NAFTA Update: Erasing cross-border complexities

The North American Free Trade Agreement (NAFTA) is more than two decades old, and its legacy is a booming cross-border trade market among the three NAFTA nations—the U.S., Canada, and Mexico.

Since NAFTA was enacted in 1994, U.S. trade with Canada and Mexico has more than tripled to $1.192 trillion in 2013. And according to the TransBorder Freight Data report compiled by the U.S. Bureau of Transportation Statistics, the two countries now buy about one-third of all U.S. merchandise exports.

The breakdown is this: In 2013, the last year full statistics are available, trade to and from Canada hit $658 billion, with another $434 billion to and from Mexico.

These numbers clearly show that the trend of making it in America and selling it to Canada and Mexico as well as sourcing materials where goods are finally sold—“in-sourcing”—are gaining steam. Both are sustainable trends, experts say, because of the strength of the U.S. dollar, increased efficiencies in North American surface transportation, the rising cost of labor in China, as well as the improved efficiencies we’re seeing in North American supply chain operations.

“Near shoring and in-sourcing are trends we’ll see growing,” says John Larkin, veteran transportation analyst with Stifel Inc. He adds that innovations, such as robotics, will only increase the manufacturing ability of the U.S., making it a more formidable competitor.

With the U.S. a signatory to more than 20 free trade agreements, it’s clear that the days of experimentation with such agreements is over—they’re clearly here to stay. NAFTA is the “granddaddy” of all such agreements, but many shippers still don’t know how to best take advantage of all of its complexities.

“Shipping within North America from the U.S. poses many challenges to companies that, for whatever reason, unwittingly believe the transaction is simply an extension of shipping within the U.S. market,” says Suzanne Richer, director of Amber Road’s trade advisory practice.

Indeed, shipping across borders requires a fine eye toward international rules, regulations, and Customs. Shippers must also account for factors such as how border delays translate into higher costs as well as the effect those delays will have on inventory in their supply chains, Richer adds.

Over the next few pages we’re going to break down the many complexities involved, explain the advantages of full compliance with all of NAFTA’s fine print, and then help enable U.S. shippers to fully participate in the NAFTA-fueled trade boom.

Grasping the challenges
The worst thing U.S. shippers can do is to treat exports to Canada and Mexico as if they were an extension of their domestic transportation network—they are not. And if you treat our neighbors as if they were simply the 51st and 52nd U.S. states, there will be severe penalties.

“Unfortunately, U.S. shippers tend to underestimate everything when it comes to crossing borders,” says Beth Peterson, president of BPE Global, a global trade compliance consulting firm. “They often treat exports as if they were domestic transactions.”

Going in and out of Mexico, for instance, often requires additional security when traveling south of the border. Because many U.S. trucking companies don’t want to take on such additional costs, they often rely on long-standing partners to handle final distribution into Mexico.

Delays at the U.S.-Mexico border at such chokepoints as Laredo, Texas, and Juarez, Mexico, are legendary, and without smoothing the

Customs procedure ahead of time, U.S. shippers can face delays that can be counted in weeks rather than days.

Going north, the problem isn’t so much security as an array of Customs and tax regulations that can appear daunting at first. But failing to ignore some of Canada’s import regulations can be costly both in terms of fines—as much as $100,000 per instance—and tax rebates available to registered U.S. exporters.

In Canada, for example, U.S. exporters can establish themselves as a Non-Resident Importer (NRI) through a program available through the Canada Border Services Agency. As an NRI, a U.S. business is allowed to act as an “importer of record,” which in effect allows that U.S. business to act much the same as a Canadian business—free from many Customs-based uncertainties and requirements.

According to Richer, many U.S. shippers are mistaken in believing NAFTA eliminated these barriers, when it fact it created a free tariff area and not a Customs-free area for the three countries. “These issues, combined with complex goods and service taxes on importations, not only pose challenges to the shipper, but also will increase the cost of the transaction for those unaware of how to control these costs,” she says. “Many import tax credits are denied when importing or exporting cross border, driving up unforeseen costs.”

While NAFTA theoretically eliminated all tariffs on domestically produced goods traveling among the three countries, determining whether a product qualifies under NAFTA’s specific rules for “domestic content” can be a daunting and complicated process.

Canadian law requires all commercial records and documentation be kept for six years. These would include all invoices, NAFTA certificates of origin, permits, bills of lading, traffic classification rulings and valuation documentation, among other things. Failing to do so can lead to fines, or worse. In fact, a 2013 report by the accounting firm Ernst & Young showed a sharp increase in the number of audits by the Canada Border Service Agency.

Once inside Canada, shipments must be loaded into a Canadian distribution network for “final mile” delivery. Coordinating inbound product flows to create a seamless north-to-south supply chain can be daunting as well. Fortunately, for U.S. shippers there are shipping companies specializing in this area.

Streamlining across borders
Let’s say your company has decided export markets to Canada and Mexico are too good to pass up and you’ve decided to take the NAFTA plunge. So, what’s your next move?

Experts say that there are several steps toward establishing a solid export foundation to Canada and Mexico:

• Map your materials. Look at the big picture. Consider creating a value stream map of your material flows from the point of origin to final destination. Adjusting internal inventories in the pipeline to have sufficient amounts can be crucial if delays at the border become lengthy.

• Don’t forget drayage. The short, final five-mile to 10-mile leg along the border is vital. Shippers often forget that this is where most border delays occur, and it can often be the weakest part of your supply chain. Monitor such movements closely.

• Communicate. Maintaining constant communications with every supply chain stakeholder is critical. In today’s information age, there’s no excuse not to be in constant communication with your suppliers, customers, carriers, Customs brokers, distribution centers, and production control to define everyone’s roles.
  

• Partner with knowledgeable players. Make sure any partners with whom you engage are knowledgeable, bilingual, and have experience in at least four areas: the U.S., Canada, Mexico, and the border zones.
  

• Use interchange agreements. Interchange agreements eliminate border transloads. Most reputable third parties already have a pre-existing network of interchange agreements in place. So, take the time to validate carriers that you’ll use on both sides of the border and make sure they’re authorized to haul each other’s trailers. This way, you can avoid the extra expense of transloading.

• Participate in Customs programs. Participation in programs sponsored by U.S., Canada, and Mexican Customs organizations like Custom-Trade Partnership Against Terrorism (C-TPAT), Free and Secure Trade (FAST), and Nueva Esquema Empresa Certificada (NEEC) can help secure loads and ensure the fastest possible border crossings.

But above all else, plan, plan, plan—and the earlier the better, says Peterson. “By classifying your products well in advance of shipping, you can obtain all of the necessary authorizations, permits, and licenses for your products to ensure a smooth clearance,” she says.

At a company and organization level, Peterson adds, most companies only consider the corporate financial models in the countries in which they operate—forgetting to understand the costs of not being a registered importer/exporter of record. This can eliminate a company’s ability to reclaim value-added taxes that can range from 17 percent to 27 percent.

“Failure to include a cost that represents a quarter of an item’s value can eliminate your profit margin,” Peterson warns.

One of the most frequent issues is that companies do not determine the proper “Incoterms” for each of their supply chains, Peterson says. Incoterms are a set of three-letter standard trade terms most commonly used in international contracts for the sale of goods. First published in 1936, Incoterms provide internationally accepted definitions and rules of interpretation for most common commercial terms.

Failure to document these terms can often result in shipment delays and unexpected costs. The quickest way to resolve all of these issues is to review your commercial invoices and make sure that all of the data needed for an efficient clearance is present.

Technology and outsourcing
Any way you slice it, NAFTA is here to stay—and U.S. companies are going to continue to enjoy an export boom and continue to figure out the complexities of cross-border trade. And while there’s technology out there to help U.S. shippers play the export game, technology alone is not the answer to bad internal processes, experts say.

“Technology can’t fix bad practices, so the most important thing to do is to define and document your processes,” says Peterson. “That said, once you know your business, technology can enforce your policies and procedures and automate your operations.”

For example, you can ensure accurate declarations and documentation; you can manage by exception; and you can be alert to new products and pending shipments and gain lead time that you previously didn’t have.

Ty Bordner, vice president of solutions consulting at Amber Road, a company that provides on-demand global trade management solutions, says U.S. manufacturers underestimate the complexity of shipping to NAFTA countries.

There’s no question that the paperwork burden can be daunting to novice NAFTA exporters. But experts and analysts say that exporting those tasks to highly automated Customs brokerage firms that can handle all the “ins and outs” associated with Customs clearance can ease that burden significantly. “Outsourcing to the experts makes a lot of sense in this case,” says analyst Larkin.

Customs consultant Peterson agrees. “Using a third-party provider can give you the expertise that you may be lacking internally,” she says. However, she adds that one common failure of companies is to completely outsource the trade compliance activities. By doing so, companies are “self-blinding” themselves.

“They may be locking themselves into bad processes and practices,” says Peterson. “It’s great to bring in an expert to build your program, but you should internalize global trade compliance so you can optimize your processes. Once you know what you’re doing, then it can be cost effective to outsource.”

However, consultant Richer stresses that shippers should first specify, understand, and prioritize their cross-border needs before engaging with third parties to address problems they cannot articulate.

And it goes without saying that any work done by a third party should be written and auditable. “That may be the bottom line for all NAFTA trading,” adds Peterson. “Get it in writing, make sure it’s available to all parties on both sides of the border, and have a contingency plan ready for those unexpected delays at the border.”