Pellerano & Herrera The Pellerano & Herrera Foundation

Textile Law Has Big Impact On The Caribbean

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Last year, the United States Congress passed the Trade and Development Act of 2000. The law was intended in large measure to promote the economic development of the Caribbean region by expanding trade relations between the U.S. and the countries of this area. Although it may be too early to be certain, it would appear that the law is, in fact, having this beneficial result.

Legal Background
More than 25 years ago, Congress passed the Trade Act of 1974, establishing the Generalized System of Preferences (GSP). The GSP grants developing countries throughout the world, including Caribbean countries, preferential access rights with respect to a wide range of manufactured and semi-manufactured products that may enter the United States without paying custom duties.

In 1983, the Caribbean Basin Initiative (CBI) allowed certain Caribbean nations to benefit from a preferential regime far greater than that provided by the GSP. Since then, most of the export products of the area have been exempted from tariff barriers when entering the U.S. Under the CBI, and its further expansion in 1986 (CBI II), products originating in one or more CBI countries (apart from textiles/apparels, footwear, petroleum, tuna, and watches) may freely enter the U.S. provided that such products have been wholly obtained, produced, or manufactured in one or more CBI countries and exported directly to the United States.
In addition, a special access program (SAP) is in effect for apparel assembled in a CBI country and imported under the "production sharing" or "offshore production" tariff, which applies regular duty rates to a duty-base excluding the value of U.S. components provided the apparel is assembled from fabric formed and cut in the United States.

For many years, thanks to this preferential tariff treatment, textile exports from the Caribbean to the U.S. showed continued expansion and contributed to the development of the apparel industry and the economic growth of Caribbean countries.

In 1994, however, this situation changed drastically with the implementation of the North American Free Trade Agreement (NAFTA). NAFTA granted commercial benefits to Mexico that were much wider than those provided Caribbean countries under the CBI. NAFTA gradually eliminated tariff barriers to Mexican textile products, while textiles originating in CBI countries continued to be subject to tariffs, as well as to import quotas.

The adverse effects of NAFTA were felt rapidly by the Caribbean economies. A report prepared by the Dominican Republic's National Free Zone Council indicated that by 1996, Mexican exports to the U.S. were growing at an annual rate of 37 per cent while Caribbean exports grew only by 10 per cent; before NAFTA, the rates had been more or less the same.

The Trade and Development Act of 2000 implements textile parity on behalf of CBI countries. In particular, the new law exempts textile products made with U.S. materials from the payment of custom duties and allows them to freely enter the U.S. under the conditions set forth in the law.
In other words, the new legislation grants Caribbean countries parity with Mexico, thus allowing these nations to benefit, with respect to textiles and other products, from a tariff treatment similar to the one granted to Mexico under NAFTA. This should allow Caribbean countries to compete with Mexico as they had before NAFTA.

Beneficiary Countries
The countries that benefit from textile parity are the countries of the Central American Economic Integration System (Costa Rica, El Salvador, Honduras, Nicaragua, and Guatemala) and Caribbean islands including Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Montserrat, Netherlands Antilles, Panama, St. Christopher and Nevis, St. Lucia, St. Vincent and The Grenadines, and Trinidad and Tobago.

It is important to note that the law sets forth certain requirements with which these countries must comply to make their products eligible to enjoy the law's preferential tariff treatment. Indeed, each of these countries first must be designated a beneficiary country under the law by the President of the United States, who can make such a designation only after verifying that each country meets certain requirements. (The President also may withdraw or suspend the designation of any CBI country as a beneficiary country on a showing that the country does not continue to satisfy the eligibility criteria set forth in the law.)

Rules Of Origin
The new law provides preferential tariff treatment for certain specified categories of textile apparels, including certain apparel assembled, assembled and processed, and cut and assembled in CBI countries as well as certain knit apparel and apparel made with fabric or yarn not available in the U.S.

Importantly, two different types of origin rules must be taken into account to determine whether a product is eligible for preferential treatment: those that provide when a product has been manufactured in a CBI country and those that provide when such a product has been manufactured with materials coming from the United States.

In general, a textile product has been obtained in a CBI country when all of its components have suffered a substantial transformation entailing a change in the respective tariff treatment of each of the components. The product must comply with the rules of origin set forth in Chapter 4 of NAFTA, which are somewhat stricter that those applicable under the CBI. The new law extends the application of this chapter to CBI countries, providing that for such purposes CBI countries shall be considered as a part of NAFTA in the same way as Mexico is so considered.

The law provides, however, that a product may have foreign components (not originating in a CBI country or the U.S.), such as thread, buttons, decorative tape, lace, zippers, and labels, so long as these components do not exceed 25 per cent of the total cost of the product components.

On the other hand, apparel must be made out of fabric wholly made in the U.S. from yarn wholly produced in the U.S., apart from yarn or fiber not exceeding 7 per cent of the total weight of the product, other than elastomeric yarn, which must always be wholly produced in the U.S. Furthermore, fabrics may contain nylon filament yarn originating from Mexico or Canada.

Procedures And Penalties
The law establishes certain procedures that must be complied with, and penalties for breach of those rules.

For one thing, an exporter of products eligible for preferential treatment must provide each U.S. importer with a certificate of origin evidencing that the product has been produced in a CBI beneficiary country and that such product complies with the relevant origin rules.

In this regard, CBI countries must set custom controls comparable to those provided under Chapter 5 of NAFTA. For instance, they must regulate the issuance of certificates of origin by exporters, who should be obliged to give notice thereof to custom authorities and be subject to sanctions in the event of having made false or wrong declarations.
Textile parity has been adopted for the benefit of CBI countries, and thus applies only when the exported products comply with the applicable origin rules.

Therefore, transshipment, which is the claiming of preferential treatment for a textile or apparel article on the basis of material false information concerning the country of origin, manufacture, processing, or assembly of the article, is subject to sanctions at both the exporter and country level.

Exporters that engage in such activities may be subjected to the withdrawal of trade benefits for two years. Furthermore, CBI countries that do not take appropriate measures to prevent such activities from taking place in their territory may be subject to a reduction in the quantities of apparel that may be exported to the U.S. from such country, in an amount equal to up to three times the quantity of transshipped articles.

Effects Of Textile Parity
In terms of volume of exports and production capacity, the Dominican Republic is probably the country that will obtain the largest advantage from textile parity; the textile industry is now expected to grow by 20 to 30 per cent.

The Dominican textile industry will benefit mainly from the categories related to the cut, assembly, and processing of clothes, which will promote the return of companies that had moved to Mexico, as well as the moving of cutting and termination companies to the country. In fact, since the implementation of textile parity, the National Free Zone Council has received several applications from companies seeking to move to the Dominican Republic.

As to local fabric production, textile parity will strengthen the process of vertical integration that had started to develop, but which had been hindered by the lack of preferential access to the U.S. Already now there are a few companies in the country that are starting to produce the fabric they use in their production.

The expansion of the textile industry also will contribute to the development of other economic sectors, including complementary industries such as thread, zippers, and hangers producers, which already have shown an interest in establishing themselves in the country, as well industries such as banking, transportation, and telecommunications, which are likely to experience an increase in their commercial activities.

The Trade and Development Act certainly is an example of a law that has had, and is likely to continue to have, important practical ramifications for individuals and businesses, domestically and internationally.