Tariff Preference Levels – Canada-United States-Mexico Agreement

Canada has begun its domestic process for the implementation of the Canada-United States-Mexico Agreement (CUSMA), which was signed by the three countries on November 30, 2018. Under the new agreement, Tariff Preference Level (TPL) commitments previously established under NAFTA have been largely maintained. The CUSMA information related to textiles and apparel is available in Chapter 6 - Textile and Apparel Goods.

What are TPL export goods?

Non-originating apparel, textiles and made-up goods (i.e. goods that do not meet the requirements under the rules of origin) may still qualify for a preferential duty rate, up to a specified annual quantity. TPL export goods must be made from fabrics, yarns or fibres that do not originate in the free trade area, and they must be:

1. for apparel goods of either cotton or man-made fibre, or wool: both cut or knit to shape and sewn, or otherwise assembled in Canada;
2. for cotton or man-made fibre fabric and made-up goods: woven or knit to shape in Canada;
3. for made-up textile goods of HS 9404.90: finished and cut and sewn or otherwise assembled in Canada; and
4. for cotton or man-made fibre spun yarn: spun in Canada.

This preferential rate for non-originating goods is called TPL and is equivalent to the rate applied to goods that meet the rules of origin. Under CUSMA, TPL goods will no longer be subject to the Merchandise Processing Fee (MPF) normally associated with non-originating goods.

Once the TPL-specified annual quantity has been fully utilized, non-originating apparel, textiles and made-up goods will be subject to the Most-Favoured-Nation (MFN) tariff rate for the remainder of that TPL year.

How do I determine if I need to use the TPLs to export goods to the United States or Mexico?

Textile, apparel and made-up textile goods need to meet the rules of origin of CUSMA in order to be considered originating goods and receive preferential tariff treatment. When these goods are produced with non-originating fabrics, yarns or fibres, they generally do not meet the rules of origin. Under the “yarn forward” rule, CUSMA requires that these goods undergo a “triple transformation,” that is, for apparel goods, the actions of spinning the fibres into yarn, knitting or weaving the yarn into fabric, and the apparel manufacturing must all occur in the CUSMA region. Similarly, textiles undergo a “double transformation,” requiring that the spinning of the fibres into yarn, and the knitting or weaving of the yarn into fabric, must occur in the CUSMA region. A made up textile good of subheading 9404.90, such as a pillow, must undergo a double transformation whereby the fabric is woven or knit in the CUSMA region and all of the operations required to manufacture the pillow also occur in the region.  Spun yarn requires that the spinning occurs in the CUSMA region.

Canadian goods exported to the United States and Mexico, which cannot meet these rules of origin, may be eligible to receive the preferential tariff treatment, as long as they are manufactured in Canada, not considered to be re-exports, and they meet the eligibility provided in Annex 6-A Special Provisions - Section C: Preferential Tariff Treatment for Non-Originating Goods of another Party.

Who would be eligible to apply for an export Certificate of Eligibility?

TPL-eligible exports are subject to controls under Canada’s Export and Import Permits Act (EIPA). For TPL goods exported to the United States or Mexico, a Certificate of Eligibility is required under the EIPA. This Certificate of Eligibility may be issued by Global Affairs Canada to Canadian residents. A Canadian resident would be required to apply for a Certificate of Eligibility on behalf of a non-Canadian resident.

How is a Canadian resident defined?

Under the EIPA, a “resident of Canada” means, in the case of a natural person, a person who ordinarily resides in Canada, or in the case of a corporation, a corporation that has its head office in Canada or that operates a branch office in Canada.

How much TPL is available under CUSMA?

Below is a summary of the negotiated levels for TPL (as of January 1, 2019) under NAFTA, and the TPL amounts negotiated under CUSMA:

Note: no changes to TPL amounts between Canada and Mexico
*SME = square metre equivalent

Note: no changes to TPL amounts between Canada and Mexico
*SME = square metre equivalent

Note: no changes to TPL amounts between Canada and Mexico
*SME = square metre equivalent

How are goods destined for export to the United States allocated TPL quota under the current NAFTA?

The TPLs are administered on an annual basis and allocations are valid only for the calendar year in which they were granted.

Under NAFTA, exporters of apparel, textiles and made-up goods to the United States are allocated TPL based both on previous years’ utilization and on a first-come, first-served basis. That is, a company will receive in one year an equivalent of its previous year’s actual utilization. Additional TPLs may be available to a company once its allocation has been fully exhausted.

TPL yarn exports to the United States are allocated on a first-come, first-served basis only, as are all exports to Mexico.

What is a “return policy”?

A return policy is a provision that allows allocation holders that are unable to utilize their allocations to return all, or part, of that allocation by a specific date. The amount that is returned can then be made available to other eligible applicants that are able to utilize the allocation, which contributes to maximum utilization of the quota. This will specifically allow for maximum utilization within the quota year. It also allows an allocation holder to maintain its allocation, without penalty, to account for short-term changes in exports. In this way, it allows an allocation holder that is unable to utilize the allocation in any one year to avoid facing a reduction of its TPL allocation due to short-term fluctuations in exports. Any portion of an allocation that is returned by the return date will be considered as having been used for the purposes of administering the previous year’s utilization policy.

There is currently no return policy for TPL goods under NAFTA.

What is a “chronic return” penalty?

Under a chronic return policy, allocation holders that return a significant portion of their allocation in two or more consecutive years may face a chronic return penalty in subsequent years. The details of the policy, including what is meant by a “significant portion”, could vary by quota. Generally, the exporter’s allocation will be adjusted downward in proportion to the amounts returned in previous years, essentially providing the previous years’ utilization. The purpose of the chronic return penalty is twofold: to direct allocations to exporters that can fully utilize them and to encourage maximum utilization of the quota by industry.

There is currently no chronic return policy for TPL goods under NAFTA.