Free Trade Agreements (FTAs)
A Free Trade Agreement (FTA) is a treaty between two or more countries that reduces or eliminates customs duties, tariffs, and trade barriers on qualifying goods. FTAs create preferential tariff treatment that can significantly lower import costs compared to standard (Most Favored Nation) duty rates.
To claim FTA benefits, importers must prove that goods originate in an FTA partner country by meeting specific rules of origin. This typically requires certification by the exporter or manufacturer and supporting documentation.
U.S. Free Trade Agreements cover 20 countries representing significant trade volumes. For many products, FTA duty rates are 0% compared to standard rates that can range from 2% to 35% or higher.
Why Free Trade Agreements Matter
FTAs provide substantial economic and operational benefits:
1. Duty Savings
The most direct benefit is reduced or eliminated import duties. Many FTAs phase tariffs to zero over time.
Example:
| Product | HS Code | Standard MFN Duty | USMCA Duty (Canada/Mexico) | Annual Savings on $1M Imports |
|---|---|---|---|---|
| Automotive parts | 8708.29 | 2.5% | 0% | $25,000 |
| Apparel (woven shirts) | 6205.20 | 16.5% | 0% | $165,000 |
| Steel pipes | 7306.30 | 5.5% | 0% | $55,000 |
To estimate your savings, multiply your annual import value by the difference between the MFN duty rate and the FTA rate. Even small duty rate reductions add up quickly.
2. Competitive Advantage
Lower landed costs allow you to:
- Price products more competitively
- Improve profit margins
- Offset higher production costs in FTA countries
3. Supply Chain Flexibility
FTAs encourage sourcing from partner countries and regional manufacturing, creating more resilient supply chains.
4. Regulatory Harmonization
Many modern FTAs include provisions beyond tariffs:
- Simplified customs procedures
- Intellectual property protections
- Sanitary/phytosanitary standards alignment
- Dispute resolution mechanisms
U.S. Free Trade Agreements in Force
As of 2026, the United States has 14 comprehensive FTAs covering 20 countries:
| FTA | Partner Countries | Effective Date | Key Benefits |
|---|---|---|---|
| USMCA | Canada, Mexico | July 1, 2020 | Replaced NAFTA; zero tariffs on most goods; simplified certification |
| CAFTA-DR | Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua | 2006-2009 (staggered) | Duty-free access for textiles, apparel, agriculture |
| Chile FTA | Chile | January 1, 2004 | Zero tariffs on 85% of goods immediately; all tariffs eliminated by 2015 |
| Singapore FTA | Singapore | January 1, 2004 | First U.S.-Asian FTA; zero tariffs on all industrial goods |
| Australia FTA | Australia | January 1, 2005 | Immediate zero tariffs on 99% of manufactured goods |
| Morocco FTA | Morocco | January 1, 2006 | First U.S.-African FTA; duty-free industrial goods |
| Bahrain FTA | Bahrain | January 11, 2006 | First U.S.-Gulf state FTA |
| Oman FTA | Oman | January 1, 2009 | Immediate zero tariffs on nearly all consumer/industrial products |
| Peru FTA | Peru | February 1, 2009 | Immediate duty-free access for 80% of U.S. exports |
| South Korea FTA (KORUS) | South Korea | March 15, 2012 | 6th largest goods trading partner; automotive/electronics focus |
| Colombia FTA | Colombia | May 15, 2012 | Immediate duty elimination on 80% of goods |
| Panama FTA | Panama | October 31, 2012 | Services trade, agriculture, manufacturing |
| Israel FTA | Israel | September 1, 1985 | First U.S. FTA; uses 35% appraised value method for origin |
| Jordan FTA | Jordan | December 17, 2001 | Simplified 35% value method; Qualifying Industrial Zones (QIZ) |
Note: The U.S. also has limited trade agreements with Japan (Phase One Agreement, 2020; Critical Minerals Agreement, 2023) covering specific sectors but not comprehensive FTAs.
Even without an FTA, countries can import to the U.S. under MFN (Most Favored Nation) rates via WTO membership. FTAs provide preferential rates that are lower than MFN.
How FTAs Work: Preferential Tariff Treatment
The Basic Concept
Standard import duty rates (MFN rates) apply to all WTO member countries. FTAs offer reduced or zero rates — but only if you can prove the goods originated in an FTA partner country.
Claiming FTA benefits requires:
- Goods qualify under the FTA's rules of origin
- Proper certification by the exporter/producer
- Correct declaration at time of import
- Supporting documentation retained for at least 5 years
Claiming FTA Benefits at Import
When filing your customs entry, you must:
- Declare the FTA using the appropriate Special Program Indicator (SPI) code on CBP Form 7501 or ACE entry
- Provide or possess a valid Certificate of Origin (or certification statement, depending on the FTA)
- Maintain documentation proving origin (bills of materials, production records, supplier declarations)
Example SPI codes:
| FTA | SPI Code | Description |
|---|---|---|
| USMCA | CA (Canada) or MX (Mexico) | USMCA originating goods |
| Chile | CL | Chile FTA |
| CAFTA-DR | CR, SV, GT, etc. | Central America-Dominican Republic |
| Australia | AU | Australia FTA |
| South Korea | KR | KORUS FTA |
Rules of Origin: Proving Goods Qualify
Rules of Origin (ROO) are the criteria that determine whether a product "originates" in an FTA partner country. Each FTA has its own ROO, and they vary by product.
There are three main ways goods can qualify as originating:
1. Wholly Obtained or Produced
The product is entirely sourced and produced within the FTA territory, with no non-originating materials.
Examples:
- Minerals extracted in an FTA country
- Agricultural products grown and harvested in an FTA country
- Livestock born and raised in an FTA country
- Fish caught in territorial waters by FTA-country vessels
Application: This method applies primarily to raw materials and agricultural goods. Manufactured products rarely qualify as "wholly obtained."
2. Tariff Shift (Change in Tariff Classification)
The product undergoes sufficient processing or assembly in an FTA country such that the HS classification changes at a specified digit level (chapter, heading, or subheading).
How it works:
Each FTA defines specific tariff shift rules in its annexes. A common rule might state:
"A change to heading 6203 (men's suits) from any other chapter."
This means:
- Non-originating fabric (Chapter 52 or 54) is imported into an FTA country
- Cut and sewn into suits (Chapter 62)
- The tariff classification changes from Chapter 52/54 → Chapter 62
- The suits qualify as originating under the FTA
Tariff shift types:
| Shift Type | Abbreviation | Meaning |
|---|---|---|
| Chapter change | CC | HS code changes at 2-digit level (e.g., 52 → 62) |
| Heading change | CTH | HS code changes at 4-digit level (e.g., 5208 → 6203) |
| Subheading change | CTSH | HS code changes at 6-digit level (e.g., 520821 → 620332) |
Different products have different shift requirements. Some require only a chapter change; others require a heading or subheading change.
3. Regional Value Content (RVC)
The product must have a certain percentage of value added within the FTA region.
Formula (Net Cost Method — common in USMCA):
RVC = [(Net Cost - Value of Non-Originating Materials) ÷ Net Cost] × 100
Formula (Transaction Value Method):
RVC = [(Transaction Value - Value of Non-Originating Materials) ÷ Transaction Value] × 100
Example:
A product is manufactured in Mexico and sold for $1,000.
- Non-originating materials (from China): $300
- Originating materials and labor (Mexico, U.S., Canada): $700
RVC = [($1,000 - $300) ÷ $1,000] × 100 = 70%
If the USMCA rule for this product requires 60% RVC, the product qualifies.
Common RVC thresholds:
| FTA | Typical RVC Requirement |
|---|---|
| USMCA | 60-75% (varies by product; automotive up to 75%) |
| CAFTA-DR | 35-50% |
| Chile, Singapore, Australia | 35-45% |
| Israel, Jordan | 35% (appraised value method) |
Detailed RVC Calculation Workflow
Calculating Regional Value Content requires careful cost accounting and material tracking. This workflow illustrates the complete RVC calculation process with both Net Cost and Transaction Value methods:
Calculation Stages:
- Blue (Start) — Initiate RVC calculation process
- Yellow (Formulas) — Apply RVC calculation formulas
- Light Yellow (Examples) — Worked calculation examples
- Light Green (Results) — RVC percentage outcomes
- Red (Failure) — Does not meet threshold
- Green (Success) — Meets RVC requirement
- Purple (Documentation) — Prepare certification and records
- Orange (Warnings) — Risks or issues to address
- Light Red (VNM Tracking) — Non-originating material identification
Key Decision Points:
- Method Selection — Net Cost (more accurate, complex) vs. Transaction Value (simpler, less precise)
- Material Classification — Originating vs. Non-Originating determines VNM
- Threshold Comparison — Calculated RVC must meet or exceed product-specific threshold
- Improvement Strategies — If RVC fails, options to increase originating content or add value in FTA territory
This detailed workflow demonstrates the step-by-step process companies must follow to calculate and document RVC, which is critical for defending FTA claims during CBP audits.
Product-Specific Rules of Origin
Each FTA publishes product-specific rules in its annexes. These rules specify which method (tariff shift, RVC, or both) applies to each HS code.
Example (USMCA for HS 8708.29 — automotive parts):
"A change to subheading 8708.29 from any other heading; or no change in tariff classification, provided there is a qualifying RVC of not less than 70% (net cost method)."
This means you can qualify either by:
- A tariff shift from outside Chapter 87, or
- No shift required if RVC ≥ 70%
Where to find product-specific rules:
- USMCA: Annex 4-B (Rules of Origin by HS Code)
- CAFTA-DR: Annex 4.1
- Other FTAs: Rules of Origin chapter or annexes in the FTA text
How Rules of Origin Are Applied
Comprehensive FTA Qualification and Application Workflow
This advanced workflow illustrates the complete end-to-end process for determining FTA eligibility, calculating qualification, obtaining certification, and claiming benefits:
Workflow Stages:
- Blue (Start/Entry) — Initial assessment and planning
- Green (Qualification Success) — Product meets origin rules
- Yellow (Calculation) — RVC computation stages
- Purple (Certification) — Documentation and recordkeeping
- Light Green (Success) — FTA benefit realized
- Orange (Partial Failure) — Claim denied, corrective action possible
- Red (Failure) — Does not qualify or penalties assessed
- Gray (No Benefit) — Standard MFN treatment
This comprehensive workflow demonstrates:
- All three qualification pathways (wholly obtained, tariff shift, RVC)
- De minimis exception handling
- RVC calculation methodology selection
- Certification process variations by FTA
- CBP verification and audit scenarios
- Consequences of failed claims
Certification of Origin
To claim FTA benefits, the importer must possess (and be able to present to CBP) a Certificate of Origin or certification statement at the time of import.
The specific format and requirements vary by FTA.
USMCA Certification (Most Flexible)
USMCA (U.S.-Mexico-Canada Agreement) does not require a specific form. Instead, it requires a certification statement containing 9 data elements in any format:
- Importer, exporter, or producer (indicate which is certifying)
- Certifier's name, title, address, phone, email
- Exporter's name, address, email (if different from certifier)
- Producer's name, address, email (if different)
- Importer's name, address, email
- Description and HS classification of goods (6-digit level)
- Information demonstrating the good is originating
- Blanket period (if applicable) — up to 12 months
- Authorized signature and date
Key advantages:
- Can be prepared by the importer, exporter, OR producer (most FTAs require the exporter)
- No prescribed form — use a letter, email, invoice annotation, or PDF
- Blanket certifications allowed for multiple shipments over 12 months
Validity: 4 years from the date of signing
Other FTAs: Certificate of Origin Forms
Most other FTAs require a more structured Certificate of Origin document. Some have prescribed forms; others allow flexible formats but require specific data elements.
Common elements required:
| Data Element | Purpose |
|---|---|
| Exporter name and address | Identifies who is certifying |
| Producer name and address | Identifies where goods were manufactured |
| Importer name and address | Identifies who will claim the benefit |
| Description of goods | Specific enough to match the invoice/entry |
| HS classification (6-digit) | Links to product-specific rules |
| Preference criterion | How the good qualifies (wholly obtained, tariff shift, RVC, etc.) |
| Declaration statement | Certifies that the information is accurate |
| Signature and date | Legal accountability |
Who Can Certify?
| FTA | Who May Certify |
|---|---|
| USMCA | Importer, exporter, or producer |
| CAFTA-DR | Exporter or producer |
| Chile, Singapore, Australia, Peru, Colombia, Panama, South Korea | Exporter or producer |
| Israel, Jordan | Exporter (or importer with supporting documentation) |
Validity Period
Certificates of Origin are typically valid for:
- 1-4 years from the date of signing (varies by FTA)
- Blanket certificates (covering multiple shipments) are allowed in most modern FTAs (USMCA, CAFTA-DR, KORUS, etc.)
The FTA Import Process
Multi-FTA Certification Process Comparison
Different FTAs have varying certification requirements, procedures, and authorized certifiers. This decision tree helps shippers navigate the certification process based on the applicable FTA:
FTA Certification System Color Coding:
- Green (USMCA) — Most flexible system; importer, exporter, or producer can certify
- Blue (Modern FTAs) — Structured Certificate of Origin; exporter/producer only
- Orange (Israel/Jordan) — Simplified 35% value method
- Purple (Traditional FTAs) — Standard certificate format
- Purple (Signatures) — Certification completion and signing
- Yellow (Documentation) — Recordkeeping requirements
- Light Green (Success) — FTA benefit realized
- Red (Failure) — Claim denied
Key Differences by FTA:
| Feature | USMCA | CAFTA-DR, Korea, Modern FTAs | Israel, Jordan | Traditional FTAs |
|---|---|---|---|---|
| Who certifies | Importer, exporter, or producer | Exporter or producer only | Exporter | Exporter or producer |
| Format | Any format with 9 elements | FTA-specific Certificate of Origin form | Flexible statement or invoice | Standard format |
| Blanket period | Up to 12 months | Varies (Korea: yes, Chile: yes) | Not specified | Varies by FTA |
| Validity | 4 years from signature | Typically 4 years | Not specified | 1-4 years |
| Self-certification | ✅ Importer can self-certify | ❌ No | ❌ No | ❌ No |
This comprehensive certification comparison demonstrates the varying complexity and flexibility across different FTA systems, helping importers and exporters understand which procedures apply to their specific trade lanes.
Recordkeeping Requirements
Both importers and exporters must maintain documentation that proves origin for at least 5 years from the date of importation.
Importer's Recordkeeping Obligations
You must retain:
- Certificate of Origin (or certification statement)
- Supplier declarations (if you're not the producer)
- Cost/value worksheets (if RVC was used)
- Production records (if you manufactured the goods)
- Purchase orders and invoices
CBP can request these documents at any time within 5 years of import. Failure to provide them can result in:
- Denial of preferential treatment → you must pay the difference between FTA rate and MFN rate
- Penalties for negligence or false claims (up to domestic value of the goods)
Exporter's Recordkeeping Obligations
If you're the exporter or producer who issued the Certificate of Origin, you must retain:
- Production records
- Purchase orders for materials
- Bills of material
- RVC calculations (if applicable)
- Any documents supporting the origin claim
Post-Entry Verification
CBP has the right to verify origin claims after import. This can happen through:
- Requests for Information — CBP asks the importer to provide supporting documentation
- Plant Visits — CBP (or partner country customs) inspects production facilities
- Post-Entry Audits — Comprehensive review of a company's FTA claims and records
If CBP determines goods do not qualify, you must:
- Pay the difference between the preferential rate and MFN rate
- Pay interest on unpaid duties
- Potentially face penalties if the claim was negligent or fraudulent
Even if your goods were released years ago, CBP can request verification within 5 years. Always maintain complete and accurate records.
Common Mistakes and How to Avoid Them
| Mistake | Consequence | How to Avoid |
|---|---|---|
| Claiming FTA without a valid Certificate of Origin | Claim denied; duties owed plus penalties | Always obtain certification before importing |
| Using the wrong preference criterion | Origin denied upon audit | Work with your supplier to verify how the good qualifies |
| Misclassifying the HS code | Wrong product-specific rule applied; claim denied | Use a customs broker or tariff classification expert |
| Failing to retain supporting documentation | Cannot defend FTA claim; duties owed | Maintain all records for 5 years |
| Assuming all goods from an FTA country qualify | Not all goods meet origin rules | Always verify each product's origin |
| Not updating certifications when sourcing changes | Origin status may change if materials change | Re-validate origin when supply chain changes |
De Minimis Rules
Many FTAs allow small amounts of non-originating materials without disqualifying the product. This is called de minimis.
Example (USMCA):
If a product contains up to 10% non-originating materials by value (7% for certain textiles), it can still qualify as originating even if the tariff shift rule is not met — provided the RVC requirement is met (if one exists).
How it works:
- You're making a product in Mexico that requires a tariff shift from outside Chapter 62
- You use fabric from China (non-originating)
- The Chinese fabric is only 8% of the product's value
- The tariff shift rule is NOT met (fabric stayed in Chapter 52 → finished good in Chapter 62)
- BUT: Under de minimis, the 8% non-originating material is "forgiven," and the product can still qualify if it meets the RVC requirement
De minimis thresholds:
| FTA | De Minimis Threshold |
|---|---|
| USMCA | 10% (7% for textiles/apparel) |
| CAFTA-DR | 10% |
| Most other U.S. FTAs | 10% |
Accumulation: Multi-Country Production
Most modern FTAs allow accumulation or cumulation — materials and production from any FTA member country can be counted as "originating."
Example (USMCA):
- U.S. company produces engines in the U.S. (originating)
- Ships engines to Mexico
- Mexican factory assembles vehicles using U.S. engines + Mexican parts + some Chinese steel
- The U.S. engines count as originating materials for Mexico's RVC calculation
- The finished vehicle qualifies for USMCA benefits when imported to the U.S.
This encourages regional supply chains and allows multi-country production while still qualifying for FTA benefits.
Advanced FTA Strategies
1. FTA Stacking (Indirect Materials)
Indirect materials (tools, equipment, fuel used in production but not incorporated into the final product) can often be treated as originating regardless of where they came from.
This simplifies RVC calculations because you don't need to track the origin of factory equipment.
2. Tariff Engineering
In some cases, it's cheaper to import components from FTA countries and assemble locally to take advantage of lower FTA rates.
Example:
- Importing finished bicycles from China: 11% MFN duty
- Importing bicycle frames from China (6% duty) + assembling in Mexico → USMCA 0% duty when imported to U.S.
This requires analysis of:
- Component vs. finished good duty rates
- Assembly costs in FTA countries
- Rules of origin for the finished product
3. Supplier Programs
If you source from multiple suppliers, require them to:
- Provide supplier declarations or origin statements
- Update you when materials or production locations change
- Maintain documentation for verification
Many companies build origin tracking into their ERP systems to automate compliance.
FTAs and Duty Drawback
Duty drawback allows you to recover duties paid on imported materials that are later exported. However, FTAs often restrict or eliminate drawback.
USMCA example:
- You cannot claim both USMCA preferential treatment and drawback on the same goods
- If you import materials duty-free under USMCA and re-export them, no drawback is available
Always consult the specific FTA's rules on drawback (typically in the "Customs Procedures" chapter).
FTA Resources and Tools
Official Government Resources
| Resource | Description | Link |
|---|---|---|
| USTR FTA Hub | Official U.S. Trade Representative FTA information | ustr.gov |
| CBP FTA Guidance | Customs procedures and requirements for each FTA | cbp.gov |
| ITA FTA Rules of Origin | Department of Commerce guide to identifying and applying ROO | trade.gov |
| USMCA Certification Template | CBP's optional template for USMCA certification (9 elements) | cbp.gov |
| FTA Tariff Tool | Look up tariff rates under each FTA | usitc.gov |
Related Topics
- HS Codes — Accurate classification is critical for applying FTA rules of origin
- Import/Export Documentation — Certificates of Origin are part of the documentation package
- Customs Bonds — FTA claims that fail verification can result in bond claims for unpaid duties