New U.S. Trade Act to Help Caribbean Nations Overcome NAFTA Disadvantage
By V. James Adduci II
Published in the North American Free Trade and Investment Report (May 31, 2000)
After several failed attempts, countries that are eligible to participate in the Caribbean Basin Economic Recovery Act (“CBERA”) (also known as the Caribbean Basin Initiative or “CBI”), will move one step closer to gaining equality with Mexico effective October 1, 2000.1 In May of this year, Congress passed and the President signed into law the Trade and Development Act of 2000, with the goal of enhancing trade with the Caribbean and sub-Saharan countries.2 Of particular interest is that “The Caribbean Basin Trade Partnership Act” expands the benefits of the CBI program with respect to textile and apparel articles.
Up until this time, Caribbean nations had been suffering a disadvantage with regard to textiles and apparel due largely to the enactment of the North American Free Trade Agreement (“NAFTA”). Prior to the enactment of NAFTA, CBI tariff preferences had allowed many Caribbean products to compete successfully against comparable Mexican products for U.S. market share. Under the CBI, eligible articles the growth, product, or manufacture of a designated beneficiary country, which are imported directly to the United States from a beneficiary country, qualify for duty-free treatment provided they meet certain criteria. However, also under CBI, and despite its goal to assist the region in modernizing the agricultural sector and encourage development of higher-value exports such as manufactured products, textile and apparel articles subject to textile agreements were generally excluded from eligibility.
The impact of NAFTA quickly became evident in the textile and apparel area. Under NAFTA, Mexico immediately benefited from the elimination of quotas and the “yarn-forward” rules of origin and, thus, the CBI countries found themselves at a disadvantage.3 The intent behind the new expansion of the CBI program was to address the trade and investment departure that occurred in the CBI beneficiary countries when NAFTA was implemented. Estimates for El Salvador alone, suggest that the expanded program could create 100,000 new apparel industry jobs over the next three to four years and triple textile exports to between $3.5 billion and $4 billion, according to the Ambassador from El Salvador.4
The Congressional findings set forth in the legislation indicate that Congress sees expansion of the program as a way to provide economic relief to the Caribbean Basin for losses resulting from natural disasters. Additionally, and perhaps more importantly, Congress wanted to reward the region for its commitment to join a Free Trade Area of the Americas by no later than 2005. The new law extends preferential tariff treatment to textile handicrafts and all non-textile products currently excluded from preferential treatment under the CBI program.
Some of the highlights of the new law in the areas of textiles and apparel are:
• CBI beneficiary countries will get duty-free and quota-free access to the U.S. market for apparel and textile luggage products made with U.S. fabric and
U.S. yarn, or from fabrics cut in a CBI country using U.S. sewing thread.
• Apparel made from regional fabric also qualifies for benefits but are subject to caps. Specifically, knit-to-shape apparel (excluding socks) and knit apparel (excluding outerwear T-shirts) made from regional CBI fabric is eligible for duty- free and quota-free access up to a cap of 250 million square meter equivalents for the first year with a growth rate of 16 percent per year for the next three years.
• Outerwear T-shirts from the CBI region are also eligible for duty-free and quota free access up to a cap of 4.2 million dozen, with a provision for growth.
• The NAFTA 7 percent de minimus rule is included except for elastomaric yarn, which must be fully formed in the U.S.
• Apparel made from fiber, fabric or yarn that has been determined in accordance with the NAFTA to not be supplied by the U.S. domestic industry in commercial quantities in a timely manner may be entered duty and quota free. Interested parties can petition to include additional products if yarns or fabrics cannot be supplied by U.S. industry in commercial quantities in a timely manner.
• Brassieres cut and sewn in a CBI country and/or U.S. will be duty and quota-free for a one year period (10/1/00 to 9/30/01). Thereafter, brassieres must contain U.S. fabric equal to or greater than 75 percent of the aggregate Customs value of the fabric in the article. Beginning October 1, 2001, U.S. Customs will audit these importations to insure compliance. Violators will be barred from receiving CBI benefits for the next year until the aggregate cost of the U.S. fabric is at least 85 percent of the aggregate declared Customs value.
• Existing quotas for CBI countries will remain in force until 2005 for apparel that does not meet these new requirements.
• Up to 25 percent of the cost of the components of the assembled product can be derived from foreign findings and trimmings, and certain foreign interlinings.
• Safeguards against import surges on certain textile products and tariff benefits may be modified under the same provisions in NAFTA.
However, the new benefits do not come without some cost to the beneficiary countries. When the CBI was enacted in 1983, beneficiary countries were expected to protect intellectual property rights, allow U.S. companies access to domestic markets, protect U.S. investments, and provide reasonable working conditions to its nationals. The President could waive these requirements if he determined it was in the United States’ economic or security interests to
designate a country as a beneficiary. However, the reality has been that despite reports of non-adherence to these requirements, only one beneficiary country has ever been dropped from the CBI program.5
The expanded CBI program, however, has been given some real teeth. The conference report that accompanies the new law requires that beneficiary countries implement strict Customs procedures to protect against transshipment. If an exporter is found to have engaged
in illegal transshipment of textile or apparel products from a CBI beneficiary country, the law requires that the U.S. deny all benefits under the CBI program to that exporter for a period of two years. Additionally, U.S. Customs can triple charge a CBI country’s quota for illegal transshipment if the country is not taking appropriate action to prevent transshipments. Finally, beneficiary countries are required to collect data on textile and apparel production and to demonstrate that an effective visa system is in place in order to qualify for benefits.
There is an expectation, in the textile industry, that the new law will lead to increased business security after global textile quotas are phased out in 2005.6 Apparel companies have already indicated that, as a result of this expansion of the CBI program, they will shift production from Asia to the Caribbean and it is expected that $1.42 billion in duty savings would be realized over five years.7 However, it is widely held that Asian exporters are already seeing their share of exports decrease. This is especially true for the “big four” in the area of apparel exports: Hong Kong, China, Taiwan and Korea.8 The perception is that this decrease in market share has a
direct correlation to the increase in regional trading initiatives such as CBI. Additionally, for the U.S. market, factors such as geographic proximity, economic stability and the expansion of free trade programs have led to a shift of apparel production from Asia to Mexico and the CBI beneficiary countries.
Regarding trade with sub-Saharan African countries, this portion of the law also goes into effect on October 1, 2000. The “African Growth and Opportunity Act,” as it is called, is the culmination of a five-year effort that expands the generalized system of preferences to provide duty-free treatment for almost all products from sub-Saharan Africa. Forty-eight countries in sub-Saharan Africa are eligible to participate in the program. However, the program requires
that specific criteria be met prior to designation as a beneficiary country.9 In order to satisfy the criteria, eligible beneficiary countries must already have safeguards in place or have begun to take steps to meet the criteria. Generally, the criteria to be met covers the areas of workers’
and human rights, combating government corruption, elimination of trade barriers with respect to U.S. goods, and observance of the rules of law.
Some of the highlights of the new program in the textile and apparel area are:
• All existing quotas on Mauritius and Kenya will be eliminated even when third country fabrics are used. However, an effective visa system must be in place.
• For a four-year period, garments made by least developed countries from third country fabric (e.g.,Hong Kong) qualifies for duty-free treatment, subject to an overall cap for garments made from regional fabric. “Least developed” countries are defined as those countries with a gross domestic product of less than $1,500 per capita.
• Congress has earmarked $5,894,913 to be appropriated for the purpose of sending verification teams to at least four countries each year, and to assist beneficiary countries to develop and implement visa systems, legislation, regulations and train officials to prevent transshipments.
• Exporters found to have illegally transshipped articles are banned from eligibility for five years.
• Duty-free treatment for apparel wholly assembled and cut in sub-Saharan Africa from regional fabrics of U.S. or Sub-Saharan yarns in an amount equal to 1.5 percent of total U.S. apparel imports in the most recent 12-month period. This cap increases to 3.5 percent of total U.S. imports in the previous 12-month period over an eight-year period.
• There is an immediate elimination of duties on apparel made from fabrics wholly formed and cut in the U.S. of U.S. yarns, or cut in the region if U.S. sewing thread is used.
Congress’ intention of enacting this law is to encourage higher levels of trade and direct investment in the sub-Saharan region. The hope is that the program will eventually aid in the development of positive economic and political developments in this region. Currently, apparel imports from the sub-Saharan region of Africa represent less than 1 percent of total apparel imports into the United States. According to the White House, the apparel trade could experience a surge of up to $4.2 billion by the year 2008 from the current $250 million.10 However, only time will tell if these expectations are met.
The reality of the matter is that there are enormous obstacles to overcome before sub-Saharan countries can really take advantage of such a program. More importantly, the region has one unchangeable factor working against it – distance. As the cost of shipping fabric to Africa and returning finished apparel articles to the U.S. increases, the incentive to take advantage of this program decreases. If the status quo remains in the Caribbean, given its proximity, that region will probably always present a more attractive proposition for the U.S. market.
1. The CBERA was enacted, in 1983, not as much out of a need to offer economic support to our close neighbors but, rather, out of a response to the perception that the Soviet’s were gaining ground in our back yard. The belief was that if the United States promoted economic development and political stability in the region, the Soviet’s progress would be thwarted. Thus, the Caribbean became the beneficiary of this unilateral tariff preference program.
2. There are other miscellaneous provisions pertaining to wool fabric that are included in this new act. However, they are not included in this discussion.
3. “Yarn-forward” means that the yarn is spun and the fabric woven in the United States.
4. Adam Entous, “U.S. House Approves Africa-Centam Trade Bill,” Reuters, May 4, 2000.
5. In 1988 and 1990, Panama lost its benefits for failure to cooperate with the U.S. in the area of drug enforcement.
6. There is some debate in the trade industry as to what will happen to quotas in 2005. Some analysts predict that over 90 percent of apparel products will still be eligible for a quota in 2005. See Andrew Tanzer, “The Great Quota Hustle,” Forbes, March 6, 2000, p. 124.
7. Joanna Ramey, “House Passes Africa-CBI Trade Bill,”Women’s Wear Daily, May 5, 2000.
8. In recent years, the apparel trade has split into three large trading blocs: the U.S. is served by Mexico and CBI countries; Western Europe, which is served by Eastern
Europe and North Africa; and Japan, served by Southeast Asia. See Stephen E. Lamar, “The Apparel Industry and African Economic Development,” Law and Policy in International Business, Summer 1999.
9. As previously discussed, participation in CBI also requires that certain criteria must be met prior to designation as a beneficiary country. However, unlike CBI which allows the President to waive the criteria if it’s in this country’s best interest, the trade program with sub-Saharan Africa only gives the President discretion to terminate a participant if it is determined that the country is not making continued progress in meeting the applicable requirements.
10. Helene Cooper and David Rogers, “House Approves Africa Trade Bill, Which Is Seen as Proxy for China,” The Wall Street Journal, May 5, 2000.
May 31, 2000 issue of North American Free Trade and Investment Report, with permission of the publisher, WorldTrade Executive, Inc.