ALSTON&BIRD LLP

US Apparel Trade Policy Issues

Guatemala City May 23, 2012
Copyright 2012 Jonathan M. Fee All Rights Reserved

New FTAs finally passed

President Obama signed the Korea, Colombia and Panama FTAs into law on October 21, 2011 Congress also passed, and the president signed, legislation extending Trade Adjustment Assistance, the Generalized System of Preferences and the Andean Trade Preference Act, all of which languished from inaction since the last Congress

Implementation Korea
South Koreas ruling Grand National Party, which recently changed its name to the New Saenuri (New Frontier) Party (NSP), weakened after losing the Seoul mayoral election, passed the FTA and 14 bills necessary for implementation in a surprise plenary session on November 22, 2011 The minority Democratic Party (DP), which recently merged with another minority party to form the Democratic United Party (DUP) didnt offer any votes, although one member voted his opposition by releasing tear gas in the main chamber of the National Assembly

Implementation Korea
President Lee Myung-bak, also of the NSP, quickly signed the legislation in early December The NSP wanted to implement the FTA as quickly as it could, as long before the April 11 parliamentary elections as possible, to thwart efforts by the opposition to exploit public FTA opposition for political gain It worked the United States and Korea implemented the FTA on March 15

Implementation Colombia
Everyone hoped for implementation in time for the Summit of the Americas, held in Cartagena in April President Santos made it clear that he wanted the two countries to announce an implementation date during his meeting with President Obama on April 15 May 15 was the hoped-for implementation date

The deal got done

On April 15, Presidents Obama and Santos announced implementation of the FTA effective May 15 Santos: There will be thousands millions of jobs created for the U.S. and Colombia Obama: Its a win for Colombia by giving you even greater access to the largest market for your exports

Implementation Panama
Panama must also pass legislation to ratify a number of IP treaties Panama must also pass legislation to revise the manner in which it administers tariff rate quotas to conform to the requirements of the FTA AmCham in Panama predicted 12 to 18 months before the necessary processes could be completed But recent reports say Panama is accelerating legislative action and the FTA could be effective in August

The 3 FTAs and their context

The Colombia FTA will let Colombia catch up to Peru and will replace ATPDEA for apparel from Colombia The Panama FTA will let Panama compete more directly with CAFTA, NAFTA, Peru and Colombia and will replace CBTPA for apparel from Panama The Korea FTA has no predecessor; Korea has enjoyed no preferential status with the United States since it lost GSP status during the Reagan administration

Trans-Pacific Partnership
Negotiations are pending with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam Textile provisions are not fleshed out yet The most interesting aspect is the inclusion of Vietnam, the first substantial apparel producer in the Far East and the first non-market economy to be considered for an FTA with the United States

Vietnam
Vietnam is already a very successful competitor for access to the U.S. apparel market, accounting for 8 percent of all U.S. apparel imports, second only after China, at 41 percent It uses a lot of Chinese fabric and competes with Chinese apparel producers Vietnam has inflation and labor issues it will be a challenge for a workers state to deal with labor unrest and collective bargaining

Vietnam really such a threat?

Poverty on the rise Social insurance who is covered? Exports are strong and growing; but productivity is declining Growth and inflation have outpaced policy, regulation and wages Result? Labor unrest GVN is hamstrung by implicit political challenge in potentially stronger unions Will Vietnam be a viable source going forward?

Jumping on the bandwagon

Canada, Colombia, Costa Rica, Japan, and Mexico are all interested in joining TPP talks, and Taiwan suggests joining in ten years Each has held meetings with the TPP countries about joining The TPP countries will probably wait until a deal is concluded before considering new partners Canada and Mexico have already made formal applications for participation

Mexico and Canada

Bringing Canada and Mexico into TPP might give the United States the opportunity to make adjustments to NAFTA Two welcome changes would be to improve the NAFTA short supply process for apparel, maybe making it operate more like CAFTAs (although CAFTA short supply has its own problems) and to remove the burdensome duty deferral feature from NAFTA

Recent and upcoming talks

The TPP countries just concluded talks in Dallas last week; the next round will be held in San Diego on July 2-10 In addition to strict yarn forward rules, U.S. textile interests want tough customs enforcement rules and easily triggered safeguards All the parties would like negotiations to conclude this year, as difficult as that may be

TPP idea to replace yarn forward

The TPP Apparel Coalition, comprising AAFA, RILA, USAITA, NRF and the Outdoor Industry Association, have advanced new ideas for rules of origin, and joined Perus apparel industry in a letter to the U.S. and Peru outlining their proposals Labor and components are only 25 percent of a garments value, they say, and yarn forward is outmoded and too restrictive

Ideas
CTH allow a garment to be originating if processing causes it to undergo a change in tariff heading in a TPP country; mere cutting and assembly or knitting to shape would satisfy such a rule RVC a garment would be originating if it met a 35 percent regional value content; similar to GSP

Ideas
No separate chapter or special provisions for textiles and apparel No separate safeguard provisions or customs enforcement rules Harmonize origin rules, including those with existing FTAs with the United States Improved short supply process Allow cumulation among members, and create a process for cumulation with members of other FTAs

U.S. House members weigh in

May 1 letter to USTR Ron Kirk signed by 76 House members Without strong textile rules state-subsidized producers in Vietnam could easily overwhelm U.S. and other producers in this Hemisphere Urges yarn forward, extended duty phase-down periods, strong safeguards, prohibition on goods of state-owned enterprises and vigorous antiChina-transshipping rules

So do some U.S. senators

May 1 letter to President Obama signed by 15 senators Prefer a more flexible approach than yarn forward We ask that you take a new approach which reflects the significant value created by American retailers, apparel brands, manufacturers, and importers as well as domestic textile producers

CECATEC Position on TPP

Vietnam proposals would put the CAFTA regions textile and apparel production at enormous risk and tilt the playing field in textiles in Vietnams favor by giving new benefits to state run and subsidized textile and apparel producers and pit thousands of privately owned and financed factories in the United States and Central American against massive state funded and state subsidized Vietnamese and Chinese producers

What to look (out) for in TPP

Exceptions to yarn forward; e.g., single transformation; will there be very few exceptions (like the Colombia FTA) or many (like NAFTA and CAFTA)? Safeguard and enforcement provisions Immediate duty free treatment of textiles or staging, like NAFTA Short supply: will the rules be like CAFTAs, will TPP incorporate items from other FTAs, and will the list be capped and temporary like the list under the Korea FTA? Maybe this will generate a more transparent discussion of just what is the purpose of short supply

Whats the purpose of short supply?

Original view: Some yarns and fabrics just arent available in the FTA region and participants should be allowed to use them to make originating garments More protectionist view: short supply is only temporary, just long enough to allow U.S. companies to bring production back to the United States

CAFTA fixes
What happened to them? All the CAFTA countries, except the United States, have approved them The most difficult fix, as a matter of timing, is the single yarn sewing thread change, which will make such thread subject to the sewing thread chapter rules Extension of the third-country fabric rule for AGOA is probably more urgent; it would make sense to put both matters in the same legislation; but there is still no indication even when the AGOA change will be considered

AGOA third-country fabric

The third-country fabric provision expires September 30 unless it is extended; prospects for extension in time are slim While the long-term goal of AGOA is to wean the industry from thirdcountry fabric, that goal has not been met and apparel producers still depend on third-country fabric for U.S. business This is fairly non-controversial, because these exports are capped; so it will likely get extended sometime after the deadline with retroactive effect allowing duty refunds

Nicaragua TPL
Far more thorny than AGOA or CAFTA fixes The USTR apparently wants no extension after the TPL expires at the end of 2014 Some people want it to be extended as is and some want it to be expanded to the other CAFTA countries Failure to extend will be a definite setback for Nicaragua, and arguably a setback for U.S. mills that benefit from the 1-for-1 requirement for cotton and man-made fiber woven trousers

Dont forget China competition

Infrastructure (roads and ports) Modern, high-end equipment Relatively low corruption Reasonably reliable electric power Flexible, pro-apparel production government Open to imports of equipment, raw materials and components Quality, price, delivery Political stability and security None of the above is the result of an FTA or a trade preference, and none of the above is cheating

Mitt Romney on trade

Formed a Trade Policy Advisory Committee in October, chaired by former Commerce Secretary Carlos Gutierrez Free trade is essential to restoring robust economic growth and creating jobs Will reverse the stagnation brought about by the Obama administrations neglect of our trading interests

Mitt Romney on trade

Obama has been treated as a doormat by China Supported the Korea, Panama and Colombia FTAs and would support FTAs with India and Brazil (Secretary of State Hillary Clinton suggested a free trade agreement with Brazil in a speech in Brazil last month) If the Obama administration stalls the TPP in the run-up to the 2012 election, a Romney administration will move to complete negotiations at the earliest possible date Believe in America, Romney Campaign

Mitt Romney On China (WSJ Op-Ed)

Actually doing something about Chinas cheating makes some people nervous. Not doing something makes me nervous. We are warned that we might precipitate a trade war. Really? China is selling us $273 billion per year more than America is selling China why would it possibly want a trade war? And what is the alternative to confronting China? It is allowing the Chinese to take by trade surrender what we fear to lose in trade war

Barack Obama on trade

Opposed CAFTA as an Illinois senator Caused controversy in 2007 when he proposed that NAFTA should be renegotiated to strengthen labor provisions Look, people dont want a cheaper T-shirt if theyre losing a job in the process They would rather have the job and pay a little bit more for a T-shirt And I think thats something that all Americans could agree to

Barack Obama on Latin America

Newsweek reported that, before he went to Cartagena, Obama argued that the U.S. exports three times more to Latin America than to China and noted that 60 percent of Latin Americas exports to the United States are manufactured goods whereas 87 percent of Latin Americas exports to China were commodities We believe that economic partnerships cant just be about nations extracting anothers resources, he said

Concluding thoughts
TPP isnt the end of the world for the CAFTA region China will remain the huge competitor for quite a while Numbers for exports from CAFTA countries, since the recession, are promising for increasing exports to the United States

Jon Fee
Alston & Bird LLP 950 F Street, N.W. Washington, D.C. 20004 202 239 3387 jon.fee@alston.com