NAFTA CASE STUDY                                                    © 2002 Joseph Zodl

    You've just been hired as Vice President in Charge of All Things International at a growth company that is pleased with its increased sales as a result of international marketing efforts, but there are some problems that need to be faced: reconfiguration of product due to cultural differences, structure of letters of credit, terms of sale, and others. You report directly to the President

    Upon your arrival the first day, you are confronted by the Director of North American International Marketing whom you have met once before you were hired. A year ago, after much effort, the company President hired her away from a competitor where she had a superb sales record for domestic sales. For the past year, she has significantly increased domestic sales for this company, and expanded sales into Canada and now Mexico, reporting to the VP-Marketing. With you coming on board, she has been made one of your direct reports.

    She has recently returned from a trip to Mexico where she has successfully signed a five year exclusive contract with a new Mexican Distributor. Upon researching the matter you find the following:

  1. In return for exclusivity, the Distributor will purchase a minimum of 10,000 units of product each month over the next year. (If they don't purchase the minimum, they would have to send your company the check anyway.)
  2. In return for agreeing to purchase this minimum, the Director of North American International Marketing has committed to guaranteeing a supply of up 20,000 units per month if the Mexican Distributor wishes them.
  3. Profit per unit is 10% of the selling price.
  4. The Mexican duty rate is 15% of the selling price.
  5. The Mexican Distributor has asked the Director if the goods quality for duty free treatment under NAFTA. The Director, who believes that "all goods crossing the border are now duty free," and knowing that the goods are made in the United States at your domestic plant, so guaranteed. The Mexican Distributor requested that this be put into the written contract which the Director did.
  6. The first order is due to be shipped the first of next month and is for 15,000 units.
  7. Upon returning to home office, the Director requested the International Operations Director, who now also reports to you, to prepare a NAFTA Certificate of Origin for the Distributor.
  8. The Operations Director advised the Marketing Director that the goods, while made in the U.S., do not qualify under NAFTA because they do not meet a preference criterion.
  9. The Marketing Director has talked with the Mexican Distributor to "feel them out" about importing without a NAFTA Certificate. The Distributor says, of course they can still import U.S. product without a NAFTA Certificate. But now the goods will be dutiable at 15%. They will expect that you will either supply the Certificate as specified in the contract your company voluntarily signed, or, if they must pay Mexican duty, that your company will "make them whole" by discounting the goods 15%.
  10. The goods have significant Malaysian content. These are parts which are absolutely essential to the finished good. They cannot be obtained from elsewhere because they are patented products so you essentially have one possible supplier.
  11. It may be possible to reverse-engineer similar parts that will be interchangeable with the patented part and with no patent infringement issues. However, this is expected to take several years and will be very expensive.

What do you do?

For starters, fire the Director of North American International Marketing.

Order that the NAFTA Certificate of Origin be issued anyway.

Discount the goods 15% for the first five years and then renegotiate.

Attempt to renegotiate the contract with the Mexican Distributor.

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