Life or death for businesses: Companies scramble to certify made-in-Canada products as some worry U.S. rules will change again

Canada as the country of origin: It’s a certification that many Canadian companies haven’t bothered securing, because it wasn’t worth the cost and hassle under the previous trade regime. But in Donald Trump’s economy, it’s a label that may prove life or death for businesses.

 

Ever since the U.S. President signed executive orders last week delaying 25-per-cent tariffs on many Canadian and Mexican goods, provided that the products are compliant under the United States-Mexico-Canada Agreement (USMCA), some Canadian companies have been scrambling to see if they can pull together the necessary information and paperwork to qualify.

 

Under USMCA, which was negotiated during the first Trump administration, most goods can move between the three borders without duties, as long as they meet product-specific rules-of-origin thresholds, which is the extent to which the items come from Canada, the United States or Mexico.

 

It’s a highly technical analysis that can consider criteria such as the amount of foreign materials used in a particular good, the value of production, including labour and materials and the degree to which foreign materials in an item have been transformed into a new product. The required thresholds vary by product and it’s not always a simple calculation of something being more than 50 per cent Canadian.

 

Trade lawyers warn that the process can be onerous and costly, which is why many companies never bothered going down that road. But in this new world, suddenly it can be too expensive to ignore.

“Right now, there’s massive interest in trying to figure out how to qualify under USMCA,” said John Boscariol, the head of the International Trade and Investment Law Group at McCarthy Tétrault LLP. “For some, it’s very easy. Agriculture or natural resources. There’s no foreign content. It’s basically pulled out of the ground in Canada.”

 

But depending on the product, he continued, it can mean having to trace back the origins of dozens of different materials or ingredients through complicated supply chains.

 

Wendy Wagner, the head of Gowling WLG Canada’s International Trade Group, gave the hypothetical example of a deck-building kit, where a company may be sourcing screws from ten different places. Perhaps all the screws are mixed together in a big bin, so it’s impossible to separate which ones come from where.

 

When a company has been able to investigate and collect evidence for its products, officials will then need to sit down with a trade specialist and go through the information to see if it meets the threshold.

 

“You get a sense how complicated it is to go through this exercise,” Ms. Wagner said.

 

Before the second Trump presidency, trade lawyers say the country of origin didn’t matter that much for many businesses, which is why data shows that only about 38 per cent of imports from Canada to the U.S. were USMCA certified last year.

 

Many goods crossing the Canada-U.S. border used to qualify under the most favoured nation (MFN) principle. In general, MFN means that member countries of the World Trade Organization should treat each other equally. So if a country lowers a trade barrier with one partner, it has to do so for everyone.

 

Under MFN, Canadian companies could often export many products to the United States for free or for a nominal amount – such as a 2-per-cent tariff – even without the USMCA exemptions. For many businesses, Ms. Wagner said, spending the money to track supply chains and then taking on the compliance burden of having to continuously keep records to prove origin wasn’t worth it.

 

American customs can and do audit exporters and mistakes can be costly. “If there’s a 2-per-cent duty, you’d rather pay than take the chance,” she said.

 

There isn’t a formal application process to be Canada-origin certified. Rather, exporters prepare their paperwork and then when the goods cross the border, they declare it USMCA compliant and therefore exempt from tariffs. From there, American customs officials may audit a company and demand proof of origin.

Nithya Nagarajan, a Washington-based trade lawyer who works with Husch Blackwell LLP, said the onus isn’t only on exporters. American importers are expected to do their due diligence on the goods they’re bringing into the country.

 

“They need to make sure that they have every step of the product cycle process, that they know it’s manufactured in Canada … they can’t just accept the document as is,” she said. This means checking to see if the certification records presented match the specific products coming in and that the invoice matches the packing list, among other things.

 

“You are, effectively, certifying to the accuracy of the document.”

 

For Mr. Boscariol from McCarthy’s, the kicker is that the USMCA-compliant reprieve is expected to be temporary.

 

“Trump said that it could come back April 2. So what Canadian companies are dealing with now is that, it’s only valuable to qualify for the next two weeks.”

 

There is hope he will continue it, Mr. Boscariol said, but then again, there’s also a chance he will reinstate blanket 25-per-cent tariffs – or do something else entirely.

 

 

 

 

 

This article was first reported by The Globe and Mail