Understanding The North American Free Trade Agreement (NAFTA) - Business - Business Ideas

Understanding the facets of the North American Free Trade Agreement is invaluable if your company is manufacturing in Mexico.

Many believe NAFTA - enacted in 1994 to erode trade and investment barriers between the United States, Mexico and Canada - makes doing business in Mexico duty free. While most companies shipping merchandise to a manufacturing plant in Mexico may qualify for tariff-free status on those items, certain customs paperwork requirements must be met to ensure businesses are aligned with NAFTA policies.

"Not everything going into Mexico is duty free," notes Steve Haywood, president of FOCUS Business Solutions, Inc., a nationally licensed U.S. Customs brokerage firm specializing in NAFTA Customs-regulations issues. "As you know, Mexico has something called Sectoral Programs, also known as PROSEC. Materials eligible for PROSEC may be able to enter as an import, Mexico-duty-free, or may be subject to tariffs of up to five percent."

PROSEC was implemented by the Mexican government as a means of overcoming challenges faced by international factories, or maquiladoras, in Mexico after NAFTA took root. The maquiladoras' trials stemmed from NAFTA's Article 3, which states participants cannot waive or reduce import tariffs conditioned upon the export of the finished goods to another NAFTA country.

While PROSEC is a measure allowing foreign or domestic producers to petition the government for either tariff reduction or elimination regardless of whether the finished product will be sold within the country or exported, it only applies to certain sectors of the Mexican economy - including automotive, textiles and electronics.

Companies conducting business in Mexico may take advantage of PROSEC without a NAFTA certificate. Still, if a business intends to manufacture and ship products to the States for consumption, NAFTA certificates must be secured for the raw materials used.

Businesses shipping goods to and from Mexico from non-NAFTA-regulated countries also may take advantage of "Regla 8" or Rule 8 - another tool provided by the Mexican government inviting imports across its border duty free. When these items are shipped to the United States after assembly, however, they can encounter U.S. tariffs and may not necessarily qualify for NAFTA treatment, Hayward points out.

To reap NAFTA benefits, claim Prosec status or utilize Regla 8, a company producing goods in Mexico for shipment to the States must first file a Certificate of Origin, which states items covered by the certificate are "originating" goods as defined in NAFTA Chapter 4. For preferential tariff consideration, the certificate must be completed by the exporter and be in the importer's possession when the declaration is made. Incorrect or fraudulent Certificates of Origin can mean penalties for the exporter should a Customs audit occur.

Free trade - or reduced-duty trade - is good business. U.S. government sources cite Canada and Mexico as the top two consumers of U.S. exports in 2010, spending $248.2 and $163.3 billion on American goods, respectively. The United States concurrently purchased $276.4 billion in Canadian products and spent $229.7 billion on Mexican imports. Moreover, bilateral trade between Mexico and the States has more than quadrupled in the last two decades .