NAFTA Rules of Origin allow only apparel manufactured within the NAFTA free trade zone from fabrics woven or knit from North American yarns to qualify for tariff free treatment. Most Canadian-made apparel does not qualify as for free trade as manufacturers use fabrics and yarns from around the world. However, NAFTA provides preferential quotas called Tariff Preference Levels (TPL) which allow for apparel made from imported textiles that do not meet the rules of origin to be exported duty-free to the U.S. (and Mexico).
TPLs allow a certain amount of apparel cut and sewn in Canada to be exported to the United States at duty-free, even though these goods do not qualify for free trade under the NAFTA rules of origin.. Non-qualifying apparel exported to the U.S. without TPL is subject to the Most Favoured Nation (MFN) tariff rate. Canadian-made apparel (goods of HS chapters 61 and 62) are eligible for TPL. There are two TPLs: wool apparel and cotton and man-made apparel
TPL is allocated by the Department of Foreign Affairs and International Trade (DFAIT) to Canadian companies based on their past exporting record. Companies requiring TPL for the first time may receive a new entrant allocation". Companies must use their allocation fully (95 per cent or more of allocation) to maintain their allocation level for the next year. If a company does not utilize the TPL allotted for a given year, their allocation in subsequent years will be reduced and redistributed to other holders. Companies can protect future years’ TPL by returning quota to the government for re-distribution on or before September 30 of each year if they feel they will not be able to fully utilize their allocation.
Many Canadian apparel manufacturers have been unable to secure large TPL allocations because they have exported before. They are forced to make up for this by purchasing TPL in the marketplace. The government allows companies with TPL allotments to transfer out up to 25 per cent of their TPL allocation. Companies with a TPL allocation of 2,000 SME or less have the option to transfer out up to 100 per cent of their original TPL allocation once in every three-year period. The combined amount of the transfers out and returns of the TPL cannot exceed 25 per cent of the original TPL allocation, except companies, which choose to transfer up to 100 per cent of their TPL allocation.
TPL that is re-allocated at the beginning of the quota year is called a bonus. For companies that are growing their exports, the bonus TPL allocations give companies greater amounts of TPL based on their previous years’ performance. It is important to understand how these allocations are made.
Because the majority of quota is allocated at the beginning of the year TPL can be retroactively applied to duties exporters were forced to pay when they ran out of their own TPL. It can be risky to rely on receiving a retroactive allotment, as it is up to DFAIT who receives a bonus and how many TPL units it is.
Companies who do not have an exporting record can get a small amount of TPL allotted to them and they are also able to transfer in TPL from other companies who will not use all of their own yearly allotment.
TPLs are measured in Square Metre Equivalents (SME). SMEs are calculated based on conversion factors negotiated and agreed upon as part of the NAFTA agreement. They can be found in Annex 300-B Schedule 3.1.3. The conversion factors sometimes appear arbitrary - and they are. But in practical terms they cannot be changed.
Due to the constraint companies face in accessing TPL, companies who hold TPL quota are able to trade a portion of their allotted TPL. The Canadian Apparel Federation (CAF) proposed that a transfer policy be developed to maximize exports under TPL and to provide a simplified framework in which the industry can better manage the use of TPL for exports of non-originating apparel to the U.S.
Many Canadian apparel manufacturers have been unable to secure large TPL allocations because they have little exporting history. They are forced to make up for this by purchasing TPL in the marketplace. The government allows companies with TPL allotments to transfer out up to 25 per cent of their TPL allotment for a price. Companies with a TPL allocation of 2,000 SME or less have the option to transfer out up to 100 per cent of their original TPL allocation once in every three-year period. The combined amount of the transfers out and returns of the TPL cannot exceed 25 per cent of the original TPL allocation, except companies, which choose to transfer up to 100 per cent of their TPL allocation.
Here are some issues to keep in mind when considering acquiring TPL:
Remember quota costs should be reflected in the value for duty of your exports.You can go to the quota holder directly to arrange for the TPL transfer. The list of TPL holders is posted at:
Given that there is not enough TPL for everyone, CAF encouraged the government to adopt the TPL transfer system. There are many ways to qualify a garment for NAFTA, other than using TPL, and holders should utilize their TPL allocation in the most beneficial manner.
For example, there are many knitwear manufacturers who have large holdings of TPL, and use it to cover their exports. When considering fabric or yarn sources, it may be more cost efficient to source North American fabrics than from other countries aboard. This way, the apparel automatically qualifies as NAFTA originating, and valuable TPL can be used on high value exports or transferred out for a profit.
Some Canadian apparel made from “short supply” fabrics that are non-NAFTA textiles may also qualify for tariff relief. Manufacturers should see NAFTA, Annex 401 for a full list of fabrics that qualify. The fabrics included are very specific in their weight, make-up and weave, but Canadian apparel manufacturers may find a significant savings by using one of these fabrics to avoid NAFTA duties.
Part of tariff planning is knowing your product line, the duty paid on your imported fabrics and the duties that would be due in the U.S. were NAFTA privileges not claimed. It is important to plan when and on what TPL is used so the exporter gets the most value, or can transfer it out to get the most benefit from the TPL allocation.