The United States has entered into many free trade agreements that benefit both exporters and importers. In order to receive those benefits, exporters must certify that their products qualify with the provisions of those agreements. For example, when an exporter provides a NAFTA Certificate of Origin to their buyer, they are certifying that their goods qualify for reduced or free duty under the North American Free Trade (NAFTA) agreement.
When a shipment occurs within the United States, companies must realize that their domestic shipment may become international. When your domestic customer takes your products and sell them internationally as either a finished product or as a component of a larger product, they must provide their foreign buyer with country of origin information.
A Typical NAFTA Certificate of Origin Scenario
Company A located in Minnesota manufacturers components. Company A sells these components to company B located in Arizona. Company B uses these components to produce a widget. Company C in Canada purchases this widget.
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To reduce the amount of duty they have to pay to Canadian Customs, company C requests a NAFTA Certificate of Origin for this widget from company B. Since company B purchased components from company A, they need proof that the components qualify for NAFTA. They should not claim NAFTA benefits unless they have documentation from company A that the components do, in fact, qualify. Therefore, company B fills out a NAFTA Certificate of Origin and sends it to Company A for a signature.
Company A should not sign this document unless they fully understand the NAFTA rules of origin, and they can demonstrate how their components qualify for NAFTA under these rules of origin. (See my series of articles that describe what steps need to be taken to determine NAFTA qualification.)
When company B provides company C with a NAFTA Certificate, they must keep records of how their product qualifies for NAFTA. Since they did not produce the components purchased from company A, they need written verification that the components do qualify. If company B or C gets audited by U.S. or Canadian Customs, company B must demonstrate how they determined that their widget qualified for NAFTA.
This is why company B is asking company A for a written verification. It is important that companies A and B keep accurate records of the manufacturing process and the calculation of NAFTA preference.
As this example demonstrates, even if your company never exports you may receive a request for a NAFTA Certificate of Origin. It is your responsibility to provide that origin information to your buyer. Can you refuse to supply this information? Sure, but your domestic customer may be forced to purchase components or finished products from a competitor that is more willing to help comply with the NAFTA requirements.
This article was first published in October 2006 and has been updated to include current information, links and formatting.