The American Chemistry Council (ACC) sees an opportunity to modernise the rules of origin in the renegotiation of the North American Free Trade Agreement (NAFTA).
Rules of origin are the criteria that determine the national origin of a product. In free trade agreements (FTAs), they have major implications on tariffs or lack thereof on imported products.
“We have an opportunity to bring rules of origin in line with those in subsequent agreements,” said Greg Skelton, senior director of regulatory and technical affairs of the ACC. He made his comments in a press conference call on 26 June.
He referenced the US-South Korea FTA (KORUS) and the Trans Pacific Partnership (TPP), although the US formally announced its withdrawal from the TPP in January 2017 through an executive order.
POLYMER CONTENT RULE
The ACC favours the polymer content rule in NAFTA being consistent with those in the KORUS and the TPP, said Skelton.
KORUS and the TPP require at least 50% of the polymer content by weight in finished goods to originate from the partner countries to avoid tariffs. The same provision is in the Central America Free Trade Agreement (CAFTA) with the US. In NAFTA, the threshold is somewhat lower at 40%. Bringing NAFTA in line with other FTAs on this aspect would at the margin be positive for the US polymers sector, as a finished product from the US exported to Mexico and Canada would have to contain greater amounts of locally produced polymers to avoid tariffs.
Likewise, finished products imported into the US from Mexico and Canada would have to contain more polymers from these countries rather than from external sources. These polymers could include US material, which would then be re-imported in the form of finished goods into the US.
The ACC is in favour of other changes in rules of origin. In particular, this includes eliminating the Regional Value Content (RVC) rule, which requires that a product contain a certain amount of originating content as a percentage of product value; providing greater flexibility in determining origin (tariff shift/change in harmonized tariff schedule), substantial transformation, chemical reaction, purification, changes in particle size, etc); and adjusting the “de minimis” amount under NAFTA upwards from 7%, to 10% which would bring NAFTA in line with other US FTAs, said Skelton in testimony to government officials at the US International Trade Commission on 27 June. The “de minimus” rule allows up to a certain percentage (7% in NAFTA) of the selling price of a product to consist of non-qualifying material.
“There are a number of issues with RVC, but the two most commonly cited ones are that it can be very costly and difficult to comply with the administrative requirements to prove origin, especially if the rules require tracing the value of specific parts and materials,” said Skelton to ICIS. “In addition, origin is determined through meeting a percentage of value, so if the floor percentage is not reached or the ceiling percentage is exceeded, the product will not qualify. Similar considerations apply to de minimis – raising this to 10% would reduce costs/compliance issues in claiming origin.”
Canada is the top destination for US chemical exports amounting to $20.4bn in 2016, excluding pharmaceuticals, according to the ACC. Mexico was second at $19.2bn. The US had a $14.6bn trade surplus in chemicals with Mexico, and $3.0bn surplus with Canada in 2016, excluding pharmaceuticals. The overall US chemical trade surplus was $28.2bn (ex pharma), according to the trade group.
Since the implementation of NAFTA in 1994, chemical trade between the countries has more than tripled from $20bn to $63bn by 2014, according to the latest statistics by the ACC. For the US chemical industry, intracompany trade accounts for a significant portion of global transactions – around 50% of exports and 70% of imports are intracompany, according to the ACC, highlighting the global aspect of supply chains, even within companies. “Eliminating or reducing barriers equals a direct bottom line value for our companies. Putting up trade barriers is like putting a wall in the middle of a factory,” said Skelton.
The ACC is “very aligned” with its trade group counterparts in Mexico and Canada, noted Skelton. In March, the ACC along with ANIQ (Mexican Chemical Industry National Association) and the CIAC (Chemistry Industry Association of Canada) issued a joint statement highlighting NAFTA’s benefits for the regional chemical industries and manufacturing economies, as well as opportunities to harmonise regulations and practices and promote digital data flows.
While certain changes to NAFTA could benefit all parties, at the top of the priority list is to “maintain duty-free trade for all qualifying chemical products”, said Skelton.
The free trade of chemicals is not likely to be a particular area of controversy in NAFTA renegotiations, but the ACC would be concerned if other areas became controversial and hampered the overall agreement, he said.
“After over two decades, it’s important to see if NAFTA meets current needs. We are hopeful [a renegotiated NAFTA] will provide value for US exporters and the economy in general. The expansion of US chemicals will be felt throughout the economy,” said Skelton.