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International Trade Developments



President Bush Signs DR-CAFTA; WTO Issues Preliminary Ruling Against U.S. In Export Tax Dispute



By Peter Mayberry - INDA Director of Government Affairs



Published August 30, 2005
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While Washington, DC typically goes into summer hibernation mode during July and August, the summer of 2005 will likely be remembered for two dramatic developments on the international trade front—both of which stand to impact the nonwoven fabrics industry. On August 2, President Bush signed into law the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (Public Law No. 109-53), commonly referred to as the DR-CAFTA. And, although it received considerably less press attention, on July 20, a World Trade Organization (WTO) panel issued a preliminary ruling against the U.S. in its ongoing dispute with the European Union (EU) related to its former Foreign Sales Corporation/Extraterritorial Income Act (FSC/ETI) export tax regime.

Once implemented, the DR-CAFTA will immediately eliminate duties charged by several of our neighboring countries to the south for qualifying U.S. products in the nonwovens value chain or will phase out those duties over the next five to 10 years. And, if the WTO panel upholds its July 22 ruling, the EU will be permitted to slap a long list of U.S. goods—including items in the nonwovens value chain— with 14% retaliatory tariffs.

Given the significant implications that both of these developments are expected to have on the industry, it is important that we review the background and key points for each.

DR-CAFTA

Even those who typically do not follow international trade issues have probably heard or read about the Bush Administration's push for a controversial free trade agreement between the U.S., Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua. Indeed, the CAFTA has presented the greatest challenge to the future and credibility of the Administration's free trade agenda, mostly because of fierce opposition from various labor, environmental and industry groups. U.S. textile interests were especially vocal in their opposition, arguing the CAFTA would lead to job losses by encouraging textile production to be shifted out of the U.S.

Recognizing the pact's uncertain fate, the Administration let it sit on the backburner for more than a year after negotiations were completed in order to take time to build support behind the scenes. Even still, when the pact was finally sent to Capitol Hill for consideration this June, Democratic lawmakers (not surprisingly) came out in full force against the pact. Even worse for the Administration, however, was the fact that several Republican lawmakers with textile industry interests also chose to break ranks with their party to oppose the pact.

After an intense lobbying effort by the White House that included promises to amend the agreement's rules of origin for non-visible pocketings and linings—and to scale back other provisions built in to the agreement to provide flexibility in sourcing inputs—the U.S. Senate voted on June 30 to approve the pact by a margin of 54 to 45, while the U.S. House of Representatives eventually voted to approve the agreement by 217 to 215 on July 28.

Despite the close votes, CAFTA supporters maintain the pact is a "no-brainer," because nearly 80% of imports from CAFTA countries already enter the U.S. duty-free under pre-existing unilateral preference programs. They argue the agreement would simply level the playing field by extending similar access to U.S. products.

INDA, Association of the Nonwoven Fabrics Industry, initially chose not to support the CAFTA because it includes a NAFTA-like "yarn-forward" rule of origin for most textiles and apparel items instead of the rules advocated by INDA's International Trade Advisory Board (i.e. a straight forward tariff shift rule of origin for nonwoven roll goods and a fabric-forward rule for converted products made from nonwovens).

In May, INDA was approached by a coalition of U.S. textile industry groups previously opposed to the agreement about signing onto correspondence supporting it. After weighing the fact that a large number of nonwoven value chain items would receive free trade benefits and that many INDA members have operations in the region and/or look toward these countries for market opportunities, INDA's ITAB members agreed to support the measure. Many agree that the newfound textile industry support created some of the momentum needed to get the pact through Congress.

FSC/ETI

The U.S. dispute with the EU over its former FSC/ETI export tax regime dates back to January 2002 when the WTO ruled FSC/ETI an illegal export subsidy and granted the EU the right to impose $4 billion in retaliatory sanctions if the U.S. Congress did not overturn the regime.

After growing frustrated by a series of failed Congressional attempts to overturn and replace illegal export tax breaks, the EU began imposing its awarded sanctions in the form of 5% punitive tariffs on a laundry list of U.S. products including a number from the nonwovens value chain in March 2004. The EU increased these duties by 1% every month that Congress failed to bring the system into compliance with the WTO ruling. The tariffs were eventually allowed to increase to 14% before Congress finally stepped in and passed the American Jobs Creation Act of 2004 (Public Law No: 108-357) or "Jobs Act" as it has come to be known, which overturned and replaced the former FSC/ETI system.

Somewhat mollified, the EU suspended the 14% duties in January, but simultaneously announced a request for a WTO compliance panel to look at certain transitioning and grandfathering provisions in the Jobs Act that allowed U.S. exporters to continue to benefit from the former tax regime. The EU then circulated a second list of U.S. products, saying it would re-impose the 14% tariffs on these items if the WTO compliance panel backed its arguments.

Unfortunately, several items from the nonwovens value chain appear on this list including certain personal care and hygiene items classified under Harmonized Tariff Schedule (HTS) codes 4818.40.20 and 4818.40.40, as well as nonwoven fiberglass mats described by HTS code 7019.31.00.

Looking Ahead

It is still not clear when the DR-CAFTA will fully come into force. The U.S. must negotiate effective dates on a country-by-country basis, and each individual country must ratify their agreement. The U.S. then must make a determination whether each country has brought its laws into compliance with the pact's provisions. According to the law firm of Sandler, Travis and Rosenberg, P.A., Costa Rica, the Dominican Republic, and Nicaragua have still yet to pass implementing legislation.

With regard to the U.S.-EU dispute over the "Jobs Act" transitioning provisions, the WTO panel is widely expected to uphold its preliminary findings when it releases its final determination on August 12 as no previous compliance panel has ever overturned a preliminary ruling. That having been said, the U.S. is expected to appeal such a decision, leaving the fate of the retaliatory tariffs up in the air.

More information: www.ustr.gov. For an INDA-prepared summary of the DR-CAFTA, or a copy of the list of items potentially targeted for retaliatory tariffs in the U.S.-EU dispute, contact INDA Government Affairs Associate Jessica Franken: 703-538-8805 or jfranken@aol.com.