Comment: The US-Colombia trade pact two-step
By Steve Lamar | 15 May 2012
The US-Colombia Free Trade Agreement comes into force today (15 May) - but, as in so many cases, the disruptive nature of US trade policies means all is not quite what it seems. Here Steve Lamar, executive vice president of the American Apparel & Footwear Association (AAFA), cautions the US apparel and footwear industry about the immediate rule changes impacting the supply chain.
It is an old adage in Washington that it is hard to take two steps forward without also taking one step back.
The 15 May entry into force of the US-Colombia Free Trade Agreement (FTA) provides the US apparel industry with a front row seat on this particular Washington two-step.
To be clear, the Washington trade community is excited about the entry into force of this FTA. The Colombia FTA is a much-delayed and hard fought trade agreement that will provide for a permanent, two-way trade relationship between the United States and Colombia.
Among other things, it means that the trading community will no longer need to depend upon the on-again, off-again renewals by Congress that created so much uncertainty in the past decade.
Unfortunately, some US apparel companies are approaching this entry into force date as a mixed blessing, and with a certain level of anxiety because of a confluence of three developments.
First, the Administration announced in mid-April that the FTA would enter into force on 15 May - only a month later. This sudden announcement, of course, was made in Cartagena during the Summit of the Americas.
While there had been rumours in the days immediately before that weekend that a Colombia FTA announcement was possible, the conventional wisdom just a week or so earlier was that the FTA would not enter into force until much later in 2012, partly because the Colombian Courts needed to approve several of the IPR related measures. Some sceptics figured it would not enter into force until 2013 so the President could punt the issue until after the election.
Second, Colombia's access to the United States under the Andean Trade Preferences Act (ATPA), the basis of the current US-Colombian apparel partnership, is structured to turn off the second the Colombia FTA is scheduled to turn on.
In contrast, there were nearly two years between the entry into force of the Peru FTA (February 2009) and the expiration of the Andean agreement with respect to Peru (December 2010).
The on-off nature of the Andean-FTA transition with respect to Colombia was something about which we had warned over the past few years. While trade policy can apparently turn on a dime, US supply chains cannot. We had been successful in securing a decent transition for Peru. Unfortunately, by the time that decision came around for Colombia, policy makers were uninterested in the same arguments and simply wanted a clean break.
Third, the first two issues alone or together might not be so much of a problem if it weren't for the third issue - namely the slightly different rules of origin (and customs entry procedures) between the Colombian Andean and the Colombian FTA agreements.
Some of the biggest issues here are in apparel. Although both programs feature a yarn-forward approach, the assessment of that yarn-forward provision is different in the Andean (entire garment with a 25% allowance for foreign findings and trimmings) and the FTA (the component that confers the essential character).
In some cases, the rule of origin (ROO) becomes a bit more flexible as we move from the Andean to the FTA (for example, the de minimis allowance goes from 7% to 10%; the bra rule goes from a 75% value-added to a simple cut and sew rule). But in some cases, the ROO becomes more restrictive. Three of the most problematic new restrictions are:
- the elastomeric origination requirement (including in de minimis),
- the sewing thread requirement, and
- the elastic strip requirement.
Under the Andean provisions, sewing thread and elastic strips are considered findings/trimmings and so are only restricted by the 25% foreign findings and trimmings cap. In practical terms, this means there is no origination requirement under the Andean program. Likewise, there was no restriction for elastomeric under the Andean program. Under the Colombia FTA, however, all three have to originate in either the US or Colombia.
When we combine the sudden entry into force, the lack of transition, and the impact of the new ROO restrictions we end up with some pretty significant problems. For example, otherwise qualifying garments made with Central American sewing thread will be acceptable when imported into the US from Colombia on 14 May. But that same product, when imported into the US on 15 May is not eligible for duty free treatment.
Transition or warning would have allowed companies more of a chance to exhaust any inventories of non-qualifying thread (or elastomerics or elastic strips) and prepare for the more restrictive approach. But in this case, we received neither. We are already hearing stories of US apparel companies who followed the rules under the Andean program to secure duty free treatment only to learn that they will now have to pay duties because those garments will be ineligible under the Colombia FTA.
We continue to look for short and longer term solutions to this problem. Until then, we offer this commentary, which will perhaps be a guide for future trade policy debates: Trade liberalisation should be a continual and predictable process. Unfortunately for our friends in Colombia, and our members who do business there, the only thing that has been continual and predictable is the decline of the Colombian industry brought about by the disruptive nature of US trade policies.
Our hope is that the Colombia FTA, notwithstanding its inauspicious beginnings, will eventually serve as a stable platform through which long term trade and investment can flourish.
This article first appeared in the American Apparel & Footwear Association's Political Trends blog. The AAFA is the national trade association representing apparel, footwear and other sewn products companies, and their suppliers, which compete in the global market. Click here to visit the AAFA website.
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