Overview of the Central America - Dominican Republic Free Trade Agreement Jonathan Fee and BJ Shannon Alston & Bird LLP

With the implementation of the U.S. Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) with respect to Costa Rica on January 1, 2009, CAFTA-DR's implementation is now complete. The United States President signed legislation to implement CAFTA-DR on August 2, 2005, but implementation took place on a rolling basis. CAFTA-DR took effect with respect to El Salvador on March 1, 2006, with respect to Honduras and Nicaragua on April 1, 2006, with respect to Guatemala on July 1, 2006, with respect to the Dominican Republic on March 1, 2007, and with respect to Costa Rica on January 1, 2009. CAFTA-DR gives immediate duty free treatment to most goods, including all textiles and apparel and textile luggage. Changes to the CAFTA-DR text were negotiated after the agreement was concluded to restrict the origin of pocket bag fabric in CAFTA-DR garments, as requested by U.S. legislators during the votes on the agreement's passage in the House and Senate, and to grant concessions to the other DR-CAFTA parties in return for agreement to the pocketing rule. The following summary also covers these changes.

Retroactivity

The CAFTA-DR text provides for retroactivity for apparel imports to January 1, 2004, which allows importers to apply for refunds of duties for imports of apparel that would have met CAFTA-DR's origin rules if CAFTA-DR had been in effect. CAFTA-DR's implementing legislation was amended in August 2006 to clarify, for goods co-produced in two or more CAFTA-DR countries, that retroactive refunds are also available during the period between the first and last implementation date of the co-producing countries. The deadline for requests for such refunds is 90 days after the date on which CAFTA-DR entered into force with respect to the last country, or approximately April 1, 2009. The tariff preference level (TPL) for certain apparel from Nicaragua, the special wool apparel provision for Costa Rica, and textile and apparel "cumulation" rules, discussed below, are not retroactive.

Textile and Apparel Rules of Origin

1. Yarn Forward and Other Tariff Shift Rules

All textile and apparel goods are immediately duty free from all CAFTA-DR countries if they satisfy CAFTA-DR's preferential rules of origin. The origin rules applicable to textiles and apparel are known as tariff shift rules. The most common is the "yarn forward" rule that first appeared in NAFTA. Yarn forward means that the component determining classification must be woven or knit in one or more CAFTA-DR countries with yarn spun or extruded in CAFTA-DR countries, and that the garment must be cut (or knit to shape) and assembled in CAFTA-DR countries. For example, a cotton t-shirt containing foreign cotton fiber will be yarn forward as long as the yarn is spun, the fabric is knit, and the t-shirt is cut and sewn in CAFTA-DR countries. Since the United States is itself a CAFTA-DR country, any of the processes required to be performed in CAFTA-DR countries can be performed in the United States.

Following NAFTA's example, CAFTA-DR provides that garments of yarns and fabrics not generally produced in the United States or the other CAFTA-DR countries, such as garments of silk or linen, are subject to a more lenient "single transformation" rule, under which they are treated as originating goods if they are cut and sewn in CAFTA-DR countries from fabric and yarn of any origin. Brassieres of any fabric are similarly subject to a single transformation rule. This is also identical with treatment of brassieres under NAFTA, and is simpler to use than the complicated brassiere rule under the Caribbean Basin Trade Partnership Act (CBTPA).

CAFTA-DR diverges from NAFTA in its treatment of several textile and apparel articles. For example, wool apparel and other articles of wool are originating under CAFTA-DR if they are "fabric forward," meaning that the yarn can be of any origin. CAFTA-DR also allows a single transformation origin rule for men's and boys' woven boxer shorts and woven pajamas, women's and girls' woven pajamas and negligees, certain woven girls' dresses, and certain textile luggage.

The CAFTA-DR countries also agreed to apply this more lenient single transformation rule to additional classifications of garments to compensate for the stricter rule for pocketing, discussed below. These single transformation rules and the pocketing rule took effect on August 15, 2008. The additional garments that are subject to a single transformation rule include certain infant dresses, certain women's and girls' cotton coats and suits, certain women's and girls' man-made fiber suits, certain men's dress shirts, and certain women's wool anoraks and windbreakers.

2. Application of Tariff Shift Rules to the Component Determining Classification

For apparel and other made up articles of Harmonized System (HS) Chapters 61, 62, and 63, tariff shift rules only apply to the component that determines the classification of the good (subject to the exceptions, described below, for visible linings, pocketing, sewing thread, and narrow elastic fabric). For apparel, this is usually the fabric component that gives the garment its "essential character," which is most often the fabric forming a garment's outer shell. Incidental fabric in the garment is therefore not subject to the applicable tariff shift rule and can therefore originate in non-CAFTA-DR countries. This exception eliminates the need for a "findings and trimmings" rule like the one found in CBTPA. This rule only allows CBTPA garments to incorporate very few, specific foreign articles, up to 25 percent of the value of all components (e.g., hooks and eyes, snaps, buttons, etc.); but CAFTA-DR generally allows unlimited foreign components, except that the fabric determining classification must of course be yarn forward or meet the relevant origin rule.

3. Additional Requirements for Visible Linings, Pocketing, Sewing Thread, and Narrow Elastic Fabric

For many garments with visible linings, a separate rule requires that certain types of visible lining fabric must be woven or knitted in the United States or one or more of the other CAFTA-DR countries. Additionally, since August 15, 2008, pocketing must be woven or knitted in CAFTA-DR countries from yarn spun or extruded in CAFTA-DR countries.

For all apparel and made up articles of Chapters 61, 62, and 63 containing cotton or man-made fiber sewing thread, the sewing thread must be formed and finished in the United States or one or more of the other CAFTA-DR countries. Sewing thread includes only plied yarns; the sewing thread rule does not apply to single yarn sewing thread. For any garment containing certain narrow woven or knitted elastic fabric of five percent or more elastomeric yarn, such fabric must be formed from yarn and finished in CAFTA-DR countries.

Garments made with short supply yarns or fabrics and garments subject to the recently negotiated single transformation rules are not subject to the visible lining, pocketing, sewing thread, or narrow elastic fabric rules.

4. De Minimis

Generally, up to 10 percent by weight of non-originating fibers or yarns in goods classified as textile and apparel articles can be non-originating without causing the finished article to lose its originating status. For apparel and certain made up articles containing more than one component, the de minimis allowance is 10 percent by weight of the component determining classification. As an exception to the de minimis allowance, CAFTA-DR provides that a good containing elastomeric yarn (except latex) will not be originating unless all elastomeric yarn in the component determining classification is originating, meaning that any elastomeric yarn must be spun or extruded in the United States or other CAFTA-DR countries.

5. Short Supply

Seventy-two yarns and fabrics were designated as short supply materials that are not commercially available in the CAFTA-DR countries. These materials can be used without disqualifying the garment from CAFTA-DR originating status. The list was a composite that included yarns and fabrics designated as such in NAFTA, the Andean Trade Partnership and Drug Eradication Act (ATPDEA), and CBTPA, plus yarns and fabrics that were added in the CAFTA-DR negotiations, after the negotiations but prior to implementation, and through commercial availability determinations.

CAFTA-DR also provides for the designation of new short supply articles at the request of interested entities. Such requests are approved upon a finding that such materials are not available in commercial quantities in a timely manner in the United States or the other CAFTA-DR countries, or in the absence of any objection from other interested entities. Updated information about new commercial availability determinations, including the current version of the short supply list, is available on CITA's website at www.otexa.ita.doc.gov.

Articles of Chapters 61 through 63 (which cover apparel and certain made up articles) will be treated as originating if they are cut and sewn or otherwise assembled in CAFTA-DR countries, and if the fabric of the outer shell (exclusive of collars and cuffs) is wholly of one or more of the following:

• short supply fabric,
  
  
• fabric that is formed in the United States or one or more of the other CAFTA-DR countries with short supply yarns,
  
  
• any combination of the foregoing fabrics and originating fabrics, which originating fabrics can contain de minimis yarns (except that elastomeric yarns must be formed in CAFTA-DR countries).

6. Safeguards

As in the case of safeguards against other goods, safeguard measures in the form of duties are allowed by any CAFTA-DR country if textile or apparel imports increase to a level that threatens or causes "serious damage" to domestic industry. Safeguards may not last more than three years or past the end of the "transition period," which is defined as five years after the entry into force of the agreement. Safeguards may be accompanied by concessions.

The United States imposed a safeguard on imports of certain socks from Honduras during the period from July 1, 2008 through December 31, 2008. During this period, cotton socks from Honduras, including tubes knit in the United States if toe closure occurred in Honduras, were subject to duty at an ad valorem rate of 5 percent.

7. Nicaragua Tariff Preference Level (TPL)

Nicaragua was granted a very broad TPL for certain non-originating apparel goods of cotton and man-made fibers, with a small sub-limit for certain non-originating wool garments. Goods made of wool were initially excluded, but certain men's wool sport coats in textile category 433 were added to the TPL in exchange for Nicaragua's agreement to the pocketing rules. If the goods subject to the TPL meet all other preferential treatment requirements in CAFTA-DR, and are "both cut or knit to shape, and sewn or otherwise assembled" in Nicaragua, then they are treated as though they are originating even if the apparel is made from fabric or yarn "produced or obtained outside the territory of the Parties." The limit on imports into the United States from Nicaragua under this TPL, during each of the first nine years after CAFTA-DR takes effect, is 100 million square meter equivalents (SME). The wool sport coats covered by the TPL have a sub-limit of 1.5 million SME within the overall TPL.

Moreover, at the time of Nicaragua's implementation of CAFTA-DR, Nicaragua and the United States agreed that, for each SME of certain cotton or man-made fiber woven trousers exported to the United States under the TPL, Nicaragua must export an equal quantity of trousers made with U.S. formed fabric of U.S. formed yarn. The trousers of U.S. fabric and the trousers of foreign fabric need not be of the same type of fabric, as long as both are covered by the applicable trousers classifications. This one-to-one purchasing rule applies only to the first 20 million SME of cotton trousers exported under the TPL during the first year. The cap will increase to 30 million SME in the second year, to 40 million SME in the third year, and to 50 million SME in the fourth year.

8. Costa Rica Wool Provision

Costa Rica was granted a special allowance for certain wool garments, including wool jackets, skirts, suits, and trousers. These apparel articles originally were eligible only for import at 50 percent of the general U.S. duty rates. But in exchange for Costa Rica's agreement to the pocketing rule, the United States agreed that the specified wool goods from Costa Rica would be eligible for duty free treatment. These garments must be "both cut and sewn or otherwise assembled" in Costa Rica, and they must comply with CAFTA-DR's special rules for visible lining fabric, pocketing fabric, sewing thread, and narrow elastic fabric. The preferential treatment is limited to imports into the United States of 500,000 SME annually from 2009 through 2018.

Also in exchange for agreement to the pocketing rule, Costa Rica was granted a TPL for an additional 500,000 SME in each year from 2009 through 2018 of tailored wool garments made of uncarded wool fiber or of wool yarn with a diameter of greater than 18.5 microns. Like garments made under Nicaragua's TPL, these garments must be cut and sewn or otherwise assembled in Costa Rica, but they are not subject to CAFTA-DR's visible lining fabric, pocketing fabric, sewing thread, or narrow elastic fabric rules. The United States and Costa Rica have agreed to meet before the end of 2018 to determine whether to extend or eliminate these programs.

9. Dominican Republic Two-for-One Rule

In exchange for the Dominican Republic's agreement to restrictions on the origin of pocketing fabric, the United States promised to pass legislation to implement a two-for-one rule for the Dominican Republic. Under this rule, which became effective November 25, 2008, one SME of qualifying apparel made with fabric of any origin may be imported free of duty into the United States from the Dominican Republic for every two SME of qualifying apparel produced in the Dominican Republic according to CAFTA-DR's ordinary yarn forward rules. Qualifying apparel articles, which must be cut and sewn or otherwise assembled in the Dominican Republic, include woven trousers, bib and brace overalls, breeches and shorts, skirts and divided skirts, suits, and suit-type jackets and trousers of chief weight of cotton (excluding denim).

Producers in the Dominican Republic may accumulate credits in an account with the U.S. Department of Commerce for the quantity of qualifying U.S. fabric that they purchase and export to the Dominican Republic on or after August 1, 2007. Producers may then exchange these credits for earned import allowance certificates for the duty-free entry of qualifying apparel articles.

10. Cumulation

Since August 15, 2008, cumulation has been allowed for Chapter 62 woven garments containing materials produced in Mexico, if the Mexican components would have qualified as originating if they had been produced in the United States or one or more of the other CAFTA-DR countries. (This means that, wherever CAFTA-DR yarn or fabric is required for these garments, yarn or fabric from Mexico can be used instead.) Canada is also eligible to participate in cumulation, but the Canada has not yet reached an agreement with the United States and the other CAFTA-DR countries.

Two limits apply. First, not more than 100 million SME of cumulated garments may be imported into the United States during the first year that cumulation is in effect. The limit also may be increased to 200 million SME after the first year, and may be increased to account for the Dominican Republic, which joined CAFTA-DR after negotiation of cumulation provisions in the original agreement.

Second, within the overall limit, CAFTA-DR creates sub-limits of 45 million SME for certain cotton or man-made fiber trousers or skirts, excluding blue denim garments, 20 million SME for certain blue denim garments, one million SME for certain wool apparel from the CAFTA-DR countries other than the Dominican Republic, and one million SME for certain wool apparel from the Dominican Republic.

11. Co-Production Between the Dominican Republic and Haiti

A special provision in the U.S. implementing legislation covers co-production between the Dominican Republic and Haiti. Recognizing that co-production of garments is an important feature of apparel production in the Dominican Republic and Haiti, the United States will provide CBTPA benefits for such production, notwithstanding the discontinuance of CBTPA benefits for other Dominican Republic merchandise.

12. Miscellaneous Textile and Apparel Rules

CAFTA-DR provides an alternative rule for apparel and made up articles of Chapters 61, 62, and 63 by which the United States will apply duty only to the value of an assembled good minus the value of the fabrics wholly formed in the United States or components knit to shape in the United States. Such goods must be sewn or otherwise assembled in CAFTA-DR countries from fabric wholly formed in the United States and cut in CAFTA-DR countries or knit to shape in the United States. Cotton or man-made fiber sewing thread used to assemble such garments must be wholly formed in the United States. Yarn in such garments can be of any origin. This generally means that such garments will be dutiable only on the value added in CAFTA-DR countries. For sets (generally consisting of two or more articles that go together and are packaged and marketed together, like a blouse with a matching scarf) to be originating, each good in the set must be an originating good, or the value of the non-originating components must not be more than ten percent of the value of the set.

CAFTA-DR incorporates a feature of the ATPDEA under which the presence of nylon filament yarns originating in Canada, Israel, or Mexico will not disqualify a textile or apparel good that is otherwise eligible for CAFTA-DR preferential treatment.