PROUDLY MADE IN CANADA

February 6th, 2015

PRACTICAL CONSIDERATIONS ON THE EVE OF THE IMPLEMENTATION OF THE FREE-TRADE AGREEMENT BETWEEN CANADA AND THE EUROPEAN UNION

JEAN-MARC CLÉMENT | Montréal
DIDIER CULAT | Quebec City

On September 26, 2014, Canada and the European Union concluded a free-trade agreement providing several measures to promote commercial exchanges between Canada and the European Union. It is called the Comprehensive Economic and Trade Agreement (CETA).

First free-trade agreement between the European Union and a country member of the G7, the CETA distinguishes itself notably by providing for the elimination of 98% of all custom tariffs between Canada and the 28 member States of the European Union upon its implementation.

This should be distinguished from the gradual reduction of custom tariffs when the North American Free-Trade Agreement (NAFTA) was implemented which were spaced out over a period of seven years. This represents a net advantage for Canadian businesses, most of which will see their goods enter the European Union duty free as opposed to products of competitors from other countries who will have to include custom duties in their pricing.

Entirely made in Canada?

It is important to note however that in order to be eligible to duty free benefits, goods exported to the European Union must qualify as products originating in Canada, as defined in the CETA. It would be natural to suppose that, if a product is manufactured in Canada, it must necessarily be “originating” in Canada; that is not always the case. It is important to distinguish between a product made in Canada and a product that is “originating” in Canada pursuant to this agreement.

Nowadays manufacturers source raw materials and manufacturing inputs from the four corners of the earth.The CETA requires a certain level of regional content and transformation before a product made in Canada qualifies as “originating” in Canada and thus be eligible to duty free benefits. Special attention must be given to the country of origin of component parts embedded in products manufactured in Canada in addition to their level of transformation in Canada before concluding that the product qualifies as an originating product. There are rules of origin which dictate how much regional content and transformation must occur in Canada. The purpose of this analysis is to determine if the product satisfies the rules of origin, and if so benefit from the much sought after tariff preference.

One can easily imagine a Canadian business that assembles electrical equipment for which the vast majority of the components originate in Asian countries for example. This may cause the equipment to fail to meet the rules of origin, deny originating status and consequently be inadmissible to duty free benefits.

Ever since NAFTA, manufacturers have been used to preparing certificates of origin that attest to the qualification of their products when exported to the United States or Mexico. This will also be the case for goods exported to countries of the European Union.

Certificates of origin

Below are a number of practical suggestions when issuing certificates of origin:

  • Verify the origin of raw materials and manufacturing inputs in order to detect opportunities or possible problems, and make the appropriate changes in order to maintain or improve your competitiveness;

  • Analyse the final destinations of your sales and the applicable custom tariffs;

  • Determine the critical elements that would permit or prohibit your goods from being admissible to duty free access;

  • Know your suppliers and obtain certificates of origin for the products that you receive from them;

  • Know your products in order to be in a position to issue certificates of origin with all the certainty that the products are truly originating in Canada;

  • Maintain documents that support the eligibility of your product as originating in Canada in the event of an audit by customs officials;

  • Put in place new processes in your business in order to ensure compliance with rules of origin;

  • Train your personnel so that they properly understand the risks stemming from errors in the country of origin of products and components that make-up your products.

As for products on which tariffs will not be eliminated on the day of the implementation of the CETA, those tariffs shall be gradually reduced to zero over a period of up to seven years.

Before being implemented, the CETA must be approved by the European Council and by the European Parliament. Implementation legislation must also be passed by the Parliament of Canada. At this stage, it is uncertain whether the approval of the member States of the European Union is required and a debate on this question could arise when the agreement is approved by the European Council.

Our specialists at BCF will be more that happy to advise you concerning rules of origin and the measures that need to be undertaken in order to comply with the requirements of the CETA.

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