International Law & Trade - Law Firms Highlights Of The Dominican Republic-Central America- United States Free Trade Agreement (CAFTA)

Saturday, October 1, 2005 - 01:00

The U.S, Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed CAFTA on August 5. On August 2 President Bush signed the implementing legislation (Pub. L. 109-53) after the House of Representatives passed it (H.R. Bill 3045) by a bare majority of only 2 votes. The legislatures of five signatories have approved CAFTA. Those of Costa Rica and Nicaragua are expected to do so within the next six months. By January 1, 2006, CAFTA should be operational for all parties that have obtained the necessary legislative approvals.

Scope And Significance

The six Central American and Caribbean parties account for more than $32 billion in two-way trade in goods with the U.S. They account for an export market for U.S. products and services that is second only to Mexico in Latin America - an export market larger than Russia, India, and Indonesia combined. In the first year of operation, CAFTA is expected to account for an estimated $1 billion tariff savings for U.S. producers on $15 billion of trade. Market access will increase significantly for U.S. producers in both goods and services. Key U.S. product sectors expected to benefit include textiles, technology, industrial equipment, paper, and chemicals, and key U.S. service sectors are expected to include distribution, construction, engineering, technology, telecommunications, and financial services.

CAFTA replaces three existing unilateral U.S. trade preference programs: the Caribbean Basin Initiative (CBI) (1983), Caribbean Basin Economic Recovery Act (CBERA) (1990), and Caribbean Basin Trade Partnership Act (CBTPA) (2002). These programs already afford duty-free access to the U.S. market for over 80 percent of the consumer/industrial and agricultural goods of the six non-U.S. signatories.

President Bush soon will issue executive orders to implement all of the trade in goods provisions of CAFTA. U.S. producers will for the first time receive reciprocal tariff-free treatment for over 80 percent of the U.S. consumer and industrial products and over half of the U.S. agricultural products that flow south to these countries. All originating textile and apparel articles may be afforded duty free treatment under the new rules of origin on a reciprocal basis retroactively to January 1, 2004. Over a period of 15 years, tariffs on all originating products will be eliminated.

While implementation of the trade in goods provisions require few changes in U.S. law and practice, it will obligate other parties to make significant changes in their internal legal structure and trade relations with the U.S. CAFTA is hoped and expected to institutionalize economic and, to some extent, political reform in Latin America by reducing poverty and corruption while promoting growth, equal opportunity, stability, and the rule of law in signatory countries. More than anything, CAFTA reflects a U.S. commitment to sustained engagement with signatory countries in support of democracy, regional integration, and economic growth.

CAFTA goes far beyond trade in goods. Its comprehensive provisions cover trade in services, investment, intellectual property rights, government procurement, and labor and environment to the extent relevant to cross-border economic activity. The goal is to move each signatory closer to U.S. legal standards and practices. CAFTA incorporates many of the principles and practices of the North American Free Trade Agreement (NAFTA) and extends and refines them, especially in the areas of protection and enforcement of intellectual property rights, labor rights, and environmental protection.

Trade In Goods Provisions

CAFTA rules of origin for duty-free entry of goods are similar to the NAFTA rules. A good "originates" in the territory of one or more CAFTA signatory countries ("Territory") if it has been (1) wholly produced or obtained in the Territory (e.g., goods grown, mined, or those recovered from goods that have been used and disassembled in the territory), (2) transformed or produced entirely in the Territory from non-originating parts, components, or materials to the extent that there is a requisite shift in tariff classification from the non-originating part, etc. to the good produced, provided that in some cases the good produced also meets a regional value content test or other tests specified in CAFTA, or (3) transformed or produced entirely in the Territory exclusively from parts, materials, components that themselves qualify as "originating" by one of the first two tests.

While establishing whether a good is "originating" for duty preference purposes, the rules of origin do not establish the specific country of origin for application of country-specific tariff rate quotas ("TRQ's") or U.S. country of origin marking requirements. Other U.S. law and rules used in the normal course of international trade will be the source of authority for such determinations. U.S. TRQ's apply to certain agricultural products from all signatories and, for Nicaragua, certain textile and apparel product. To prevent circumvention of rules of origin for duty preferences, marking, and administration of TRQ's, the implementing legislation provides for on-site verifications and strict enforcement.

U.S. textile and apparel importers must take extra precautions to ensure compliance in advance of importation to avoid possible detention, seizure, and forfeiture of goods, not simply denial of duty-free entry. CAFTA duty preference rules of origin for textiles and apparel generally require that all processing after fiber formation (e.g., yarn and fabric production, cutting and assembly) take place in one or more of the signatory countries - the so-called "yarn forward" rule. This is the NAFTA rule, but with differences. CAFTA has exceptions to the rule that only the component of the garment that determines its tariff classification need satisfy the applicable origin rule for the garment.

The textile and apparel rules of origin for duty preferences are a complex and product-specific hodge-podge of special requirements. There are exceptions to the yarn forward rule for fibers, yarns, and fabrics determined to be in short supply in the Territory. A textile or apparel good that contains excepted fiber, yarn, or fabric will be entitled to the duty preference regardless of the origin of those inputs. Subject to a quantitative limit, materials of Canadian or Mexican origin will be considered "originating" when used in production of certain woven apparel, provided that Mexico or Canada reciprocate under NAFTA and agree to verification procedures. It is expected that CAFTA will increase demand for U.S.-produced fabric and encourage sourcing of textiles and apparel in this hemisphere rather than in the Far East.

CAFTA will liberalize access to the U.S. market for sugar by only about 1.1 percent of U.S. sugar consumption in the first year. Import quotas for future years are also small. The maximum total quantity will increase from 107,000 metric tons in year one to a mere 151,000 in year fifteen, little more than the level of one day of U.S. sugar production. Not surprisingly, U.S. sugar trade with these countries will continue to account for less than one-quarter of one percent of the total trade.

CAFTA includes various provisions to safeguard the U.S. domestic industry from an unmanageable flood of new imports during the transition period for duty phase out. They allow for, and in some cases require, imposition of additional duties when certain import thresholds are met. CAFTA's general safeguard provision closely parallels the global safeguards in sections 201 through 204 of the U.S. Trade Act of 1974 in terms of standards and procedures. In addition, a separate agricultural safeguard authorizes extra duties on certain agricultural products whenever country-specific import levels exceed volume thresholds set forth in an Annex - not to exceed the Normal Trade Relations (NTR) duty rates or extend beyond the end of the calendar year in which imposed. The implementing legislation gives the Committee on Implementation of Textile Agreements (CITA) responsibility to implement textile and apparel safeguards, authority that will expire five years after CAFTA's effective date. CITA must determine that the subject imports have created "serious damage or actual threat thereof to a U.S. industry producing like or directly competitive goods" before imposing additional duties for a period not to exceed three years.

Trade In Services Provisions

CAFTA will bring market access for services in the other signatory countries closer to U.S. standards. All services sectors are subject to CAFTA rules unless a signatory country has negotiated a specific exemption for all or part of a particular sector. Trade in services commitments apply to the state, local, and national governments of each signatory. They complement CAFTA investment and financial services provisions.

As with trade in goods, the basic principles of market access for services are that (1) under its domestic law, the signatory country shall treat all foreign providers, whether or not resident in the country, no less favorably than it treats the most favored domestic provider ("National Treatment"), and (2) with respect to its international trade, the signatory country shall accord to all signatories no less favorable economic and commercial benefit than it gives to other signatories ("Most-Favored Nation Treatment").

Sector-specific provisions include an innovative, comprehensive definition of express delivery services that will enhance market access for U.S. companies, and a provision that gives service providers more freedom of contract to avoid and resolve disputes when they arise between domestic suppliers and foreign distributors or dealers. Under dealer protection regimes that pre-date CAFTA, foreign firms have often been tied to exclusive and inefficient distribution and dealer arrangements.

Other Commercial Activities

CAFTA commits the signatory countries to provide a strong and predictable legal framework for cross-border investment, defined broadly to include direct ownership by foreign individuals or entities of local businesses, real estate, intellectual property rights, concessions, permits, and debt instruments, and contracts. It also covers in-country operations of foreign financial institutions and cross-border trade in financial services. The key concepts are similar to those for trade in goods and services: National Treatment, Most-Favored Nation Treatment, transparency and domestic regulation and enforcement.

With some specific exceptions set forth in schedules incorporated into CAFTA, U.S. investors and financial institutions will be able to establish, acquire, and operate investments of all types in signatory countries on the same terms as local and favored foreign investors. For example, performance and local hiring requirements and restrictions on foreign transfer of funds are to be eliminated. Foreign investors are to have rights of enforcement against private parties in signatory countries comparable to those of local counterparts. U.S. standards for rule of law, transparency, and prior notice and comment are to be the norm for administrative rule-making in each signatory country.

CAFTA builds on existing international standards for recognition and enforcement of intellectual property rights at a level similar to that afforded in the U.S., and each signatory must accede to major international agreements on patents, copyrights, trademarks, and trade secrets. The high standards are made meaningful by requiring rigorous civil and criminal enforcement, through measures similar to those that exist in the U.S.

CAFTA defines labor laws broadly. A key element is the commitment of each signatory to effectively enforce its labor laws through a sustained or recurring course of action to the extent that such enforcement affects trade between the parties. Workers and employers are to have access to fair, equitable, and transparent enforcement procedures.

CAFTA includes an enforceable commitment by each signatory to enforce effectively at the national level its domestic environmental laws to the extent that those laws affect trade between the parties. Each party commits to make judicial, quasi-judicial, or administrative proceedings available to sanction or remedy violations and to make appropriate and effective remedies available.

Robert B. Silverman is a Partner and Robert F. Seely is Of Counsel at Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP.

Please email the authors at rseely@gdlsk.com or rsilverman@gdlsk.com with questions concerning this article.