials comprising a good derive from outside a party territory, but they're made originating in the party territory by satisfying either a tariff shift or an RVC rule, which we'll turn to in a moment. So essentially here the non-originating materials become originating in the party territory and then their assembly produces the finished product which qualifies for preferential treatment. A third very common rule is the product specific rules requiring that change in tariff classification. If you could just flip to the next slide. Thanks.
This set of rules is commonly called the tariff shift rules. I'm sure many of you are familiar with that phrase. This involves a non-originating material or part or component that's used in the production of a good that undergoes a specified change in HTS code as a result of the processing that occurs in an FTA territory. So the applicable tariff shift rule will be unique to each HTS heading or subheading. That means that proper application of a tariff shift rule really requires a sound understanding of product classification because in order to assess whether the non-originating material undergoes the appropriate shift, both the material and the finished good have to be properly classified under the harmonized tariff schedule. I'm guessing this sounds all a bit abstract. I think the best way to understand the concept is with a quick example. You see that outlined on the screen in front of you. In this example, the finished imported good's a framed mirror and it enters the US under subheading 7009.92. So let's say in this case that a manufacturer in Mexico sources and ships raw materials from a non-USMCA country, let's say China. Brings them into Mexico, process them, assembles them to produce the finished framed mirror and then ships the finished mirrors for importation to the US. The applicable USMCA tariff shift rule would be the one for the finished goods. It would be the rule under 7009.92. You can see here that that rule requires that all non-originating materials have to be classified in a different subheading. So if you could just flip to the next slide. I think pictures are always helpful.
You can see here that we have non-originating materials. We've got mirror sheets. We've got hangers. We've got plastic and each one of those individual components is classified in a different heading or subheading. As a result of the processing in Mexico they shift into the final subheading of the framed mirror. So the tariff shift is satisfied and the imported framed mirror would be eligible for preferential treatment at time of entry. Again, the takeaways here are that the tariff shift rules are really important because many goods are the result of raw materials being sourced globally. To benefit from duty free treatment the non-originating materials may have to undergo a tariff shift. Having a robust understanding of classification is really key to substantiating of claims that products meet the tariff shift rules. Next slide, please. Great.
A second product specific rule can be the regional value content, or the RVC requirement. Each FTA has it's own product specific rules of origin that can prescribe RVC but not all products are automatically subject to the RVC rules. It really depends on the specific FTA and the specific rule of origin. Broadly speaking this rule requires that a good contain a certain percentage of FTA content. To benefit the product has to have a certain amount of added value from an FTA. The RVC calculation will be defined specifically in the rules of origin of the FTA. There a variety of methods. The ones that are applicable under the USMCA are up on the screen in front of you. I won't walk through them point by point but you can see that the formulas involve basically offsetting the cost of the non-originating materials against the value of the good and then coming up with a percentage for regional value content. Next slide, please. Great.
So far we've covered some of the most commonly seen rules of origin and as we mentioned each FTA has its own rules and there are others that certainly could apply. Here we've pulled together some other useful rules that you might across different FTAs. One's the de minimis rule which is an important one for importers. This often will allow product to be considered originating even where it contains some non-originating material that does not meet the applicable tariff shift or RVC requirement. So for example, in the USMCA, a good can still be originating and can still benefit from preferential treatment even if all the non-originating materials don't satisfy the tariff shift, if they fit the di minimis threshold. So if the value of all those non-originating materials cannot exceed 10% of the transaction value or the total cost of the good. So this is a handy tool that importers can use to qualify their goods for preferential treatment even where a tariff shift rule or an RVC is not necessarily met. Moving forward, most if not all FTAs will have a direction rule in some form. Essentially this means that a good has qualified as originating either by being wholly produced or undergoing the appropriate tariff shift. It won't be considered originating if it subsequently undergoes further production or operations outside the party territories, and that's subject to some exceptions, of course. So for example, if a product is manufactured in Mexico, so that it meets the rules of origin, but before it's shipped to the United States for importation it's sent to a non-USMCA country for additional processing, then the product may not be considered originating and it may not receive preferential treatment. Another set of rules that you might see across FTAs is how to treat accessories or packaging material. In the USMCA accessories will be treated at originating if the imported good is also originating, subject to certain conditions of course. While packaging materials and containers for shipment are generally disregarded in determining whether an imported good is considered originating. So, again, these are just some of the rules an importer should be aware of to really understand and get their arms around an FTAs rules of origin.
As we're using the USMCA as a case study there are some USMCA specific rules that I thought I'd call out for importers as well. For example, under the agreement there is a rule of origin covering unassembled goods and goods classified in the same HTS code as their parts. Under this rule the good can be originating if it's produced entirely in the USMCA territories and if the RVC is not less than 60% under the transaction value method or 50% under the net cost method. The idea here is that it's a very technical analysis that involves several skill sets including classification, understanding the general rules interpretation for classification, tariff shift rules, RVC but it can be useful for importers. So it's kind of a tool in the toolbox. The USMCA also allows for the use of inventory management methods. This rule will apply to fungible goods and materials. These are considered interchangeable for commercial purposes and they essentially have identical properties. These rules cover fungible materials that are used in production and fungible goods that are co-mingled and then exported. In both cases the determination as to whether the good is originating can be made on the basis of an inventory management method. Those are specifically described in the USMCA regulations. For those of you who are familiar with this kind of idea this is your specific identification method, average method, FIFO which is first in first out, or LIFO. If anyone has any specific questions on these points we're happy to discuss after the presentation. Again, this is just to give you a flavour of the kinds of tools available to you when you're considering FTA applicability.
Finally, the self-produced materials rule. Put simply this is a handy rule and for producer in an USMCA country uses non-originating raw materials to produce an intermediate good, which is then incorporated or processed to make the final end product, the producer has the option of declaring that intermediate good non-originating for the specific purpose of satisfying the appropriate tariff shift requirement. This is a rule that's a carry over from NAFTA and it's a very useful mechanism for companies that seek preferential treatment. So I think you've been listening to me talk for quite a while now. So I think it would be a good time for me to turn to my colleagues and ask for a little additional input. In your practice are there any other rules or principles that importers should take their time to kind of understand when structuring and bolstering their FTA compliance programs?
Wendy: I'll jump in here, Maria, and thanks for that. It was a really clear explanation of a really complex subject. You did very well. I'm going to take it a little bit more high level. One of the things I think to look at right at the outset is whether there's actually a Free Trade Agreement to use, and to benefit from, and that may sound very simple but sometimes when your supply chain is more complex it can become an interesting question. For example, in Canada, we have a lot of Canadian companies who are subsidiaries of US corporations and a lot of times the US corporations are sourcing product from anywhere in the world, Asia, other manufacturing countries and they're bringing it into the US and putting it in stock, and then supplying customers in Canada or elsewhere from that stock. That's fine and it may be the appropriate way to do things but you might be missing out on the availability of the use of the Free Trade Agreement in that scenario because, for example, Canada has a Free Trade Agreement with Europe, CETA. So if you were sourcing your goods from Europe, and you were bringing them directly into Canada instead of bringing them into the US and putting them in stock and then re-exporting, you might be able to benefit from CETA. So if you've got global sourcing and global supply chains you always want to take a look at how you should structure those if duties are an issue there may be a way to make use of a Free Trade Agreement that you didn't think of. You had touched, Maria, on the issue of trans-shipment and the rules in Free Trade Agreements around trans-shipment and sometimes it may even be possible to bring goods into the US, keep them in bond, do a minimum amount of processing or sorting or repackaging in some circumstances, depending on what the Free Trade Agreement allows, and then ship those goods to Canada and still be able to benefit from the Free Trade Agreement between Canada and the foreign country. So those are always things to look at just in case you were otherwise sort of missing out on an agreement that might be in place.
Maria: Thanks, Wendy. Hunter or Turenna, do you have any other thoughts on that?
Turenna: No. I think that you have to address the main concerns. My only suggestion here and this is where the practical part of our webinar will be important for you to understand is that sometimes the issuer of the certificate of origin is really not aware of these technicalities and these rules that you have here explained, Marie, and for some companies, and we have seen this in every type of company in terms of size and ... scale, sometimes for these officers it is quite simple just to fill out the form to determine that if the goods are moving from the United States to Mexico they have a US origin and this is where the problem begins because of the lack of preliminary and strategic study and structure of the proper rules of origin should apply. So this is where the fun part begins because this is where the origin relations, the origin verifications begin. Of course the consequences, as we will see, in the following slides and the consequences are really costly to the importers of ...
Maria: Great. Thanks for that, Turenna. I have a few additional slides. I'm very close to reaching the end of my portion of the presentation so I'm going to blow through these real quick. The ones in front of you involve a case study with the USMCA, and I basically just wanted to show an example of how to use the rules of origin in practice. I'll keep this very high level. What we have here is an example where a mattress is the finished good being imported into the US. It's produced in Canada of materials imported from the US, from China and from Taiwan. If you just flip the slide we go right into the rules of origin. I think that's a little small and blurry for you to see but if we could make it bigger you'd see that the applicable rule of origin here is (b)(iii) because we have a good that is produced, in part, by non-originating materials. It's not wholly grown. Instead we have these non-originating materials that undergo some processing. Next slide, please.
Right. So here we have the applicable tariff shift rule and of course we apply the product specific tariff shift rule, which would be the rule for mattresses of 9404.21, and again that's super small and tiny so we're going to flip to the next slide. Great, there it is. So under this rule of origin it requires a change to the relevant subheading from any other chapter. So it's a pretty easy tariff shift to make. You'll see here that we have the bill of materials and it shows that there are only three non-originating materials. The first two clearly undergo the tariff shift as they fall outside the chapter 94, which is where the finished belongs, but we can see that the mattress cover coming in from China is in the chapter so it doesn't meet the tariff shift rule. But that's actually not where the analysis ends. If we just flip to the next slide.
Here we have, again kind of tiny and small, but we're able to use here the de minimis rule. Again, this permits a product to be originating where all non-originating materials that don't undergo the tariff shift, where they're less than 10% of the value of the good. So in this case the mattress cover happened to fall under that threshold and it met the de minimis rule so therefore the finished, which was the mattress, was eligible for preferential treatment under the USMCA. So, again, it's a very fact specific, very rule specific analysis but it's key to bringing goods under the FTAs because you can take advantage of opportunities for significant duty savings. That's about it for my part of the presentation. If you want to flip it over we can pass it on to Turenna.
Turenna: Thank you, Maria. Free Trade Agreements are not only important for international trade and global businesses around the world seeking for a place as a manufacturing or service platform for export purposes. There are also a political and substantial element and of course we have seen that with our renegotiation of NAFTA and the new USMCA that we have now in place in Mexico, the United States and Canada. So we go to the next slide. We are going to see what has Mexico done in terms of the Free Trade Agreement network. Mexico has been very active in the past decades trying to expand their business network platform because although our main, and still great partner, is the United States the political and geographical situation of Mexico it is strategic for many companies that are wishing to provide services or goods to the US which is the major country consumer in the world, or at least it still is of today. So we had 16 Free Trade Agreements with more than 40 different countries around the world. Of course the most recent one is the USMCA. We call it in Mexico the T-MEC but it's USMCA actually. As you are going to be able to notice we practically have been very active trying to expand our networking team in terms of business development. We have Free Trade Agreements with Europe, with Japan. Of course they're part of the CPTPP. With Europe, with Israel and many Latin-American countries. For Mexico the Free Trade Agreement also represent a legal certainty for foreign investors to invest in our country. It represents the set of the rules that need to be followed for foreign investor to have their expansion projects in our country.
Moving to the next slide, we wanted to share with you that these Free Trade Agreements will not come alone. They come with secondary legislation that needs to be adopted within the countries, in this case within the United States, Mexico and Canada, but in general terms Free Trade Agreements are considered like they're legal and the master framework for secondary legislation and for, of course, proper implementation of the principles that have been negotiated with the countries involved. What do we get from them? As Maria just explained, trade facilitation benefits for producers, for exporters, for importers, of course preferential tariff rates. In general terms you ... goods can be exempted from the import duties in a very high percentage of our tariff law. It also involves the strengthening of supply chain that has been pretty complex and of course given the new technologies involved has been pretty complex and is actually now a mixture of supply chains, not only within the region but throughout the world, mainly of course in many sectors from Asia. What Maria just explained about how the rules of origin should apply are pretty important for your companies to consider. Why? Because there are a lot of elements, for instance in the automotive sector, could be involved. The supply chain, that is a specific area for very specific reasons. It's so specialized, so sophisticated that perhaps the suppliers can only be in Asia or can only be in the United States. So it is very important for your companies to work together with the producers, with the exporters and with the importers, and understand where the new rules of origin that should be applicable to your goods. Why? Because there are obligations that are arising from the business and cross border structure of Europe, of your operations in the region. The USMCA did bring a number of new considerations that are different from NAFTA. It is advisable to move ahead, to plan and to be strategic with the customs compliance. There is a very important increasing of auditing activity in Mexico. It has always been an origin factoring ... Many sectors have been audited through the past decade, questioning the real origin of the products. Why? Because as Wendy explaining to you is, for instance sometimes there are specific scenarios in which you can actually still claim origin, where the goods can be trans-shipped, but in many occasions the companies really don't pay enough attention as to how the goods or origin must be complied with.
In the next slide I wanted to share with you this is a chain of obligation. The producer, the exporter and the importer are obliged to comply with the rules of origin. The correct issuance of the certificate of origin has changed, as you may now. There is no format as we used to have with NAFTA but there is specific requirements that have made it simpler to actually fill out a documentation that will actually represent your origin certification. But planning for that is simple. Planning as to what you need to understand, prior to handling USMCA origin certification, that is where you need to focus on because you need to have a preservation of your customs files for at least 5 years. Including, among other items, a clear traceability of your bill of materials. Of course, in such bill of materials is a rolling force for you to include the number of this ..., for instance. You need to also include the HTS certification of all raw materials and inputs because of the tariff shift rule of origin that we have already explained to you about qualifying, for instance, in that specific case. You need to have the country of origin of secondary materials. If not USMCA then where are the coming from? It is also advisable to keep certificates of origin or affidavits issued by the producers of such secondary materials to have this evidence of proof that such spare part, or such input, was actually produced in the USMCA territory or within one of the specific USMCA rules. Very importantly, the value/cost of this secondary materials. Why? Because of the formulas that Maria was explaining as to how to qualify as USMCA origin.
If we go to the next slide. Mexico has increased, as I was mentioning, Mexican origin verification procedures. The ... administration, SAT, which is a Mexican acronym has been very active in this origin verifications and why I deliberately put SAT because many times the exporter who receives a letter from the SAT, in Spanish, and without having the clear knowledge as to why a foreign authority is coming to my premises and asking me for actually the formula for the production of my specific good. This is something that is actually operational in the USMCA. These audits can trigger through a questionnaire, notified to the exporter or producer or a visit to their facilities. They have specific deadlines, including in that official document, generally 30 days for the delivery of very specific information about the production of your specific goods sent to the Mexican territory. What are the potential consequences if not answering on time? Invalidation of such certificates of origin and, of course, the implementation after a very long and a very time consuming process to the importer of all the import duties that they should have been paying with an unqualified certificate of origin. Of course with interest and surcharges. So the tax contingency really begins growing depending on the period of time that such audit is being treated. That largely look like the importer would have the responsibility? Yes. It would have the responsibility of framing in Mexico or in the United States or in Canada but the business relationship with your producers, or with your suppliers, will actually putting into a very dangerous line and eventually they could actually bring the case to their territory and, of course, treat potential legal actions against the producer or exporter that actually gave the importer a misleading or a false certificate of origin.
Finally, in the next slide, what are the origin verifications recommendations to your business? Again, the importer should be in permanent contact with the producer of the goods, with sufficient product traceability, evidence in terms of volume, in terms of input, in terms origin and to keep the records at least 5 years, even all the way down to the payment of such inputs. Believe me, in Mexico, they have been growing a very sophisticated audit department in this type of origin verifications. So it is quite important for this recommendation to go to the foreign entities sending goods into our country. Importers, of course, must conduct preventative audits to producers and exporters, to verify the compliance of the specific rules of origin. The producers should periodically update the bill of materials of your originating goods with the information that I have talked about in the past slides. Of course, have supply contracts and establish responsibilities for a proper certification of origin. This is something that is new. It's something that we have recommended to some of our clients and these actually have worked well trying to support and solidify your business operations around the region. The responsibilities of both parties must be included in your agreement. This is where best practices it would be important for you to consider.
Finally, in the next slide, I just wanted to talk to you about some other items. I think that we have also discussed this slide. We can move to the next one. For permanent importations, besides origin, there are other type of customs conditions that are being reviewed. For instance, a customs evaluation. The inclusion of the new value manifest regulations that have recently been implemented in our country. Again, that was validity of payment, royalty agreements, supply agreements. These types of defense file that we are actually recommending for arranging matters it will also be advisable for you to have for custom evaluations situations. Why? Because, again, it is only ... , of course, a correct type of certification that complies with non-tariff regulations, estimated price, which are new important regulations that could be considered somehow as an ... restrictions, specifically in sensitive sectors in Mexico such as textiles, apparel, shoe wear, aluminum products, etcetera, and insurance, freight expense and royalties all require this customs valuation auditing that we have been looking at an increase and a targeted spot for our tax authorities.
In the next slide, a final recommendation for temporary importations. The ... ... or IMMEX programs. Temporary importations are allowed within a very specific program to import on a temporary basis without the payment of import duties and value added tax for a specific period of time, 18 or 12 months, depending on the case. There are specific systemic and controls that need to be implemented such as the famous Annex 24, compliance with such first ins and first outs. Again, to look out for the temporality of a temporary importation. The issuance of complimentary pedimentos. This has to do with another specific article in the USMCA. When you're importing goods from a third party, with no written agreement, you will need to decide where and when to pay the duties. If at the moment of the ... or if going to the United States which will be the higher duty to be paid and that is where you should actually proceed with the payment of dues. Very specific rules that just do not give you a very high level hint as to how systems are moving in in our country. Again, the compliance with non-tariff regulations such as import permits, Mexican official standards, labelling matters, as well as the Annex 31 and VAT credits, which is actually, again, part of this temporary importation ratings which are being increased in our country and are part also of this platform that Mexico has been trying to develop as a global producer of goods and services. With that I think that I will share with Wendy the opportunity to continue with discussing compliance business implications.
Wendy: Sure. Thank you so much, Turenna. I'm going to take it back a step, not as technical. If we can bounce to the next slide we'll get started with that and talk a little bit more about what are the things you have to pay attention in the business from a trade perspective. Of course, one of the things you shouldn't forget is that when you are structuring your supply contracts you need to look at the issue of trade. You need to decide which party is going to do what and who's going to be responsible for what. There are some shortcuts with respect to that in contracting. Many of you will be familiar with the term incoterms which means an international commercial term. It's essentially what that is, is a short cut that defines different responsibilities and who bears the risk for different matters within the course of the shipment of goods and the importation of the goods and delivery of the goods. It's really important to understand incoterms. It's also important to understand that they change. They're updated from time to time because we want to ensure that the way that incoterms are structured keeps developing in accordance with changes in the way that supply chains work and e-commerce and the prevalence of different types of shipment and movement of goods. Another thing you need to do when you're using an incoterm in a contract is to define which year of incoterm you're using. There was just recently incoterms 2020 adopted so if you were defining an incoterm within the contract you'd specify if your using incoterms 2010 or incoterms 2020. It's fine to use any year of incoterm that you want. You just have to be specific about which one you're using. Some of the more familiar ones that people will have heard of before is, for example, Xworks. That's the one that puts the least obligation on the seller. Basically the buyer has to get the goods at the seller's premise, or at an agreed upon place in the seller's jurisdiction, and the seller's not even taking care of clearing the goods for export in that circumstance. So basically all the obligation on the buyer. Then the opposite of that is delivery duty paid and that puts the most obligation on the seller. In that case the seller is doing exactly what the incoterm says. They're delivering the goods duty paid to the buyer. So they're taking care of importation and that can be really important depending on what level of risk you want to bear as the seller of the goods, or as the buyer of the goods, and what you're prepared to do from that perspective. One of the things is really important is tariffs change and we saw that in a way that we hadn't seen it for many, many years or decades with the former Administration in the United States. There was a lot of uncertainty. There were tariffs put in place on steel and aluminum and there were retaliatory tariffs as a result in Canada, Mexico and other countries. That's a very unsettling circumstance because you may have agreed to obligations to bring in certain goods, as the importer of record, and had not anticipated that you would have to bear a 15% duty on those goods, as the importer of record. So when you're looking at supply contracts you need to be aware of the fact that duties can change. Unexpected tariffs can be imposed and you need to define who's going to bear the costs of that. Are you going to be able to adjust the terms of sale in that circumstance? Are you going to be able to renegotiate or are you going to be stuck with that liability? So that's really important from a business risk perspective. Flip over to the next slide.
Turenna touched on this quite a bit. We've already considered the importer's obligations. Again, to take it back a step, you have to think of it in the transaction of who is the importer of record? It's normally the importer of record on customs documentation that government authorities will look to first, in terms of liability. You can transfer that risk contractually. For example, if your exporter is saying that the goods qualify for a free trade agreement and you won't have to pay duty, you can put something in your contract that says that if they are wrong they're going to be responsible, from a contractual perspective. But suppliers can go bankrupt. Unexpected things can happen and the basic fact is that if you're the importer of record customs is going to come knocking on your door to collect the duties. So it's good to transfer risk from a contractual perspective but it may not be the full answer. So you just have to be aware of those risks. As the importer of record, just to sum up some of the things we've already discussed, if you are claiming duty free tariff treatment and you're obtaining goods from a foreign supplier, and particularly if they're not a related party to you, you have to be confident that you can rely on their representation through the certificate of origin, or statement of origin, that those goods actually do qualify for duty free treatment. Turenna already discussed auditing of your foreign suppliers. One of the things that comes up all the time when this situation arises is you need to demonstrate to the customs authorities, as the importer of record, that your good qualifies for duty free treatment but the foreign supplier doesn't want to provide you with the documentation you need to prove that because, in a lot of circumstances, it's very confidential commercial documentation. They're going to have to divulge the amounts they paid for their own inputs into the production of a good which can be very sensitive. So you might have an issue with that if you haven't clearly defined that in advance and impose that obligation. Then you have to look at, especially if your in sort of a high risk industry in terms of duties and the imposition of duties, some of the primary commodities that Turenna had mentioned, you should look at having more than one source of supply. We haven't touched on issues such as anti-dumping duties but oftentimes when those are put in place they're prohibitive in terms of your ability to source goods from that jurisdiction. So if you are sourcing goods from a few different countries, or you have the option to do that, you're prepared for that eventuality. Let's just flip to the next slide.
Again, we had reviewed this but sort of bringing it back to a high level. If you are an exporter or a producer of goods in a country and you are providing that certificate or origin, as Turenna mentioned, don't just sign away on the certificate of origin. It's not that easy. We wish it was but it's not. You have the risk of being audited by a foreign country and you have obligations to retain certain documentation. You may have liability from a contractual perspective to that importer of record, who's ultimately going to be liable for the duties, and there's instances where if you provided a false certificate of origin, of course you may be sued by the importer who's going to have to bear the cost of those additional duties that they didn't expect. Flipping over to the next slide.
Many of the audit principles that Turenna had covered, they're similar among the three countries. We had had in Canada some pause in audit activity for COVID which everyone was really happy about. It ended. Customs storage user are back at it. There's a lot of sort of common errors that we see in customs audit situations. One of the things is just the basic tariff classification of the good. Every single good has a tariff classification. It's based on a harmonized code, globally, but only to the first 6 digits of that classification. So you can have variations among countries and you can have variations even in the first 6 digits if a country just interprets where a good fits differently than another country. So it really is a fact specific exercise and it drives the remainder of the analysis, because it you're not starting from the correct tariff classification then you may not be applying the correct rule of origin, and you may come to the wrong conclusion about whether you can claim free trade treatment for that good. It really does start there. Then there's other issues which we've already discussed. Record keeping is very, very important in case you are audited and have to substantiate the claim for duty free treatment and then there's other customs issues like value for duty, using the right sales price as the basis for value for duty. So I'm going to stop there and turn it over to Hunter to run through a bit of a checklist for trade issues.
Hunter: Thanks, Wendy. Next slide, please. So building on what Maria, Turenna and Wendy have explained today, we wanted to propose some pointed questions that can help focus your trade compliance efforts. The first one is that, do you understand the current exposure to customs and trade non-compliance risks? So is this something that the company has looked at and have you looked at how it can change now that we've shifted from NAFTA to the USMCA? As Wendy explained about incoterms, is this something that the company has looked at? Have you looked at what the current liability is? Is this something that someone is paying attention to and then someone's looking at? Oftentimes these things don't have to be that complicated but someone does have to be paying attention to it. Is there a current customs and trade compliance manual or framework? Do you have some of that? Do you need something like that? When was it last updated? These are simple things but you need to be turning your mind to them. One of the most important ones is, is there someone in the business who is responsible for customs and trade compliance? As Turenna explained, you might be getting from a customs authority of a different country, in a different language and people in your organization that are going to be receiving those letters, they need to know who do I send this to? Who do I escalate this to? Because it's so easy for these things to kind of get lost in the wind. No one responds. The deadline's passed. They can be very short, 20, 30 days and all of sudden you may be looking at some type of penalty action when maybe you did everything correct. Maybe you have the correct tariff classification. You had the correct certification or origin. You had done everything correctly but no one responded to the customs audit. You could find the documentation but no one did because that audit letter didn't make its way to the right person. Reviewing contracts with customs agents and third party logistics providers. Again, this is something that every organization that is shipping goods across borders is going to have these contracts. Have you taken a look at them? Do you understand what the terms are and can they be amended or can you look at a different option? Different companies will propose different ways of arranging how the risk is shared and maybe your current provider is not going to offer something that someone else might be. Again, it's not about making this complicated but it's about turning your mind towards these issues. Finally, does the business understand the core data requirements for a customs declaration and the legal risks associated with getting this wrong? These are the things that you need to make sure when you're filling out the customs documentation that the business understands what data is most important. Can we go to the next slide, please.
A couple more focused on the USMCA. Have you looked at the changes to the product specific rules of origin that must be reviewed? In some cases these have become stricter and some cases these have become more conducive to your aid, but again, you can't automatically assume that simply because a product qualified 2 years ago under NAFTA, that same product now qualifies under the USMCA. Have you looked at the greater regional value content requirements? Or have other flexibilities been explored? We've seen from Turenna and what she explained there is all kinds of different unique options that you can utilize under these agreements but you have to look for it. No ones going to automatically give them to you. Finally, making use of the direct-to-consumer courier shipment, de minimis rules that have been changed for Canada and Mexico. Is that something that your company's looked at? Have you considered all of these different options under the trade agreements to try and utilize some efficiencies in your business? Finally, just to kind of close out, I just wanted to propose a question to my colleagues and ask about what they expect going forward on a macro level in the Free Trade Agreement space for their respective jurisdictions.
Maria: Sure, Hunter, I can jump in. What we're expecting? I guess we'll see. It's been a very active last few years in the international trade space. One of the newer things that we saw with the USMCA was the labour value content inclusion in the automotive rules of origin. So that's something to keep an eye on that we could see in future FTAs, and important for people listening and importers who have a large amount of exposure or opportunity to FTAs is, that there's opportunity to lobby in favour of changes to rules or new rules under new FTAs in your favour. That's something to also keep in mind when you're evaluating your own assessment on FTA exposure within your own organizations.
Hunter: Great. Thank you so much.
Turenna: Thank you, Maria. Can you repeat the question. I'm sorry. Go ahead.
Hunter: No. I was going to ask if you had anything else to add, Turenna, so go right ahead. Thanks.
Turenna: Thank you, Hunter. I agree with Maria. It is still ... to say how this, after ... limitation ... be the new trends but this is what we're seeing in Mexico, Canada and the United States and I think that we all agree that customs compliance, in terms of origin, in terms of customs evaluation. When you were actually explaining about the incoterms, how ... the best practices to keep the record keeping, I was going to address one question specifically that I am seeing here in the chat from Andrea Mendoza, regarding a question that she has about what is the effects of the limitation for the keeping of records in terms of origin. Not only in origin but in terms of the customs ..., there is customs auditing, general terms is 5 years and, yes, although the import declarations pedimentos must be kept, especially when your talking about machinery equipment, there is no specific timeframe and they can actually go visit your facilities for customs compliance purposes at any moment. For origin, and in general terms for auditing, in terms of ..., the 5 years that I was mentioning are involved in the clear legal status of importation, within not only the USMCA but also in our Mexican legislation.
Wendy: Great. Thanks everyone. I think we're out of time so I'm not going to add anything to those really excellent comments. We don't have a time for questions left so I just wanted to encourage everyone to follow up with us with questions regarding our respective jurisdictions after the presentation. Feel free to send an email. I think all of our contact information is available. Otherwise I hope that everyone found the presentation useful. It was probably a lot to digest in an hour but you will have the slides and feel free to follow up with us at any time. Thanks so much for attending.
Turenna: Thank you very much and thank you for Crowell & Moring and Gowling, for working together with us.