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Posted Date: 6/1/2003

Rules of Origin Major Concern for CAFTA Negotiators


As lawmakers try to iron out a trade agreement between the United States and Central America, apparel and textile industry rules of origin have come to the forefront as a subject that likely will require many rounds at the negotiation table.

In January, working level negotiations began on the proposed U.S.-Central American Free Trade Agreement, or CAFTA. The purpose of this agreement would be to eliminate tariffs and other barriers to trade in goods, agriculture, services and investment between the United States and the Central American nations of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.

In an initial meeting, participants representing each country decided on a structure for the negotiations, including nine rounds of negotiations planned in 2003, according to the Office of the U.S. Trade Representative.

Francisco Escobar, president of the El Salvador-based apparel producer Fresco Group, says apparel and textiles are among the major issues to be discussed. "We must negotiate in the most simple and flexible way, no quotas, no tariffs, no complicated rules," Escobar says.

On April 10, the presidents of the five Central American countries met with U.S. President Bush, members of the U.S. Congress and several representatives from special interest groups to discuss the need for a commercially viable agreement. Jim Jacobsen, vice chairman of Kellwood Co., chairman of the Caribbean/Latin American Action (CLAA) organization and co-chairman of the Business Coalition for U.S./Central American Trade Relations, attended the meeting, emphasizing the need for new rules of origin for the apparel industry.

"Today Central America is a predominately CM [cut-make] industry for apparel, and they're a huge employer," says Jacobsen, who also is on the board of directors of the American Apparel & Footwear Association (AAFA). "But poverty in the [region] is on the rise. By developing appropriate rules of origin, we can help [these countries] grow into full-package providers."

Along those lines, Tom Travis, a partner at Sandler, Travis & Rosenberg, a law firm representing interests in the negotiations, notes: "We are looking forward to some flexibility in the rules of origin to allow the Central American economies to increase their share of the U.S. market for textiles and apparel."

Travis says the big question is: What types of exceptions will the new rules take into account? Specifically, Travis questions how effective the yarn-forward rule will be in a post-2005 environment.

"When quota restraints will sunset in 2005, duty-free access and quick response will still be key advantages for Central America," says Travis. But if the cost of yarn required to make duty-free garments offsets the cost of the duty-free benefits, "the resulting garment may not be competitive in the U.S. marketplace," he concludes.

Likewise, Jacobsen observes that while Central America currently has advantages over Asia in terms of quota and duty preferences and proximity to the U.S. market, "Asia still has lower labor costs, and productivity is comparable."

When quotas phase out, Central America will lose its advantage without a proper trade agreement in place, Jacobsen says, noting: "A good trade agreement will improve their productivity and help them to grow their industry. . The problem is the [U.S.] textile industry and labor will fight any kind of liberalization."

As for how the negotiations will play out in 2003, Escobar notes: "The good thing for both the United States and Central America is that our economies complement each other, and we are not in a 'real' adversarial position. There is so much more to win by both."

He says he expects the negotiations to be concluded by the fall, with an agreement becoming active in spring 2004. However, the U.S. Congress could give CAFTA a timeframe waiver, allowing the agreement to take effect Jan. 1. "The latter would be really a great thing for our industry both in the United States and Central America," Escobar observes.

Travis also says he believes the negotiations for an agreement will be successful. "There is great interest on both sides in seeing that they are," he notes. He predicts a fine-tuned agreement will be in place by 2004.

Yet not everyone is optimistic about CAFTA. Mike Todaro, managing director of the American Apparel Producers' Network (AAPN), notes: "What I'm hearing is the nations are not working together down there. Unlike the Far East, these guys aren't becoming the 'Near South.' "

The policy makers involved report they hope to have hammered out a deal by the end of December.

TRACY HAISLEY is associate editor of Apparel and may be reached at thaisley@apparelmag.com.


American Apparel & Footwear Association (AAFA)

Steve Lamar . 800-520-2262


American Apparel Producers' Network

Mike Todaro . 404-843-3171


Caribbean/Latin American Action (CLAA)

Jim Jacobsen . 202-466-7464


Office of the U.S. Trade Representative

Richard Mills . 202-395-3230


Sandler, Travis & Rosenberg

Tom Travis . 305-267-9200



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