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Avoid this common export pitfall

A Canadian company asks the TCS if its Chinese-made product should be exported directly to the U.S. from China or if it should go through Canada first. The question is straightforward, but raises a common export pitfall.

Dear TCS,

I have recently invented a new product in Canada that I intend to have made in China and imported back to Canada, with an assumed duty of zero. This is for resale to the retail market segment. I will also be shipping this to customers in the U.S. where I assume there will be a Most-Favoured-Nation (MFN) duty of 2.7%.

Should I bring all inventory into Canada then ship to U.S. myself or should I ship to U.S. direct from China? Does shipping a product made in China from Canada change the MFN status? I can calculate the cost of transportation but am not aware of any hidden costs. I expect to get hit twice for brokerage and perhaps a higher transportation charge for bringing my product from China to Canada then to the U.S. Is there anything else?

Thanks,

A Newfoundland and Labrador firm

Dear Newfoundland and Labrador firm,

Thanks for your email. The answer to your question is actually straightforward. However, after reading your email I realize there may be another important challenge you will need to be prepared for. First, let me answer your question.

Since your product is being manufactured in China it does not qualify as originating under the North American Free Trade Agreement (NAFTA) rules of origin. These rules are used to determine the origin or nationality, as it were, of goods. Only goods that are deemed originating in Canada, the U.S. or Mexico are eligible for NAFTA preferential tariff treatment.

Your product will enter the U.S. under the U.S. general or "normal trade relations" rate which in Canada we refer to as the "most favoured nation" or MFN rate. This U.S. tariff rate of 2.7% will be applicable regardless of whether your goods enter the U.S. directly from China or if they are transhipped through Canada. So from a tariffs perspective there is no advantage or disadvantage to either shipping option.

However — and this is where you raise a particularly important issue — you may face some intellectual property challenges when you manufacture your product in China. I would recommend that you take stock of your intellectual property assets and consider registering any core intellectual property with the advice of experienced legal counsel.

With a new invention, you have the option of registering directly in China or you can use the Patent Cooperation Treaty process to register in multiple jurisdictions, including China.

Having your production in China increases the risk of infringers copying your invention, even though you do not intend to sell your product in China. If you do not register your rights, or take the necessary precautions to ensure that your invention is considered a trade secret, then your new product may be at risk.

On the manufacturing side, it may be prudent to seek out two or more factories to make components of the new product. This way, no single party has access to the product's full design. You would then have the components assembled before you export and avoid passing on too much know-how to one business partner.

Finally, if the product is a success and if you do not register your trademark, nothing can stop a third party from registering that trademark in China and seriously disrupting your export operations. China is a first-to-file country, which means in most cases, the party that registers for a trademark first will obtain the trademark. In considering whether the cost and effort is worth it, you will have to consider whether you could cope with no longer having access to your brand, or whether it would be cost prohibitive to change your product once a third party registers your trademark in China. Chinese customs officials could then stop all outgoing shipments of your products that display your brand.

Even though you are not targeting the Chinese market, there are some important intellectual property issues to consider.

Do not hesitate to contact me for more information. I’d be happy to help.

Sincerely,

Gary Lee
Trade Commissioner
Canadian Embassy in Beijing

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