United States: Preferential Treatment: How Textile Trade Agreements Limit Or Benefit "Free" Trade

When was the last time you bought or wore clothing made in the U.S.? How about clothing made in Europe (besides specialty items such as suits or leather)? If you have bought clothes recently, you are likely aware that most of the items are imported from a developing country, and it is difficult to find clothing made in the West.

When was the last time you bought or wore clothing made in the U.S.? How about clothing made in Europe (besides specialty items such as suits or leather)? If you have bought clothes recently, you are likely aware that most of the items are imported from a developing country, and it is difficult to find clothing made in the West.

Cheap labor in developing countries is certainly a major cause of this trend. However, free trade agreements and programs are also significant factors. Many free trade agreements allow certain textile merchandise to be imported free of duty or at reduced duty into the U.S.

The term "free trade agreement" is a bit of a misnomer. Almost all of the free trade agreements and acts contain various and often stringent requirements that a country must meet before textile products from that country can enter the U.S. free of duty and quota restrictions. This article briefly discusses several major trade acts and agreements that provide preferential textile trade benefits to designated countries.

The preferential treatment offered by these acts and agreements certainly encourages trade between the U.S. and the beneficiary countries, and to a certain extent, helps shape the market share of the countries that export textile products to the U.S.

The information provided in this article may serve as a quick reference for existing and potential importers, exporters, retailers and manufacturers of textile products. It will also help companies in making strategic decisions on market expansion and investors in evaluating investment in the textile industry.

Andean Trade Preference Act

The Andean Trade Preference Act, as amended (ATPA), provides duty-free treatment for certain articles imported from designated beneficiary countries. Currently there are four eligible beneficiary countries: Bolivia, Colombia, Ecuador and Peru. The ATPA remains effective until December 31, 2006.

Under the ATPA, duty-free treatment applies to any article that is grown, produced or manufactured in any of the four eligible beneficiary countries if (1) the article is imported directly from a beneficiary country into U.S. customs territory, and (2) at least 35% of the appraised value of the product has been added in the beneficiary country. So-called "inputs" from other ATPA beneficiary countries, including the beneficiary countries of the Caribbean Basin Initiative, Puerto Rico and the U.S. Virgin Islands, may be counted toward the 35% requirement. Additionally, U.S. inputs (excluding Puerto Rico) may be counted for up to 15% of the value of the article.

Textile and apparel articles, however, can be imported free of duty and quota restrictions if the articles are shipped directly from a beneficiary country to the U.S. and satisfy the pertinent rules of origin. In general, apparel assembled in Andean countries from U.S. fabrics made from U.S. or Andean yarns, Andean specialty fabrics made from Andean yarns, fabrics or yarns in short supply in the U.S. and other NAFTA countries, and Andean-formed fabrics from U.S. or Andean yarns (subject to a cap), are eligible for the duty-free treatment. Additionally, textile luggage assembled in Andean countries from U.S. fabrics made from U.S. yarns, handloomed, handmade or folklore articles, and brassieres are also eligible for duty-free treatment.

African Growth and Opportunity Act

The African Growth and Opportunity Act, as amended (AGOA), became law on May 18, 2000, and will remain effective until September 30, 2008. Thirty-seven sub-Saharan African countries have been designated eligible. However, to receive the apparel benefits under the AGOA, a country must also meet certain customs-related requirements. Among the 37 eligible countries, 23 countries are eligible to receive the apparel benefits.

The AGOA grants duty-free and quota-free treatment to the following apparel articles imported directly into the U.S. from an eligible country: apparel assembled, or assembled and further processed, from fabrics or knit-to-shape components cut and formed in the U.S. from American yarns; apparel assembled from U.S. formed fabrics and/or U.S. or AGOA knit-to-shape components from American yarns and thread; and apparel assembled from AGOA fabrics or knit-to-shape components from either American or AGOA yarns (subject to a cap). Additionally, knit-to-shape sweaters made in the region from cashmere and certain merino wools, articles made from yarns and fabrics in short supply in the U.S. and other NAFTA countries, and certain handloomed, handmade or folklore articles, are also eligible for duty-free treatment. Finally, through September 30, 2004, textile articles made in those AGOA countries with a per capita gross national product of less than $1,500 a year in 1998 are also eligible for duty-free treatment.

Caribbean Basin Initiative

The Caribbean Basin Initiative (CBI) is a general term used to refer to several acts related to the Caribbean Basin region. These acts provide permanent duty-free treatment for a wide range of products from the 24 designated CBI beneficiary countries. However, to receive the textile benefits under the CBI, a country must also meet certain customs-related requirements. Currently, 14 countries are entitled to receive the textile benefits. The textile benefits expire on the earlier of September 30, 2008, or the date on which the Free Trade Area of the Americas (FTAA) or another free trade agreement becomes effective between the U.S. and the CBI beneficiary countries.

The CBI provides duty-free and quota-free treatment to apparel and textile articles made in the Caribbean Basin region and imported directly into U.S. customs territory. It applies to apparel assembled, or assembled and further processed, in the CBI countries from fabrics formed and cut in the U.S. from American yarns, apparel cut and assembled with American thread from fabrics formed in the U.S. from American yarns, and knitted or crocheted apparel cut and assembled from fabrics formed in the U.S. from American yarn and thread. Subject to an annual cap, the duty-free treatment also applies to knit-to-shape apparel from American yarn and knit apparel cut and assembled from regional or American fabrics from American yarns, and non-underwear T-shirts made of regional fabrics from American yarn. Additionally, the duty-free and quota-free treatment also applies to brassieres, apparel made from fabrics or yarns in short supply in the U.S. and other NAFTA countries, certain handloomed, handmade or folklore articles, and luggage from fabrics formed in the U.S. from American yarn. Therefore, with certain exceptions, the preferential treatment requires the use of American yarns.

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) is a comprehensive trade agreement entered into by the governments of Canada, Mexico and the U.S. It provides for the elimination of tariff and non-tariff barriers within specified time periods for products that meet the NAFTA rules of origin. On January 1, 2003, all NAFTA-originating goods became duty-free. Import quotas in the U.S. were lifted on January 1, 2004. Goods that do not originate in the NAFTA territory may enter the U.S. free of duty and quota requirements if they qualify under the Mexican Special Regime for certain goods assembled in Mexico from U.S. formed and cut components. If the goods are non-originating, they may still be entitled to the NAFTA reduced duty rates even though they may be subject to quota and textile visa requirements.

NAFTA provides four rules of origin. Eligible goods must be (1) wholly obtained or produced entirely in the territory of Canada, Mexico and the U.S., (2) transformed in the territory meeting tariff change rules, (3) produced entirely in the territory exclusively from originating materials, or (4) produced entirely in the territory if one or more of the non-originating materials constitutes "parts" used in the production of such goods.

As applied to textile articles, the industry often uses four shorthand ways of describing the basic rules of origin: the "fiber forward" rule (requires that the fiber be formed in the NAFTA territory); the "yarn forward" rule (requiring NAFTA-originating yarn); the "fabric forward" rule (requires that fabric be formed in the territory); and the "cut and sewn" rule (requires that the cutting and sewing of the finished articles be in the territory). In general, the rule of origin for yarn is fiber forward, and the rule of origin for fabric and apparel is yarn forward, with certain exceptions. As long as the particular goods are originating in the NAFTA territory, the goods will be quota-free and duty-free when they enter U.S. customs territory.

U.S.-Singapore Free Trade Agreement

The U.S.-Singapore Free Trade Agreement (US-SFTA) was entered into on May 6, 2003. This is the first free trade agreement the U.S. has entered into with an Asian country. On December 31, 2003, the US-SFTA was implemented for goods entered or withdrawn from warehouse for consumption on or after January 1, 2004. There is no set expiration date for the US-SFTA.

The US-SFTA provides that each country shall accord national treatment to the goods of the other country and shall progressively eliminate its customs duties on originating goods of the other country. Under the agreement, Singapore guarantees zero tariffs immediately on all American products and ensures that it will not increase duties on any American products. Most Singaporean products will enter the U.S. duty-free upon the effective date of the US-SFTA, and the remaining tariffs on the most sensitive products will be phased out over a 10-year period.

The rule of origin under the US-SFTA is very similar to that under NAFTA. A non-textile good qualifies for preferential tariff treatment if (1) the good is wholly obtained or produced entirely in Singapore and/or the U.S., (2) each non-originating material used in the production of the good undergoes an applicable tariff shift, or the good satisfies applicable regional value content or other requirements, or (3) the goods are certain information technology and medical products imported from Singapore.

Textile and apparel products will be duty-free immediately if they satisfy the US-SFTA's rules of origin requirement. The rule of origin for yarn is generally "fiber forward," requiring that the fiber originate in Singapore or the U.S. The rule of origin for fabric and apparel is essentially "yarn forward." Therefore, to qualify for the preferential tariff treatment, the product must have been cut (or knit to shape) and sewn or otherwise assembled in Singapore from yarn or fabric made from American or Singaporean yarn. Textile and apparel products may also be deemed originating goods if they contain only de minimis quantities of non-originating fibers or yarns, or if the fabric or yarn is in short supply in the U.S. Additionally, a certain amount of non-originating apparel products of cotton and man-made fibers are allowed to enter the U.S. under a reduced duty rate. To address any potential disruption and damage to American industries, the US-SFTA also provides certain safeguard measures for textile and apparel imports. The authority to provide this safeguard relief expires 10 years after the textile and apparel provisions of the US-SFTA take effect.

U.S.-Chile Free Trade Agreement

The U.S.-Chile Free Trade Agreement (US-CFTA) was entered into on June 6, 2003. This is the first free trade agreement between the U.S. and a South American country. It was implemented on December 31, 2003, for goods entered or withdrawn from warehouse for consumption on or after January 1, 2004. Over 85% of bilateral trade in consumer and industrial products became duty-free when the US-CFTA became effective, and most remaining tariffs will be eliminated within four years.

The rules of origin under the US-CFTA are very similar to the rules of origin under the US-SFTA for both non-textile and textile products. Additionally, as in the US-SFTA, the US-CFTA provides certain safeguard measures against textile and apparel imports. The safeguard measures expire eight years after the date when duties on the articles were eliminated.

The China Textile Safeguard

The World Trade Organization (WTO) mandates that textile quotas and importing countries' discrimination between exporters be eliminated by January 1, 2005. One challenge the textile and apparel industry faces is the increasing imports of textile and apparel products from China since China became a member of the WTO. To address this issue, China's WTO accession package contains a textile safeguard provision. The safeguard permits the U.S. and other WTO members to impose restraints on textile imports from China that threaten to "impede the orderly development of trade" in these products. A restraint cannot extend beyond 12 months unless the WTO member reapplies for imposition of the restraint or the restraint is otherwise agreed upon between the WTO member and China. The safeguard provision is effective until December 31, 2008. The U.S. invoked the safeguard provision on December 23, 2003, by requesting consultations with China and establishing 12-month import limits with respect to knit fabric, brassieres and other body-supporting garments, and cotton and man-made fiber dressing gowns and robes.

Trade Agreements — Beneficial but Complex

This article is a brief summary of the different acts and agreements that provide duty-free or other preferential treatment for the import of products, including certain textile products. These trade benefits generally only apply to textile and apparel articles that satisfy the pertinent rules of origin. The requirements for eligibility are very complex and technical. Countries and articles are periodically added to or removed from the eligible countries and products lists. Duty rates and quota limits can change from time to time. Importers and exporters are strongly advised to seek the advice of import/export lawyers, customs brokers and consultants to determine if a certain product qualifies for a special trade agreement duty rate and the applicable duty rate and quota restrictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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