Andean Trade Promotion

1
Andean Trade Promotion Drug Eradication Act

• Whats In, Whats Not
• A Practical Guide To the
• New ATPA Preferences
• Presented by
• Brenda A. Jacobs
• Sidley Austin Brown Wood LLP
• September 2002

2
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

3
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

4
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.

5
Overview

• New benefits wont 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

6
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

7
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.

8
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.

9
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 Representatives office)
• Expect a USITC hearing and briefing process

10
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

11
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

12
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

13
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

14
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.

15
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.

16
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

17
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

18
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 . . . . ,

19
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.

20
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.

21
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

22
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

23
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.

24
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.

25
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 mens boys
  shirts

26
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

27
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

28
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

29
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.

30
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

31
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

32
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.)

33
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

34
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.

35
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

36
Apparel Special Rules

• 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

37
Apparel Special Rules

• 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

38
Apparel Special Rules

• 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.

39
Apparel Special Rules

• 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)

40
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

41
Apparel ATPDEA v. CBTPA

• 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

42
Apparel ATPDEA v. CBTPA

• 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

43
Apparel ATPDEA v. CBTPA

• 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

44
Apparel ATPDEA v. CBTPA

• 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

45
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

46
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

47
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
• Mens 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

48
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).

49
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.

50
Cautions On Apparel Benefits

• 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.

51
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

52
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?

53
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.

54
Cautions On Apparel Benefits

• 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.

55
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

56
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.

57
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.

58
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.

59
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

60
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 . . . .

61
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

62
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.

63
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
  bjacobs_at_sidley.com