United States: CAFTA: New Rules, New Opportunities

Central America and the Dominican Republic are the second largest U.S. export markets in Latin America, behind only Mexico. On August 2, 2005, President George W. Bush signed into law the act to implement the Dominican Republic- Central America-United States Free Trade Agreement (CAFTA), thereby opening the door to important new opportunities for U.S. companies. The CAFTA countries are: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic, and the United States. CAFTA is expected to enter into force on January 1, 2006.

Eighty percent of U.S. consumer and industrial exports to the CAFTA countries will be duty-free immediately upon entry into force of the Agreement, including information technology products, agricultural products, construction equipment, paper products, pharmaceuticals, and medical and scientific equipment. Duties on autos and auto parts will be phased out over five years with duties on remaining products phased out over ten years.

The following is a brief overview of some of CAFTA’s key provisions.

The Agreement’s rules of origin are key because they define which goods are entitled to duty preferences. Goods qualify as originating if they are: (1) wholly obtained or produced in the CAFTA territory; (2) produced in the CAFTA territory from nonoriginating materials that meet the specific rule of origin set out in Annex 4.1 of the Agreement; or (3) produced in the CAFTA territory exclusively from originating materials. Like the specific rules of origin in other U.S. free trade agreements, CAFTA’s specific rules of origin are based on a tariff shift, regional value content requirement, or some combination thereof. CAFTA’s de minimis threshold is 10 percent, meaning that goods may nonetheless qualify as originating if the value of any non-originating materials that fail the tariff shift required by the Annex 4.1 specific rule of origin is not more than 10 percent of the adjusted value of the good. The Agreement contains special rules governing the origin of textiles and wearing apparel, which strengthen incentives for production of textiles and apparel within the CAFTA territory and treat as originating any fabrics determined to be in short supply in the CAFTA territory.

CAFTA seeks to ensure expeditious release of imported goods and thus prevent customs clearance from becoming a non-tariff barrier to trade. The Agreement requires CAFTA countries to (1) release goods meeting customs rules, to the extent possible, within 48 hours of arrival; (2) allow goods to be released at the arrival point without transfer to a storage facility; and (3) allow importers to withdraw goods from customs before a final determination on duties and fees is made. Express shipments benefit from expedited customs procedures and must be cleared within six of hours of the submission of all necessary customs documents, provided that the shipment has physically reached the port of entry.

CAFTA also aims to improve customs administration and enhance transparency. For example, the Agreement requires each CAFTA country to:

• publish its customs laws, regulations, and general administrative procedures;
• maintain an inquiry point to address inquiries by interested persons regarding customs matters;
• to the extent possible, publish in advance any proposed customs regulations and provide interested persons the opportunity to comment on the proposals before they are adopted;
• provide binding written advance rulings on tariff classifications, valuation, origin, and other customs matters; and
• guarantee importers access to independent administrative and judicial review of customs determinations.

Other provisions assure the confidentiality of customs information between Parties, strengthen the use of information technology meeting common standards, and eliminate the Dominican Republic’s requirement for consular invoices and "legalization" of documents, thereby effectively eliminating certain export fees previously collected in that country.

CAFTA creates new opportunities for U.S. companies to compete for government procurement contracts in the CAFTA region. U.S. companies were not previously guaranteed the right to compete for such contracts because none of the CAFTA countries are signatories to the World Trade Organization’s (WTO) Government Procurement Agreement. The total value of government procurement by the six CAFTA trading partners is estimated to be between $8 and $12 billion dollars. U.S. companies will now have the opportunity to compete for procurements by the largest purchasing entities in the CAFTA region. For example, the Costa Rican Social Security System buys approximately 85 percent of the medical equipment in Costa Rica. U.S. suppliers are also guaranteed to receive non-discriminatory and transparent treatment when competing for buildoperate- transfer contracts (BOTs), a common financing vehicle for large-scale construction projects and public work facilities.

The CAFTA provisions apply to procurements by specified government entities over a certain value threshold. The value thresholds will be adjusted for inflation and will generally be somewhat higher for the Central American Parties and the Dominican Republic during an initial threeyear period after the CAFTA enters into force. Thereafter, the value thresholds (in U.S. dollars) will be as follows:

Certain goods and services are excluded from the CAFTA’s government procurement provisions. Companies interested in competing for government procurements in the CAFTA region should carefully research which government entities are covered by the government procurement provisions and whether the products or services they wish to supply are covered.

CAFTA’s investment provisions guarantee U.S. investors:

• non-discriminatory treatment;
• the right to repatriate profits and make other transfers relating to an investent;
• protection against expropriation without prompt, adequate and effective compensation;
• fair and equitable treatment and full protection and security of their investments.

"Investment" is broadly defined to include a wide variety of tangible and intangible assets, including:

• an enterprise;
• shares, stocks, and other forms of equity participation in an enterprise;
• bonds, debentures, other debt instruments, and loans;
• future, options, and other derivatives;
• turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts;
• intellectual property rights;
• licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and
• other tangible or intangible, movable or immovable property, and related property rights such as leases, mortgages, liens, and pledges.

CAFTA protects these expanded opportunities for U.S. companies to invest in the territory of a CAFTA country by providing mandatory arbitration of investor-state disputes. If such a dispute cannot be resolved through consultation and negotiation, the investor may submit the dispute to arbitration before a tribunal comprising three arbitrators, one selected by each of the disputing parties and the third appointed by agreement of the disputing parties. A CAFTA arbitral tribunal may award monetary damages (with interest), restitution (although the respondent may elect to pay monetary damages and interest in lieu thereof), as well as costs and attorney’s fees. CAFTA arbitral tribunals are not empowered to award punitive damages.

The Agreement also creates a mechanism for settling disputes among the CAFTA Parties regarding the interpretation or application of the Agreement and with respect to measures that a Party considers would be inconsistent with the Agreement or would nullify or impair benefits accruing to it under the Agreement. The Agreement provides that the Parties should first attempt to resolve such state-to-state disputes through consultation and mediation of the Free Trade Commission (which consists of the cabinet-level representatives of the consulting Parties) before submitting the dispute to an arbitral panel.

The arbitral panel issues a report with its findings and, if requested by the Parties, makes recommendations for resolution of the dispute. The panel report serves as the basis for the disputing Parties to resolve the dispute. A Party must comply with its obligations under the Agreement in accordance with the panel report or negotiate mutually acceptable compensation. If the Parties cannot agree on compensation, the complaining Party may seek authorization to impose trade sanctions.

CAFTA introduces features not found in the WTO dispute settlement system. For instance, under CAFTA, the Parties are given the opportunity to consult on proposed, as well as actual, measures. This will presumably prevent certain disputes and give traders and foreign investors the opportunity to be heard before the actual adoption of a measure that is considered contrary to the Agreement. Similarly, CAFTA’s dispute settlement system gives the signatory countries the right to present their individual or collective views on issues of interpretation or application of the Agreement arising in administrative or judicial proceedings of another Party.

CAFTA requires a complaining Party to chose between adjudicating disputes under CAFTA or the WTO. A forum selection clause in Chapter Twenty of CAFTA precludes Parties from having recourse to both fora.

This article has been prepared by Sidley Austin Brown & Wood LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.