Textiles Other Than Certain Apparel And Certain Luggage

Andean Trade Promotion & Drug Eradication Act

What’s In, What’s Not:

A Practical Guide To the

New ATPA Preferences

Presented by:

Brenda A. Jacobs

Sidley Austin Brown & Wood LLP September 2002

Overview• Scope:

– IN: Covers any product not specifically excluded

– OUT: Excluded products: textiles other than certain apparel and certain luggage, rum and tafia, sugars, syrups and sugar-containing products subject to TRQs, tuna other than in flexible foil pouches

Overview

• Scope, continued:– PROBABLY: included unless identified as

“import sensitive”: Footwear, petroleum and petroleum products, watches and watch parts, handbags, luggage, flat goods, work gloves and leather wearing apparel

Overview

• When do benefits become available?– Upon enactment on August 6, previously

eligible products were once again duty-free• Retroactive duty-free treatment, for

previously eligible goods entered between December 5, 2001 and August 5, 2002

• But requests for refunds must be filed with U.S. Customs within 180 days of August 6.

Overview– New benefits won’t be available until Colombia

is designated as a beneficiary country and, for some products, until the import sensitivity review is completed, but may be retroactive to August 6• Reduced duty goods under the old ATPA

currently have no benefits

Overview

• Apparel tariff preference level (cap) effective October 1,

– BUT country designation has to occur first, as well as confirmation of NAFTA-like Customs procedures

Overview

• Benefits last only through December 31, 2006.

• The apparel cap lasts through September 30, 2007.– A seeming contradiction but the result: the

duty-free benefits under the cap expire 12/31/06.

ATPA Non-textile Benefits

• Some products are automatically duty-free

• Others will not be duty-free until a determination is made that they are not “import sensitive” in the context of imports from the region– But implementation could be retroactive.

• Import sensitivity review process is likely to take several months.

Import Sensitivity Review

• Import sensitivity review:

• Investigation by the U.S. International Trade Commission, which will make recommendations to the Trade Policy Staff Committee (chaired by the U.S. Trade Representative’s office)– Expect a USITC hearing and briefing process

Import Sensitivity Review

• Import sensitivity review, continued:

• TPSC may hold a hearing, too, and will make a recommendation to the President

• The President declares by Proclamation which products are eligible

• Qualifying products will be identified in the Harmonized Tariff Schedule with a “J” or “J*” in the Special Column

ATPA Non-textile Benefits• Duty-free access is based upon meeting the

following rules: – Products must meet the value added requirements (35

percent, up to 15 percent of which may be accounted for by US content, in terms of cost or value)

– Products must be substantially transformed into a product of a beneficiary country

– Products must be imported into the U.S. directly from the beneficiary country

ATPA Non-textile Benefits– For purposes of identifying whether the Andean

content is met, content from other ATPA beneficiary countries and from Caribbean Basin Initiative beneficiary countries may be counted

– 35 percent must consist of:• local materials or U.S. materials (up to 15 percent)

and • direct costs of processing within beneficiary

countries

ATPA Non-textile Benefits• Imported materials may be counted toward the

35 percent if they are substantially transformed into new and different constituent materials of the which the product is composed.

• This is usually referred to as a “double substantial transformation”

• Example:– imported leather which is cut and sewn into an upper

and then assembled into a complete shoe

ATPA Non-textile Benefits• Direct costs of processing include:

– all labor costs involved in production, – fringe benefits, – on-the-job training, – costs of quality control and supervisory personnel, – dies and molds, – equipment depreciation, and – inspection and testing costs.

• Does NOT include profit and general expenses.

ATPA Non-textile Benefits– For purposes of meeting the direct shipment

requirement, shipment through or from another ATPA beneficiary country is permitted.

– a product may not pass through the territory of any other country, or if shipped through another territory, must not have entered the commerce of that country while en route to the U.S.

– invoices, bills of lading, and other documents must show the U.S. as the final destination.

ATPDEA v. CBTPA

• ATPDEA = duty-free treatment for goods that meet the 35% local content, substantial transformation, direct shipment rule of origin (non-apparel)– CBTPA only has NAFTA “parity” for newly

designated products, meaning the current NAFTA duty rate based upon meeting the more stringent NAFTA rules of origin

ATPA Non-textile Benefits

• Tuna: Duty-free if harvested by U.S. or ATPDEA beneficiary country vessels, and

• prepared or preserved in an ATPDEA beneficiary country in foil or other flexible airtight containers weighing not more than 6.8 kg each, and

• imported directly into the U.S. from an ATPDEA country

Tuna• ATPDEA vessel is one:

– which is registered or recorded in an ATPDEA beneficiary country,

– which sails under the flag of an ATPDEA beneficiary country,

– which is at least 75% owned by nationals of an ATPDEA beneficiary country or by a company having its principal place of business in an ATPDEA beneficiary country . . . . ,

Tuna

• ATPDEA vessel is one, continued:– of which the master and officers are nationals

of an ATPDEA country, and – of which at least 75% of the crew are nationals

of an ATPDEA beneficiary country.

“Textile” Benefits• In the textile sector, apparel gets benefits

– BUT benefits also for textile luggage if made from U.S. fabric/U.S. yarn

• No benefits for the export of yarns or fabrics

• No benefits for household textile furnishings, such as bed linens or towels

• No benefits for textile accessories, handbags.

Apparel Benefits • Apparel made from U.S. formed fabric or

from components knit-to-shape in the U.S.• Either U.S. or Andean origin yarns may be

used: Yarns must be formed (spun or extruded) in the United States or Andean countries

• Does not matter whether some or all of the cutting to shape occurs in the U.S. or in Andean countries

Apparel Benefits• Apparel made from U.S. formed fabric, or

U.S. k-t-s components, continued:

• Assembly in Andean countries

• Unlimited duty-free treatment

• Any dyeing, printing or finishing of U.S. fabrics must occur within the United States

• U.S. dyeing, printing and finishing requirement does NOT apply to garment finishing processes

Apparel Benefits

• Apparel made from fabrics or fabric components formed or components knit-to-shape in ATPDEA beneficiary countries from yarns wholly formed in ATPDEA beneficiary countries in chief value of llama, alpaca or vicuna.

• Unlimited duty-free treatment.

Apparel Benefits• Unlimited duty-free treatment for apparel

made from fabrics or yarns in “short supply”:

• short supply = cannot be supplied by the domestic industry in commercial quantities in a timely manner– As already identified under Annex 401 of the

NAFTA– Yarns or fabrics as additionally identified and

proclaimed by the President.

Short Supply: NAFTA Annex 401– fine count cotton knitted fabrics– linen– silk– cotton velveteen– fine wale corduroy– Harris Tweed– certain woven fabric made with animal hairs– certain lightweight, high thread count poly-cotton

woven fabrics– certain lightweight, high thread count broadwoven

fabrics used in the production of men’s & boys’ shirts

Short Supply

• List can be expanded by the President, with advice from advisory committees and the US International Trade Commission

• President will delegate this authority to the Committee for the Implementation of Textile Agreements, CITA

Short Supply

• Administrative process takes at least 120 days total.

• Once a request is filed, CITA has 60 days to decide on the request

• Then a 60 day Congressional “layover”– So far, a few products have been added to the

lists, for CBTPA and AGOA.• Note: separate lists, separate determinations

for each preference program

Short Supply

• Conference report notes that where fabrics or yarns identified as “short supply” impart the essential character of an article, the remaining textile components may be constructed of fabrics or yarns regardless of origin, as under NAFTA Annex 401

Apparel Benefits• Apparel made from regionally formed fabric• Either U.S. or Andean origin yarns may be

used: Yarns must be formed (spun or extruded) in the United States or Andean countries– Regardless of whether the garment also contains

U.S. formed fabrics or short supply fabrics/yarns (hybrid issue)

• Assembled entirely in the Andean countries.

Apparel Benefits• Apparel made from regionally formed fabric,

continued:• Duty-free treatment subject to an annual cap• Cap covers 10/1-9/30 annual period• First cap, for 10/1/02 - 9/30/03, set at a level

equal to 2 percent of total apparel imports– Likely to be based upon year ending July 2002 data

Apparel Benefits

• Apparel made from regionally formed fabric, continued:

• Cap gradually increases, by 0.75% each year, to reach 5 percent in the 5th year.

• Put this in context: total apparel from the 4 ATPDEA countries has generally been less than 1% of total apparel imports and not all apparel imports will fall under the cap

Apparel Benefits: Bras• Unlimited benefit, subject to conditions.• A “single-transformation” rule only applies to

bras classified under HTS 6212.10, cut in either the U.S. or ATPDEA countries and sewn in ATPDEA countries

• Expectation is that most of the fabric used to make these bras will be woven in the U.S. (It does not matter whether U.S. yarn is used; yarn origin is irrelevant.)

Apparel Benefits: Bras• During each annual period beginning 10/1/03,

at least 75% of the aggregate declared customs value of the fabrics used, not counting findings and trimmings, must be formed in the U.S.

• by producer or entity controlling production• only production for which the brassiere duty-

free treatment is claimed is counted– excludes production under other provisions or for

which no benefit is claimed

Apparel Benefits: Bras• Failure to meet the 75% standard means the

producer's bras will not be accorded duty-free treatment under this provision during any succeeding years, until:

• the producer proves that at least 85% of the aggregate cost of the fabric components used to produce the bras during the previous one-year period is attributable to U.S. formed fabric.

Apparel: Special Rules

• OK to use findings and trimmings of foreign origin, so long as they do not exceed 25% of the cost of the components of the assembled product.

• Examples of findings & trimmings are: sewing thread, hooks & eyes, snaps, buttons, bow buds, decorative lace, trim, elastic strips, zippers, zipper tapes, labels.

• Note that elastic strips are not limited to brassiere straps


– Pocketing and interlinings are FABRICS, not findings and trimmings. Therefore, they must be U.S. or regional products.

– Certain interlinings may be foreign origin because they are not available in the U.S.

– But such permitted foreign interlinings will be counted against the 25 percent cost allowance for foreign findings and trimmings


• Permissible foreign interlinings are:– chest type plate, “hymo” piece, or “sleeve

header,” – of woven or weft-inserted warp knit

construction and – of coarse animal hair or man-made filaments


• 7% de minimis rule: allows some foreign yarns, so long as the total weight of these foreign yarns does not account for more than 7% of the total weight of the finished garment.


• Certain nylon filament yarns may be from Israel, Mexico, or Canada.– Classified under HTS subheadings 5402.10.30,

5402.10.60, 5402.31.30, 5402.31.60, 5402.32.30, 5402.32.60, 5402.41.10, 5402.41.90, 5402.51.00, or 5402.61.00

– But not elastomeric yarn (must be U.S. or Andean origin or within the 7 percent de minimis if foreign)

Apparel: ATPDEA v. CBTPA

• ATPDEA = less categorization• CBTPA has 3 groups for apparel made from

U.S. fabric while ATPDEA has only one• depending upon where the fabric is cut and

whether the garment is subject to finishing operations, such as stone-washing or embroidery


• ATPDEA = Use of regional yarns– Under CBTPA, only garments made with

U.S. yarns get benefits while under ATPDEA fabrics made in the U.S. and the Region can be made from either U.S. or Andean yarns


• ATPDEA = For apparel made from regional fabrics, both knits and wovens get duty-free, quota-free access– Under CBTPA, the regional apparel

benefit is limited to knit apparel


• ATPDEA = right to use any thread to assemble apparel or luggage– Under CBTPA, only U.S. thread may be used

to assemble apparel or luggage made from U.S. formed fabrics from U.S. formed yarns


• ATPDEA = No t-shirt cap

– Under CBTPA, there is a separate cap on non-underwear t-shirts

• ATPDEA = Benefits for socks– CBTPA excludes socks from benefits

Textile Luggage

• Unlimited duty-free treatment for textile luggage assembled in an ATPDEA beneficiary country from fabric wholly formed in the U.S. from yarns wholly formed in the U.S., ,whether cut in the U.S. or cut in the Andean region

Handloomed, Handmade, Folklore Articles

• U.S. and each Andean country may consult to reach agreement identifying textile products that may be certified by an Andean Government as qualifying and therefore unlimited duty-free:– hand-loomed fabrics of a cottage industry;– hand-made cottage industry goods made of

such hand-loomed fabrics; or – traditional folklore handicraft goods

Cautions on “Textile” Benefits• Colombia has a comprehensive visa

arrangement, under which all textile and apparel shipments are subject to a visa/export license requirement

• Men’s & Boys’ Wool Suits, category 443, are subject to quota.– 443 merchandise that qualifies for duty-free

access is outside the quota, but 443 goods that do not qualify will be subject to quota limitations

Caution on Benefits: Safeguard• A duty snap-back can be imposed by the

U.S., following consultations, in accordance with the procedures established under NAFTA (in the event that increased duty-free imports are causing serious damage to a domestic industry).

• But, unlike NAFTA, no compensation provided (since this is not a reciprocal agreement situation).

Cautions On Apparel Benefits

• Fear of cheating -- illegal transshipment• Defined broadly: claiming preferential

treatment on the basis of false information concerning country of origin, manufacture, processing or assembly of the article or any of its components– That is, falsely claiming a preference even if

origin is correct will be considered transshipment.


• Penalties for exporters: denial of benefits under ATPDEA for up to 2 years

• Unstated penalty: a bad visit by U.S. Customs and resulting increased scrutiny of shipments, discouraging business– Factories need to prepare for visits by U.S.

Customs and have the necessary records on site.

Factory Visits - Compliance

•Foreign factory visits by U.S. Customs are a lot like customs audits of U.S. importer facilities

•They include:– a review of the company's records, with a focus

on a specific entry or several entries into the U.S. market; and

– an inspection of the company's facilities

What Is Customs Looking For?

• 1. Compliance with the rules of the ATPDEA:

• Do your goods qualify for duty-free access to the U.S. market?

• Do your production documents prove it?

• 2. Illegal transshipment: • Are you correctly identifying the country

of origin of your goods? • Do your production documents prove it?

Factory Visits

• Customs’ reports on visits to CBTPA countries indicate that many factories are not maintaining the required documentation at the factories– Even if U.S. fabric used, the records have to be

maintained in the apparel manufacturing facility to prove that it is U.S. fabric from U.S. yarn.


• Penalties for countries, for failure to take all necessary actions to prevent transshipment, reduction of apparel trade, by 3 times the amount illegally transshipped, to the extent consistent with WTO obligations– Such reductions in trade would not be

consistent with the WTO.

Implementation Issues

• U.S. Customs needs to issue regulations, to identify how the qualifying products should be identified (by “groupings”)

• Separate rules expected for brassieres

Certificate of Origin

• The regulations will include a Certificate of Origin form.

• Importers claiming duty-free treatment will have to have in their possession at the time of entry a Certificate of Origin prepared by the exporter in the ATPDEA country supporting the claim.

Customs Procedures

• Certificate of Origin must be presented to Customs if requested, but is not part of the entry package.

• Failure to document qualification for preferences may result in duties being owed on shipments.

• 5 Year record retention requirement.

Eligibility Determination

• President also has to issue a determination that each country has implemented or follows or is making substantial progress toward implementing or following procedures and requirements similar in all material respects to the procedures and requirements under Chapter 5 of NAFTA.

Eligibility Determination• NAFTA Chapter 5 addresses:

– Certificate of origin requirements for importers and exporters

– Recordkeeping- 5 year retention rule– Origin verifications through written questionnaires

or visits– Confidentiality of business information– Maintenance of criminal, civil or administrative

penalties for violations– government to government cooperation

Eligibility Determination• New benefits will not apply until the President

designates each country as a beneficiary, based upon ATPDEA criteria:– For example, whether a country undertakes its

WTO obligations and participates in FTAA,– extent to which it provides internationally

recognized worker rights, e– extent to which it meets anti-drug certifications,– whether it is a party to the Inter-American

Convention Against Corruption . . . .

Eligibility Determination

• U.S. Trade Representative currently soliciting comments on whether each of the ATPDEA countries meet the eligibility criteria

• President has authority to withdraw or suspend beneficiary designation

• A new annual review process will be established, similar to GSP program review

Conclusions

• ATPDEA offers significantly better benefits than CBTPA

• Maximizing sales through these benefits is also dependent upon minimizing the risks of error.

• Compliance with the rules is key.

Andean Trade Promotion & Drug Eradication Act

• Brenda A. Jacobs• Sidley Austin Brown & Wood

LLP 1501 K Street NW Washington, DC 20005 202-736-8149 voice 202-736-8711 fax [email protected]

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