CHAPTER VI. Trade Regulations and Standards A. Tariffs and Import Taxes One of the most important market access provisions of the CFTA and NAFTA is the elimination of tariffs on goods produced in, and traded between, the United States and Canada. Prior to the implementation of the CFTA some products traded between the two countries entered duty-free. For those subject to tariffs, however, the CFTA established three tariff elimination categories. Duties on some products were eliminated immediately on implementation of the Agreement (January 1, 1989), while other products became duty- free on January 1, 1993. Duties on import sensitive products, such as textiles, apparel and agricultural products, are being removed in ten equal, annual cuts ending on January 1, 1998. Tariff cuts on these products reached the halfway point on January 1, 1993. The implementation of NAFTA does not in any way change this staging process for the elimination of tariffs on qualifying products traded between the United States and Canada. It is important to note that only those items produced in a NAFTA member country are able to benefit from preferential rates mandated by the Agreement. To ensure this, CFTA and NAFTA established specific rules of origin which prevent trans-shipment of goods from third countries through one CFTA/NAFTA partner to another in order to escape higher tariffs. For example, those items which are entirely produced in the United States or Canada from U.S. or Canadian raw materials, such as potatoes grown in Idaho or iron ore mined in Alberta, automatically qualify for CFTA/NAFTA duties. However, products manufactured in the United States or Canada using inputs imported from outside a NAFTA-member country, only qualify if they meet specific rules-of-origin as specified in the NAFTA. Exporters to Canada should note that the NAFTA rules-of-origin replace the rules-of-origin set out under the U.S.- Canada CFTA. Generally, the rules require that the inputs be transformed in specified ways during processing in the NAFTA- member country. Detailed information on rules-of-origin requirements or specific rulings on products may be obtained by contacting Revenue Canada, Customs and Excise. Revenue Canada collects a seven percent value-added (VAT) tax known as the Goods and Services tax (GST) on imported goods by applying it to the duty-paid-value (customs value plus import duties). Similar to the VAT found in most European countries, the GST is imposed on most goods and services consumed in Canada. The tax is not applied to exports, since they are not destined for consumption in Canada. Since the GST is a VAT, manufacturers and businesses in the distribution chain pay only on the value they add to the product or service. Only the final consumer bears the full cost of the tax. Unlike consumers, businesses in the production and distribution chain get tax credits for the GST they paid in the manufacture or acquisition of the product. Types of goods and services exempt from GST, in addition to exports, are basic groceries, prescribed drugs and medical devices, most agricultural and fish products, most educational services, most financial services, health and dental care services and a variety of others. In addition to the GST, each province, with the exception of Alberta, the Yukon and the Northwest Territories, levies a provincial sales tax (PST). With the exception of goods bound for the province of Quebec, the PST is not collected on imports, although New Brunswick PST is collected at land crossing. Additional information concerning Canadian duties and tariffs can be obtained by contacting the U.S. Commerce Department (See Appendix C) or Revenue Canada at the following address: Revenue Canada Customs, Excise and Taxation Connaught Building 7th Floor MacKenzie Avenue Ottawa, Ontario K1A 0L5 Tel: (613) 954-6990 B. Customs Valuation for Duty Canada has acceded to the GATT Customs Valuation Code which provides that the customs value of imported goods shall be the transaction value -- the price actually paid or payable for the goods. Under the transaction value system, the value for duty is the total payment for the goods made by the buyer to the seller. The transaction value generally will be accepted by Canada Customs if the goods are sold for export to Canada and if the price paid or payable for the goods can be determined. Under the transaction value system, the value for duty of imported goods will normally be determined from data submitted by the importer. However, preparation of proper documentation by the exporter significantly contributes to expeditious entry. C. Import Licenses There are no general licenses required for importing goods into Canada. There are, however, provisions related to a variety of prohibited, controlled and restricted goods. For more information regarding restrictions on the importation of these types of goods see the Prohibited, Restricted, Controlled Goods section below. D. Export Controls Canada controls exports under authorization of the Export and Import Permits Act (EIPA), the Export Control List (ELC) and the Area Control List (ACL). The ECL is an itemized list of goods subject to export control. The ACL is a list of specific countries which require export permits for all goods (whether or not they are on the ECL). The EIPA utilizes these lists in order to exercise export controls over natural resources to encourage further processing in Canada; to limit the export of goods in circumstances of surplus supply or depressed prices; to restrict the export of softwood lumber products; to ensure that there is an adequate supply and distribution of any article; to enact intergovernmental arrangements or commitments, and to ensure that military or strategic goods are not exported to countries or destinations representing a strategic threat to Canada. Under a bilateral agreement with the United States, the requirement for an export permit to the United States is waived for all goods included in the ECL except for goods in Groups 3 and 4, as well as some goods in Group 5. United States origin goods are controlled for re-export from Canada under Item 5400 of Group 5. All non-strategic U.S. export origin goods require permits. Exporters may benefit, though, from the provisions of the General Export Permit No. Ex. 12. For further information see the annual "Guide to Canada's Export Controls" published by the Department of Foreign Affairs and International Trade. The Export Controls Division can be reached by phone at (613) 996-2387 or by fax at (613) 996-9933, or by mail at the following address: Department of Foreign Affairs and International Trade Export Controls Division (EPE) Lester B. Pearson Building 125 Sussex Drive - C-4 Ottawa, Ontario K1A OG2 E. Import/Export Documentation A properly completed Canada Customs Invoice or its equivalent is required for all commercial shipments valued over C$1,200 exported to Canada. In addition to the Canada Customs Invoice, shipments must be accompanied by a completed exporters Certificate of Origin which is required in order to obtain specialized tariff treatment under the provisions of the NAFTA. For details regarding documentation requirements or to obtain sample invoices, and other forms, contact Revenue Canada. F. Temporary Entry Revenue Canada has made specific provision for the temporary entry of certain goods into Canada for various purposes such as testing, demonstration, and display. Such goods may enter under an ATA (Admission Temporaire -- Temporary Admission) Carnet or under a Temporary Admission Permit (Revenue Canada, Customs and Excise Form E29B) and may require either a refundable deposit or a proportional duty deposit, depending on the appropriate classification determined by Canadian customs regulations. Firms wishing to bring machinery and equipment, display equipment, and other items covered under Canadian temporary importation regulations are advised to contact Revenue Canada well in advance of shipment or arrival in Canada. G. Labelling/Packaging Requirements The three main pieces of legislation which regulate almost all product labelling and marking in Canada include: the Consumer Packaging and Labelling Act; the Weights and Measures Act; and the Agricultural Product Standards Act. Canada requires bilingual labelling (English and French) for most products. Bilingual designation of the generic name on most prepackaged consumer products is required by the federal Consumer Packaging and Labelling Act identified above. Under this act the following information must appear on the label of a consumer good sold in Canada: - Product Identity Declaration -- describes a product's common or generic name, or its function. The declaration must be in both English and French; - Net Quantity Declaration -- should be expressed in metric units of volume, when the product is a liquid, gas, or is viscous; or in metric units of weight, when the product is solid; or by numerical count. Net quantity may be expressed in other established trade terms. - Dealer's Name and Principal Place of Business -- where the pre-packaged product was manufactured or produced for resale. In general, a name and address sufficient for postal delivery is acceptable. The declaration should be in both English and French. The agency responsible for inspection of imports, Canada Customs, also requires an indication of the country of origin, such as "Made in the USA" on several classes of imported goods and on all printed matter. Goods not properly marked cannot be released from Customs until suitably marked. The goods can be marked, at the importer's expense, either on Canada Customs premises or on the importer's own premises under the supervision of Canada Customs officials. Moreover, Canadian regulations require that declarations of net content of all packaged consumer goods be stated in metric units in both English and French, although British or imperial units may also be shown. Most products may be packaged in random English measure size containers with the metric equivalents expressed on the label. However, specified metrically dimensioned packaging is required for some products, mainly foods, personal care products and detergents. The Province of Quebec requires that all products sold in that province be labelled in French and that the use of French must be given equal prominence with other languages on any packages or containers sold in Quebec stores. The Charter of the French Language requires the use of French on product labelling, warranty certificates, directions for use, public signs and written advertising. Further information on French labelling requirements is available from the Office de la Langue Francaise. Finally, with respect to the use of environmental claims, industry is charged with ensuring that any environmental claims are accurate and in compliance with relevant legislation. In general, environmental claims that are ambiguous, vague, incomplete, misleading, or irrelevant and that cannot be substantiated through credible information and/or test methods should not be used. In all cases, environmental claims should indicate whether they are related to the product itself or to the product's packaging materials. The Canadian government has issued a set of guiding principles governing the use of environmental labelling and advertising which may be obtained by contacting Industry Canada -- see contact list. H. Prohibited and Restricted Imports and Controlled Goods The majority of U.S. products shipped to Canada enter the market free from any import restrictions. However, under the provisions of the Canadian Customs Tariff regulations certain commodities cannot be imported such as oleomargarine, reprints of Canadian copyrighted work, and some game birds. Other goods are controlled, regulated, or prohibited under legislation falling within the jurisdiction of other government departments. Examples of regulated goods include: food products, clothing, drug and medical devices, hazardous products, some offensive weapons and firearms, endangered species, and motor vehicles. Other items are regulated under the Export and Import Permits Act and require an import permit or certificate to be eligible for importation into Canada. The Act lists various agricultural products, a number of clothing and textile items, and certain steel products. Goods originating in certain countries such as Haiti and Iraq cannot be imported into Canada. Inquiries regarding the issuance of import permits or certificates and quota allocations should be directed to: Foreign Affairs and International Trade Export and Import Permits Bureau Lester B. Pearson Building 125 Sussex Drive Ottawa, Ontario K1A 0G2 Tel: (613) 992-3386 Fax: (613) 992-9397 I. Standards Canada's standards are not identical to those in the United States. This does not mean that Canadian standards are more or less stringent than those in the United States, merely that they are different. Like the U.S. government, the Canadian government is concerned with protecting its citizens from faulty or unsafe products. However, in delineating the precise technical specifications that are required to ensure that safety, the two countries often use slightly different standards. Under the aegis of the Standards Council of Canada (SCC), several private standards-writing organizations administer technical codes and standards for areas ranging from electrical and plumbing products to health care technology. These organizations include: - The Canadian General Standards Association - Underwriter's Laboratories of Canada - The Canadian General Standards Board - The Canadian Gas Association The Canadian federal government also has numerous commodity standards to safeguard the public welfare. The standards organizations try to avoid duplication of responsibility, but there is some overlap. U.S. manufacturers and exporters should determine what standards are applicable to their products. If certification is required, it generally must be obtained before the goods are imported into Canada. The process can be time-consuming, therefore certification should be of the first steps taken in establishing and export market in Canada. Information on which standards or organization(s) administer standards applicable to the firm's product can be obtained from: The Standards Council of Canada 45 O'Connor Street Suite 1200 Ottawa, Ontario K1P 6N7 Tel: (613) 238-3222 Fax: (613) 995-4564 Standards and the NAFTA: The basic NAFTA rule is simple -- standards must not create unnecessary barriers to trade. To reduce such barriers, the NAFTA applies basic principals to bilateral trade: (a) testing facilities and certification bodies are treated in a nondiscriminatory manner (b) federal standards related measures will be harmonized to the greatest extent possible (c) greater openness will be provided in the regulatory process. Greater standards compatibility removes structural barriers to the Canadian and U.S. markets and increases the competitiveness of the U.S. and Canadian manufacturers. Significant progress toward greater compatibility between U.S. and Canadian technical standards is taking place under the aegis of the NAFTA. Standards organizations in the United States and Canada continue to work cooperatively in the development of joint standards and have made progress in several areas. For example, the Air Conditioning and Refrigeration Institute (ARI) and the CSA have harmonized performance standards for air conditioners and heat pumps, packaged water chillers, and water-source heat pumps. Underwriters Laboratories (UL) and CSA have established common electrical safety standards for air conditioners, heat pumps, and refrigerant motor-compressors. During 1992, two U.S. testing and certification organizations, UL and the American Plywood Association (APA), received accreditation in Canada. In 1993, a third U.S. testing and certification laboratory, ETL Testing, Inc., was also accredited. Also in 1992, the Canadian Standards Association (CSA) was officially recognized by the U.S. Occupational Safety and Health Administration (OSHA) as a Nationally Recognized Testing Laboratory. SCC and OSHA accreditations mean U.S. manufacturers can gain product approval for both the United States and Canada from one source, thereby eliminating the time and expense of pursuing separate certification for each market. Several other U.S. testing and certification organizations have accreditation applications pending before the SCC. The NAFTA strengthens CFTA technical standards obligations; expands coverage to include Mexico; sets up a committee on standards-related measures; establishes an Automotive Standards Council; identifies specific products for standards harmonization efforts through the creation of subcommittees on land transportation and telecommunications standards, and on labelling of textiles and apparel goods. J. Free Trade Zones/Warehouses Goods may be cleared at customs ports on the border or, if intended for inland destinations, may be forwarded in bonded carriers to the port city nearest the destination at which customs examination may be made and duties and taxes paid. With the exception of one special trade zone at the Sydport Industrial Park in Cape Breton, Nova Scotia, Canada has no free ports or free trade zones. At present, there are no federal or provincial laws specifically governing the establishment and operation of such zones. Sufferance warehouses under private ownership have been established for the storage and deposit of all imports received by various transportation modes, pending customs examination and clearance. An entry for consumption or into bonded warehouse must be presented to Customs within 30 days. Goods may be entered into customs bonded warehouses without the payment of duty but must be cleared either for export or Canadian consumption within two years. Additional periods are provided for certain goods by regulation. Goods taken from bonded warehouses for consumption are dutiable at rates of the Customs Tariff then in effect, and the value for duty purposes is the value at the time of entry for warehousing. Goods exported from bonded warehouses to third countries are subject to Canadian export regulations. Repacking and sorting can be carried out in customs bonded warehouses with the permission of Canada Customs, but assembly or other industrial activity is prohibited. K. Special Import Provisions Canada's special import provisions deal with the temporary importation of goods, as described previously in this Chapter, in Section F. L. Membership in Free Trade Arrangements The CFTA, implemented in 1989, has created vast opportunities for U.S. exporters and investors in Canada. As a result of the CFTA, trade barriers have come down, investment rules have been liberalized, and bilateral cooperation on a wide range of issues has been expanded. The CFTA has since been enhanced further through the implementation of the NAFTA which took effect on January 1, 1994. This historic Agreement brings Mexico into the North American free trade area and expands the scope of the CFTA in some key areas. For example, the NAFTA contains provisions relating to intellectual property, land transportation and the environment, which were not provided for in the CFTA. Many of the improvements to the CFTA, now reflected in the NAFTA, are the direct result of experience gained by the United States and Canada in implementing that bilateral accord. Since the CFTA has served as the model for the NAFTA, many U.S. firms who are already familiar with the CFTA are well positioned to reap early benefits from the NAFTA.