Academic journal article Multinational Business Review

Rules of Origin under NAFTA

Academic journal article Multinational Business Review

Rules of Origin under NAFTA

Article excerpt


Recent years have witnessed a blossoming increase in trade agreements among many countries. The Treaty of Rome established the ECC in March, 1957, in response to competition facing European countries from the two economic powers, the US and Japan. Now EC stands as a threatening economic power itself. In turn many countries have combined their economic strengths in trade blocs so that they can face increases in world competition and improve their share in global markets. The Free Trade Agreement (FTA) between the US and Canada, signed on January 1, 1989, aimed to eliminate all Canadian and US tariffs between the two countries by 1998.

On February 5, 1991 the presidents of the US and Mexico and the prime minister of Canada announced their intention to begin negotiations on the North American Free Trade Agreement (NAFTA). After more than eighteen months of intensive negotiations, the agreement was completed on August 12, 1992. Its objectives are to: (1) eliminate barriers to trade and facilitate the cross-border movement of goods and services between the territories of the parties; (2) promote conditions of fair competition in the free trade area; (3) increase investment opportunities in the territories of the parties; (4) provide adequate and effective protection and enforcements of intellectual property rights in each party's territory; (5) create effective procedures for the implementation and application of this agreement; and (6) establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this agreement (NAFTA, 1992).

The essence of free trade agreements is to give products obtained or produced in participating countries preferential treatment in matters related to tariff and customs. However, in the global economy in which we are living today, it is becomming more difficult to determine the nationality of products. For example, a Nissan car where the parts are manufactured in the US, assembled in Mexico, finished in Canada and sold in the US might require some judgment as to the nationality of the car. Most free trade agreements establish rules for determining a product's nationality, known as rules-of-origin.

For products that are partially produced in a country that is a member of a free trade agreement and partially in a country that is not, a judgment has to be made as to the percentage produced in the region and the percentage that is not. The judgment is usually based on the value added or cost incurred in the region (regional value content). The objective of this paper is to discuss the accounting issues involved in measuring the regional value content of products traded under free trade agreements.


Some claim that NAFTA will create a North American market with over 60 million consumers and combined gross domestic product of about 6 trillion dollars. (See Exhibit 1.)[exhibit 1 omitted] About 65% of US industrial and agricultural exports to Mexico will be eligible for duty-free treatment either immediately or within 5 years. With NAFTA, Mexican tariffs on vehicles and light trucks will be cut in half immediately. NAFTA will open Mexico's $6 billion market for telecommunications equipment and services. Barriers to trade on $250 million of US exports of textiles and apparel to Mexico will be eliminated immediately, with another $700 million freed from restrictions within 6 years. All North American trade restrictions will be eliminated within 10 years. NAFTA will immediately eliminate Mexican import licenses, which covered 25% of US agricultural exports last year, and will phase out remaining Mexican tariffs within 10-15 years. Mexico's closed financial services markets will be opened, and US banks and securities firms will be allowed to establish wholly owned subsidiaries. US insurance firms will gain major new opportunities in Mexican markets (Hills, 1992; Congress of U.S., 1992; Report of the Administration, 1992). …

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