The preferential tariff treatment provided under the Canada-EU Comprehensive Economic and Trade Agreement (CETA) eliminates almost all of the customs duties that previously applied to goods traded between Canada and the European Union. This allows businesses to import most Canadian goods into the European Union and most EU goods into Canada on a duty-free basis, reducing landed costs and improving competitiveness and profitability.

It is important for companies seeking to take advantage of this benefit to understand that preferential tariff treatment does not automatically apply to a product merely because it is traded between Canada and the European Union. Rather, the product must qualify as “originating” in Canada or the European Union in accordance with the product-specific rules of origin set forth in the CETA Origin Protocol (see “Exploring New Opportunities for Trade in Goods under the CETA – As Easy as Apple Pie”).

In addition, exporters and importers must also ensure that certain procedural requirements are satisfied, including (1) declarations of CETA origin, (2) restrictions on how originating goods may be transported between the European Union and Canada, and (3) obligations to maintain supporting documents and customs records. Importers and exporters must ensure that they comply fully with these requirements or they risk losing preferential tariff treatment under the CETA, even if the goods satisfy the product-specific rules of origin. If this happens — for example in a post-entry audit conducted by customs authorities — duties may be applied on a retroactive basis. Depending on the volumes and values of the affected shipments, the retroactive application of even a relatively low tariff (e.g., 5 percent) on all imports going back for a number of years can result in significant financial liabilities that most businesses are not prepared to absorb.

This article, which is Part 2 in a three-part series, discusses the shipping requirements for originating goods traded between Canada and the European Union. Part 1 (15 September) provides a brief overview of the CETA origin declaration required for preferential tariff treatment. Part 3 (28 September 2018) will address the record-keeping and document production obligations associated with the origin declaration and shipping requirements discussed in Parts 1 and 2.

The CETA shipping requirements for originating goods, including transportation through third countries

In order to receive preferential tariff treatment, the CETA requires originating goods to be shipped directly between Canada and the European Union or, if they must be transported through a third country, to remain under customs control at all times until they reach their ultimate destination. No value-added processing or finishing work in third countries is permitted.

Like most free trade agreements, the CETA provides that a product shall only be considered originating — and therefore eligible for preferential tariff treatment — if, after it has been produced, it does not undergo “further production or any other operation” and “remains under customs control” while it is outside Canada or the European Union.

This means, for example, that a Canadian product that is sent to the United States for minimal processing (like a finishing step requiring special equipment) or “any other operation” before it is ultimately exported to the European Union will lose its eligibility for preferential tariff treatment, even if it continues to satisfy the product-specific rules of origin under the CETA. Such a scenario would not be uncommon in the highly-integrated North American supply and production chains for, e.g., steel and other metal alloy commodities and manufactured products.

It also means that originating EU goods that are transferred from a company’s standing inventory in the commerce of a third country for export to Canada will no longer be eligible for preferential tariff treatment under the CETA.

If the product is transported through a third country, certain basic shipping activities are permitted, including unloading, reloading, or any other operation necessary to preserve the product in good condition or to transport it to its Canadian or European destination. However, such activities must be performed under customs control, e.g., in bond. The product must not be released from customs into the commerce of the third country.

In order to substantiate compliance with these requirements, Canadian and EU customs authorities may require importers to disclose bills of lading or waybills that indicate the shipping route, including all points of shipment and transhipment prior to importation, as well as customs documents establishing that the goods remained under customs control at all times. In Canada, these requirements are implemented in the CETA Tariff Preference Regulations, and they will be discussed in more detail in Part 3.

Tereposky & DeRose LLP regularly provides advice on how to apply and leverage the provisions of international trade agreements, including the CETA, the NAFTA, and the forthcoming CPTPP, while ensuring compliance with Canadian customs requirements.  Should you have any questions regarding potential opportunities, procedures or requirements under these trade agreements or any other trade related issues, we are at your disposal.