Dear John,

 

My name is Harry Strawman. I recently attended one of your NAFTA seminars. I've been kind of getting into it with my boss regarding NAFTA certificates and the legalities and what constitutes being a "producer" of goods.

 

Our company is a specialty supplier of networking equipment. We don't build our own product. We outsource production to contract manufacturers. We design the product. To maintain quality we have a controlled bill of materials (BOM) with an approved vendor list for obtaining component level materials. We don't actually do any of the buying of the parts. Our contract manufacturers do all of the buying of the components. They hire their own workers, maintain their own factories, and produce the goods to a top level assembly. We then buy the finished goods from them. We in turn sell these goods to our customers.

 

I've been lead to believe that because these are our designs, we control the BOMs, and we direct the component-level sourcing, we can therefore be considered as the producer of the goods. I've been told I'm thinking in terms of producer too literally?

 

Harry

 

Dear Harassed Harry:

 

I am reluctant to get between you and your boss without further understanding of your business or the dynamic you are dealing with. I suspect your company is reluctant to admit on your NAFTA certificates of origin that you are not, in fact, the actual producer of the goods. It seems at the core we might have differing interpretations of the word "producer."

 

When questions like this arise I defer to the treaty and the regulations themselves. The U.S. Customs regulations §181 relative to the NAFTA include the following definitions:

APPENDIX TO PART 181— NAFTA RULES OF ORIGIN REGULATIONS

 

SECTION 2. DEFINITIONS AND INTERPRETATION DEFINITIONS

 

(…)

 

"person" means a natural person or an enterprise;

 

"person of a NAFTA country" means a national, or an enterprise constituted or organized under the laws of a NAFTA country;

 

(…)

 

"producer" means a person who grows, mines, harvests, fishes, traps, hunts, manufactures, processes or assembles a good;

 

(…)

 

"production" means growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good;

I think these are pretty straight-forward definitions that would indicate your company is not a producer. I do not find any reference to proprietary designs, specifying of sources, and controlling of the BOM as activities qualifying your company as a producer. Indeed these sorts of activities are commonplace among companies that outsource the manufacturing of their proprietary products.

 

Nevertheless you describe a hybrid situation that is not directly addressed by the NAFTA regulations. That leads us to look at the Customs and Border Protection (CBP) interpretation. I have found two binding rulings that address a more expansive interpretation of the definition of producer:

HQ H028880 June 16, and

2008 HQ H064378 December 18, 2009

Both of these rulings address a unique situation within the Mexican Maquiladora industry in which the U.S. companies effectively take on full management and financial responsibilities of contracted manufacturing operations in Mexico. In both instances CBP has ruled that the U.S. company may be deemed a producer under the intent of the NAFTA.

 

In both situations it appears the U.S. companies are the ones that have the complete costing information relative to rent, utilities, labor and materials. They also have the component level classification information required to accurately originate the goods and then complete the NAFTA Certificate of Origin.

 

HQ HO28880 CBP stated the following:

The essential question here is which party is engaged in the assembly, processing and/or manufacture of the goods which are exported from Mexico to the United States. The pertinent facts include the following. While the workers at the manufacturing facilities are technically the employees of the Mexican companies, the U.S. clients have direct supervisory control and management responsibility for these workers. The U.S. clients have the right to select the workers. Offshore pays the workers, but Offshore is reimbursed by the U.S. clients for labor charges, including overtime, severance costs and transportation costs of the workers. The U.S. clients pay utilities costs, the facilities fee, the shelter plan fee, and the park maintenance fee. The U.S. clients' equipment is used in the manufacturing process and they retain title to all of their materials, products, and equipment used in the manufacturing operations. Offshore provides an office in the Mexican facilities for the U.S. client's managers. The U.S. clients are responsible for supplying CBP with all information, including cost submissions, required by CBP in connection with the importation of the goods. The U.S. clients are also responsible for supplying Offshore with information necessary for the preparation of commercial invoices and other documents prepared by Offshore.

 

Based upon these facts, we conclude that the U.S. clients control the manufacturing process in Mexico. This control of the manufacturing process by the U.S. clients leads us to find that the U.S. clients are engaged in the assembly, processing and/or manufacture of the goods exported from Mexico. Therefore, we determine that the U.S. clients are the "producers" of the goods exported from Mexico within the meaning of the NAFTA Rules of Origin Regulations.

At first blush it does not appear your company is taking on the level of control or responsibility described in the above rulings. Your contract manufacturing plants manage their own transactional costs relative to labor, facilities and purchasing and therefore have the pertinent facts to determine NAFTA. Based on the above two rulings your contract manufacturer would be considered the producer, not your company.

 

I have not found any other rulings that more directly address your situation. If your boss is hell-bent on arguing the fine point that your company meets the definition of producer, then it would be advisable to document that position referencing how the above rulings apply to your company's situation and how your control of the situation gives your company the information required for originating the goods. You would then incorporate your position within your written NAFTA policy. If you are exporting to Canada or Mexico, you could also submit this question to the regulators in those countries for a ruling.

 

Good luck to you.

 

John D. Goodrich