Full implications for nonwovens remain to be seen

Moves made to finalize CAFTA: full implications for nonwovens remain to be seen

Peter Mayberry

President Bush officially notified Congress on February 20 of his intent to sign a Free Trade Agreement with five Central American nations. These negotiations began in January 2003, and the deal has come to be known as the U.S.-Central America Free Trade Agreement (CAFTA). The five Central American countries participating in the CAFTA negotiations with the U.S. include El Salvador, Guatemala, Honduras, Nicaragua and Costa Rica.

In announcing the completion of negotiations, the Office of the U.S. Trade Representative (USTR) said the agreement “will strip away barriers to trade, eliminate tariffs, open markets, and promote investment, economic growth and opportunity.” Indeed, with annual U.S. exports to Central America exceeding $9 billion, a free trade pact with the region could bring significant prospects for U.S businesses, and the deal could be expanded further. These predictions were based on the fact that USTR launched negotiations with the Dominican Republic early this year with the intent of eventually integrating a sixth nation into the CAFTA agreement. Although the discussions with the Dominican Republic are ongoing, at press time U.S. officials were hoping to conclude the talks by the end of March.

While INDA, Association of the Nonwoven Fabrics Industry, Cary, NC, generally believes that free trade pacts such as the CAFTA offer opportunities to expand into new markets and redress existing imbalances in the international trade of nonwovens, it also recognizes the fact that–in broad sweeping agreements like this one–the devil is often in the details. To get a better sense of just what a U.S.-Central America Free Trade Agreement might mean to the nonwovens industry, therefore, it is important to review provisions of the agreement that could impact the industry, two of the more significant ones being the tariff elimination schedule and the rules of origin.

CAFTA Provisions

According to USTR, duties will be immediately removed on more than 80% of U.S. exports of consumer and industrial products to the five CAFTA countries as soon as the agreement is ratified, and 85% will be duty-free within five years. All remaining tariffs will be eliminated within 10 years. Specifically, all tariffs on textile and apparel items (goods falling under Chapters 50 through 63 of the Harmonized Tariff Schedule or HTS) would be eliminated immediately upon enactment of the agreement provided they meet the specified rule of origin. These benefits would be applied retroactively, beginning January 1, 2004.

With regard to Rules of Origin for textiles and apparel, CAFTA primarily uses a “yarn-forward” tariff-shift rule, similar to the one used in the North American Free Trade Agreement (NAFTA). This essentially means that the yarn used to form the fabric must originate in a CAFTA country in order for the finished good to qualify for free trade benefits. But, for textile goods found in Chapters 61, 62 and 63 of the HTS, the yarn-forward rule only applies to the component that confers the essential character of the article. This essential character rule, therefore, would impact any number of finished products made from nonwovens falling under Chapters 62 and 63, such as nonwoven disposable surgical gowns and drapes (described by HTS sub-headings 6210.10 and 6307.90, respectively); nonwoven tents and tarpaulins (falling under HTS heading 6306) and certain bags and containers made from nonwovens used for packing goods (HTS heading 6305), to name just a few.

Moreover, the CAFTA text contains several exceptions to the yarn-forward rule. All wool articles, for instance, are subject to a “fabric-forward” rule of origin (i.e. the fabric determines the origin of the product). Additionally, items found in Chapters 61, 62 and 63 and containing certain cotton or manmade fiber sewing threads–or certain fabrics containing elastomeric yarns–will be considered “originating” only when the threads or fabrics are wholly formed in the territory of one or more of the parties to the agreement. Like the NAFTA, the CAFTA also contains de minimis provisions that allow products to qualify for free trade benefits even if they contain a small percentage of component material that was not produced in one of the participating countries. While NAFTA only allows for 7% non-originating inputs, the CAFTA de minimis is 10%.

Also noteworthy is that most nonwovens listed outside the textile and apparel chapters of the Harmonized Tariff Schedule–nonwoven bandages and medical dressings (HTS heading 3005), nonwoven wall and ceiling coverings (HTS heading 3918) and nonwoven filtration devices (HTS heading 8421), to name just a few–will meet CAFTA rules of origin if they simply undergo a “Change in Tariff Classification” or “Change in Tariff Heading” rule of origin. Basically this means they will be eligible for duty-free treatment as long as they have undergone any sort of processing within the borders of a CAFTA participant.

This is a far easier standard to meet than the yarn-forward rule. In some instances, items such as nonwoven gas and liquid filtration devices (described by HTS subheading 8421.99) and protective mask components (found under HTS heading 9020) are able to qualify for preferential benefits by satisfying either the requisite tariff classification shift or by meeting regional value content requirements spelled out in the CAFTA. This basically means that these goods can be transported duty free provided they contain a pre-specified percentage of component materials from the CAFTA region.

CAFTA also contains an alternate provision allowing textile and apparel goods in Chapters 61 through 63, which would otherwise be considered ineligible for preferential treatment to receive reduced duty rates. These rates are calculated by subtracting the value of the fabric or knit to shape components from the value of the assembled good. To qualify for the reduced tariff, goods must be sewn or otherwise assembled in CAFTA countries with U.S. thread, from fabrics wholly formed in the U.S. and cut in one or more of the CAFTA countries or from components knit to shape in the U.S.

Like the NAFTA, the U.S.-Central America PTA contains a list of fabrics, fibers and yarns deemed to be in “short supply” within the six CAFTA countries. Because these items are “not available in commercial quantities,” they may be obtained from outside the CAFTA region and still considered originating. Presently, there are 43 items appearing on the CAFTA short supply list, but the agreement contains an enhanced short supply process that allows additional fabrics, fibers and yarns to be added to the short supply list both prior to and after the Agreement’s entry into force.

There are also “cumulation” provisions included in the CAFTA which allow duty-free benefits to be granted to some apparel products (limited to those goods falling under HTS Chapter 62) made in Central America that use inputs from NAFTA partners Mexico and Canada, subject to certain limits.

Additionally, Nicaragua’s lower level of economic development–compared to the other CAFTA countries–has been granted it Tariff Preference Levels (TPLs) for all fabrics (except wool), which means it would be allowed to purchase yarn, fabrics and other textile manufacturing components from low-cost countries such as China, utilize those components in assembling the textiles and export the finished goods to the U.S. completely duty-free. The Nicaraguan TPLs would be limited to 100 million square meter equivalents for each of the first five years of the agreement. This limit would be phased down to zero during the next five years.

CAFTA also contains provisions that allow companies to rebate, defer or reduce duties paid on material inputs contingent upon exportation of the processed or finished goods. Under the draft CAFTA text, in fact, full duty drawback/deferral is permitted on all products.

Political Future

Under rules established in the Trade Act of 2002 (the same legislation that contains Presidential trade promotion authority or TPA), the Bush Administration’s notification of its intent to sign the CAFTA started a 90-day clock during which Congress may review the draft agreement language. At the end of 90 days, the President is permitted to sign the agreement and forward implementing legislation to Capitol Hill, although there is no deadline for White House submission of a bill to implement a trade agreement. Under expedited procedures outlined in TPA, once Congress has received the implementing bill, the House of Representatives must act within 60 days and the Senate within 90 days, by voting to reject or approve the free trade legislation, without amendment.

Although this timeline suggests a Congressional vote on the CAFTA could come as early as summer 2004, observers question the Bush Administration’s resolve in seeking a vote on CAFTA in the middle of the Presidential election. Weaknesses in the domestic economy, the U.S. labor market and the recent focus on the outsourcing of domestic jobs have all made free trade agreements a political hot potato.

Even USTR Robert Zoellick has conceded that seeking Congressional approval for CAFTA in the current political climate would be more difficult than getting positive votes for FTAs with Morocco and Australia. According to a recent reports, in fact, Ambassador Zoellick has been quoted as saying “The best we can do [is] bring home agreements that get the broadest support,” adding that the White House hopes Congress can “take up as many of these agreements as possible,” while preparing those that cannot pass Congress this year for consideration in 2005.

[Note. The above description of the provisions contained in the U.S.-Central America Free Trade Agreement is an unofficial summary, the U.S. government text is the only official text available. The draft text of the agreement has been made available to the public on the website of the Office of the USTR at http://www.ustr.gov/new/ffa/Cafta/text/in dex.htm.]

Peter Mayberry

INDA Director of Governmental Affairs

and

Jessica Franken

INDA Government Affairs Associate

Peter Mayberry’s column appears monthly in NONWOVENS INDUSTRY.

COPYRIGHT 2004 Rodman Publications, Inc.

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