What should be of immediate concern to the new exporter? The phased elimination of duties on most of our exports to the United States. will have a favourable impact on the pricing of those goods.

According to the terms of the NAFTA, some tariff barriers will be eliminated immediately while others will be phased out over periods of five, ten and 15 years. Non-tariff barriers such as customs user fees, quotas and licensing requirements will also be eliminated over ten to 15 years.

Trade between Canada and the United States will continue to be governed by the tariff phase-outs negotiated under the provisions of the FTA. These phase-out schedules are unaffected by NAFTA. As was the case under the FTA, there is an acceleration clause under which tariffs may be phased-out faster than originally negotiated if the three countries agree to such action. If only two countries agree, acceleration takes place only between those two.

NAFTA provides preferential tariff treatment for all "originating" North American goods traded between Canada, the United States and Mexico. NAFTA content rules are used to determine whether an item qualifies as a good originating in North America. These rules ensure that preferential tariff benefits are only available for goods substantively produced or transformed in North America.

Any goods produced in any or all of the NAFTA countries, with components and materials that themselves are wholly sourced or manufactured in any of the countries, qualify as originating goods entitled to preferential tariff treatment.

Goods that incorporate offshore raw materials or components will also qualify for preferential tariff treatment if they have undergone a specified change from one tariff description to another. For certain goods, such as auto sub-assemblies, these criteria are supplemented by a value-added test.

The NAFTA rules of origin build on the rules that were developed for the FTA. Canadian exporters will find the NAFTA rules clearer and more predictable.

More detailed information about NAFTA go to their website at http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/index.aspx

While all firms exporting to the United States or Mexico should obtain copies of these publications, they will be particularly useful to firms whose goods are subject to a value content requirement.

Determining the eligibility of goods for NAFTA treatment and providing the importer with the Certificate of Origin is the exporter's responsibility.To claim NAFTA treatment, the importer must be in possession of a valid Exporter's Certificate of Origin from the Canadian exporter that certifies that the goods in question meet the NAFTA Rules of Origin.

The Certificate of Origin should be sent directly to the importer and not accompany the shipment. Exporters may obtain a Blanket Certificate of Origin covering more than one shipment for a specified period of validity.

Exporters can obtain copies from Canada Revenue Agency, offices in Hamilton, London, Ottawa and major border-crossing points at their website www.cra-arc.gc.ca

The NAFTA marking rules are distinct from the NAFTA content rules.The NAFTA marking rules serve the domestic purpose of informing the ultimate consumer of a good where that good was made. In contrast to the NAFTA content rules, which are common to all three parties, each NAFTA member is required to establish its own set of marking rules.

The marking rules of each NAFTA country apply only to imports from its NAFTA partners. Accordingly, the U.S. marking rules will pertain only to imports from Canada and Mexico. Similarly, Canada's marking rules apply only to imports from Mexico and the United States.The NAFTA marking rules do not apply to exports or to goods that are produced and sold domestically.

Marking must be sufficiently permanent to remain in place unless deliberately removed.

Acceptable marking methods include stampings, moldings, stickers, labels, tags and paint.

Imports do not have to be marked with their country of origin when:

1. the cost of marking would discourage importation
2. marking would materially impair the function of the good
3. marking would substantially detract from its appearance
4. the good is a crude substance
5. the importer will substantively transform the good

The tariff classification and origin status of your merchandise should be determined before you start exporting.

Advisory classifications and origin determinations may be obtained from your customs broker or from one of the member government customs agencies.

Written, binding, rulings on classification, origin status and marking requirements may now be obtained in advance from Canadian, United States and Mexican customs headquarters.

Rulings must be obtained in the country into which you are shipping your goods.

For information on NAFTA-related customs matters, advanced rulings on classifications, and tariff rates visit the following website:

http://www.dfait-maeci.gc.ca/nafta-alena/menu-en.asp

Duty Drawback is the refund of customs duties levied on materials and components imported from other countries when they are incorporated into goods that are subsequently exported.

Under NAFTA all duty drawback programs were eliminated (US in 1996 and Mexico in 2001). Each country is still able to adopt a partial duty-refund procedure for those goods that do not benefit from the preferential NAFTA tariff.

NAFTA includes provisions to help prevent standards from becoming trade barriers. It promotes the use of compatible standards, technical regulations and conformity assessment procedures. In time this should reduce the burden of compliance with the different standards for different countries.

To reduce exporters' costs, NAFTA encourages mutual acceptance of test results and certification procedures. Approved facilities will eventually be able to certify that goods meet the standards of all three countries. The Canadian Standards Association is now able to certify that certain goods meet the more than 360 U.S. health and safety standards. Underwriters' Laboratories of Illinois has been granted approval to certify that goods comply with Canadian standards.

NAFTA requires that the three countries seek to ensure that provincial, state and local governments, as well as non-government standard-setting bodies, comply with the provisions described. This clause was negotiated to help Canadian manufacturers who face a myriad of U.S. state regulations.

Not withstanding these improvements, Canadian firms exporting to Mexico or the United States must still ensure that goods meet the safety regulations, labeling requirements and other technical standards of the country into which they are being exported. Relevant information is available from the Standards Council of Canada.

Under NAFTA, exporters may be seen as a local supplier by many U.S. firms. In this case, it's customary for the American importer to request prices for Canadian goods delivered duty paid in U.S. dollars to the customer's receiving dock. Exporters need to be sure to specify who is responsible for the freight charges to final destinations.

Ontario firms exporting to the United States. will benefit by having several agents or distributors to cover states or regions. The size and diversity of the U.S. market demands that extensive coverage.

Imported goods must comply with the appropriate code, just like their domestic U.S. counterparts. All goods sold in the United States must comply with local, state and/or federal codes. Some are familiar: for example, food and drug goods and their packaging are controlled by codes. Less commonly known but equally potent are the controls imposed on residential, commercial and industrial equipment. Goods must be listed by the proper testing laboratory and display its seal.

Exports to the United States are required to meet strictly enforced marketing and labeling requirements to ensure the end user is aware of the origin of the good. Any item that enters the United States in a retail condition or substantially the same condition in which it will be sold or distributed must be conspicuously, permanently and legibly marked in English with the name of the country in which it is produced.

Anyone in the chain of manufacture, distribution and/or sale of a good has a legal liability exposure. Because of adverse lose experience, difficult and changing legislation and the attitudes of society and courts, many insurers have at times withdrawn from providing this class of insurance, especially with respect to the United States.

This problem has recently modified to some extent and some of the major insurers in Canada are prepared to consider providing protection against this risk. This is an essential consideration when doing business in the United States and needs to be recognized in your company's pricing procedure.

The North American Free Trade Agreement (NAFTA) expands on the initiatives of the Free Trade Agreement (FTA) to create internationally agreed disciplines on government regulation of investment and trade in services. NAFTA provides wider coverage of investment and cross border trade in services than does the FTA through the broader scope of investments covered by NAFTA rules and the inclusion of additional services, such as land transportation and specialty air services.

However, each country has designated a number of exclusions to the investment and services rules. In Canada's case this includes, among other measures, health and social services. In addition to the general exclusions, each NAFTA country may retain current laws and other measures that do not comply with certain rules of the NAFTA.

Such federal laws and measures are listed in the Agreement. Provinces and states have up to two years to list the measures they want to be preserved.

The good news for service firms is that the coverage of government procurement has been expanded. Canadians may bid along with American and Mexican firms on U.S. federal government and agency contracts for goods and services worth US$50,000 or more and on construction-related contract work for projects in excess of US$6.5 million. The threshold for goods and services purchases by U.S. government enterprises such as power authorities is US$250,000 and US$8 million for construction procurement.The major new agency now open to Canadians is the U.S. Army Corps of Engineers, which contracts out millions of dollars of service work every year.

The best source of information on upcoming contracts is the Commerce Business Daily. However, firms will want to have already talked with the contracting department before the request for proposal is issued.

In order to be eligible to bid on government contracts, firms must already be registered with the particular department (and often with the particular district office of the department). There is no central registration in the United States. Once you are registered, you need to indicate in writing when you do not intend to bid on a proposal on which you have been invited to bid or you risk being dropped from the registration database.

Complete this sample pricing form for an imaginary Ontario company, called Canadian Sales Inc. The purpose of this exercise is to illustrate pricing techniques.

This form has three columns. The Domestic Market column entry helps you assign all domestic costs in their correct order. It does so by showing you exactly how your domestic price is made up, including any domestic tax exemptions. The second column is for the "Other Export Market" and the third column is for the United States Market.

For the sake of this example, some simple assumptions about the sample company have been made:

• cost figures chosen for inclusion in the example are arbitrary
• having decided to enter these markets, Canadian Sales Inc. has 50 employees
• it produces an electronic item that retails at a suggested list price of $64.95 CDN
• it sells 7,000 of these units per month in the domestic market
• although the company has just begun exporting, market research shows strong potential in both the "Other Export Market" and the United States
• company sales in the "Other Export Market" are 10,000 units in the first quarter and 25,000 units in the United States in the same period
• GST should not be shown in the hypothetical costing illustration as it can be reclaimed by Canadian vendor
• U.S. exchange rate is 20 per cent
• U.S. duty rate for fictitious product assessed at 5%
• please visit the NAFTA Customs Duty Database at http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/index.aspx to determine if your product is exempt
• export freight and insurance charges are billed at cost
• company's targeted profit is 10 per cent per unit

It takes the same materials, labour and factory burden to produce the item no matter where it's sold.

Note: If only domestic sales were being produced, costs should be higher than those used here for three shifts.

Material cost savings should be apparent through bulk buying. Labour supervision costs may decrease although additional shift premiums may increase in volume of production. Factory burden is usually a fixed total cost and will vary per unit as production volumes vary.

As the head office is in Canada, the greatest administration costs are against the domestic market. These include the cost of such things as:

• billing/invoices
• salaried employees
• legal and accounting fees
• overdraft charges
• computer facilities, office equipment and supplies
• mailing costs

Domestic Market Sales costs appear as a separate total. Total Export Administrative Selling Costs refer to all expenses incurred by the executives responsible for dealing with export markets.

Costs for brochures are usually higher for the domestic market because camera-ready art and colour separations must be applied against domestic versions. Costs written against the foreign brochures are for translation, press time and paper stock only.

Crating to ship to the United States is the same for all of Canada; no special charges are added for the American market. But Canadian Sales Inc. makes an electronic device that will be shipped by sea, so a special wrapping is needed to protect it from salt air corrosion. Overseas crating must be strong enough to withstand the worst imaginable aspects of shipping.

Forwarding costs for documentation and insurance apply to both United States and other foreign markets.

Cost-before-profit totals show that everything has been taken into account except the company profit. In our sample, Canadian Sales Inc. targeted a before-tax-profit of 10 per cent per unit. It may be necessary to modify this target after testing the market's reaction.

Long-term bank interest only applies on very large dollar values and where the customer needs special financial arrangements. It does not apply here. At this point, Canadian Sales Inc. has determined its ex works sale price for all three markets.

Note: both export prices are considerably lower than the Canadian domestic price.

Export shipping costs include inland freight charges from factory to dockside, plus wharfage/loading charges. The item's price is now Free On Board (FOB) the ship and is still in Canadian dollars.

With ocean freight and marine insurance added, we now have the C.I.F. price to the specified port of entry (for example, London, England). At this point it is wise to convert to the appropriate currency.To illustrate the principles involved, U.S. dollars have been given in this example. However, British sterling could be used.

Most offshore customers expect to be quoted C.I.F. (Cost, Insurance and Freight) at the designated port of entry. When they know the C.I.F. price, they tack on final import costs and profit to arrive at the competitive price.

The United States has a separate entry process because most American importers look on Canadians as domestic suppliers. They generally ask for prices quoted in U.S. dollars, delivered to their receiving docks. In our example we have used a U.S. exchange rate of 10 per cent. In practice, as current a figure as possible should be used. The 10 per cent exchange rate has converted the ex works price from Canadian to U.S. dollars. U.S. duty and brokerage charges are based on this figure. Now add the freight cost to U.S. destination. The price reached covers delivery with duty paid to the customer's receiving dock.

Canadian Sales Inc. knows which export price can bring them a reasonable profit.The company has not forgotten the targeted 10 per cent included in the ex works sales price calculation. The foreign customer knows the landed cost and can quickly compare it to the local competition.

• North American Free Trade Agreement
  • Certificate of Origin Instructions
  • Certificate of Origin
• Packing List - Sample
• Bill of Lading - Sample
• Canadian Sales Inc. - Weight Certificate -Sample
• Export Documentary Credit - Sample
• Export Declaration
• Certificate of Origin - Sample
• Commercial Invoice - Sample

We can help you build a successful export program.
For more information please contact:

Ministry of Economic Development and Trade, Investment and Trade Division, Export Development Branch
Hearst Block 900 Bay Street, 6th Floor Toronto,
Ontario, Canada M7A 2E1
Tel: +1-416-314-8200
Toll Free in Ontario: 1-877-468-7233
Fax: +1-416-325-2766
Email: trade.officer@ontario.ca

This information is provided as a public service, but we cannot guarantee that the information is current or accurate.

Readers should verify the information before acting on it.