Date: 2016-08-12

Doing the Math to Get Free Trade Agreement Benefits

Q.  How do I qualify my products for the North America Free Trade Agreement?

A.  Many free trade agreements around the word use similar approaches to determining whether a good qualifies even though it contains less than 100 percent of value originating with the parties to the agreement.  The so-called Regional Value Content or percentage-based rules) make sense because they acknowledge that if agreements only included stuff exclusively made in the agreement partners’ countries there would be far fewer things eligible for the reduced duty benefit.  This is a global economy in which we live.

Regional Value Content Based Rules (RVC)

RVC based rules require that a good include a certain percentage of FTA content. There are four ways Regional Value Content based rules may be calculated.  The particular RVC method used depends on the product and on the FTA.  RVC based rules are:  Net Cost, Transaction Value, Build-down or Build-up. 

The Net Cost rule (NC) calculates the RVC using the net cost of the goods minus the value of non-originating materials (VNM) expressed as a percentage.  

Net Cost method:

           RVC = NC – VNM x 100

                                    NC

The Transaction Value rule (TV) calculates RVC by subtracting the transaction value of the goods minus the value of non-originating material (VOM) expressed as a percentage.  The total is then divided by the TV, which is the value stated on the commercial invoice for customs purposes.

Transaction Value calculation method:  

            RVC = TV – VNM x 100

                                    TV

Build-up method:

            RVC = VOM x 100

                                AV

Build-down method:

            RVC = (AV – VNM) x 100

                                     AV

If by using the build-up method the good has greater than 35 percent of originating content, it qualifies as originating under many of the FTAs.  If by using the build-down method the good has greater than 45 percent of originating content, it qualifies as originating.

It is very important that you know the net cost of the inputs of items from outside your country and that of your buyer’s.  There are cases where the qualifying percentages are very close, making careful record keeping very important in case the transaction is audited by the Customs offices of any of the participating countries.

Hint:  There’s no shame in asking your teenage children for help solving the equations. A freight forwarder can also lend a hand, and once you get the hang of it your off to the races.

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