CAFTA-DR Fixes Open More Market Opportunities

nactment of legislation correcting some problems that resulted in connection with the
Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) should open some additional
market opportunities for textile manufacturers, retailers and other importers of textiles and
apparel. When CAFTA-DR was enacted last year, it was viewed as a way to compete against a flood of
imports from China, because of the proximity of Central America to the US market and the duty-free
treatment of goods. Participating countries — the United States, Costa Rica, the Dominican
Republic, El Salvador, Guatemala, Honduras and Nicaragua — agreed on a target date of Jan. 1, 2006,
for entry into force. However, a number of countries failed to ratify the pact, and a rolling
implementation developed. The delay in implementation meant those countries that came on board
could not benefit from the duty-free treatment, and they lost their rights under the Caribbean
Basin Trade Promotion Agreement.

The legislation fixing the problems allows retailers and other importers to apply for
retroactive refunds of duties they have been paying as a result of the rolling implementation. It
also gives US Customs and Border Protection power to enforce tariff preference levels (TPLs), and
it changes the rule of origin for pocketing fabrics to require apparel to contain pocketing fabric
made in the United States or CAFTA-DR countries. The law also changes the TPL with Nicaragua to
implement a commitment from Nicaragua to increase its purchases of US trouser fabric to match
quantities of such fabric sourced outside the region.

The CAFTA-DR region is the second-largest market for US yarns and fabric with textile and
apparel exports totaling $3.6 billion.

More On FTAs On Bush Agenda

Although the Bush administration continues aggressively to pursue a free trade agreement (FTA)
agenda, it is likely to be some time before most of the FTAs become a reality. The administration
already has negotiated 25 FTAs, and at least five more are in various stages of negotiation or are
under consideration by Congress. Only one — with Peru — is likely to be acted upon before Congress
adjourns for the year in November. Negotiations on FTAs have been completed with Peru and Colombia;
and others are under consideration with South Korea, Malaysia and Thailand.

With the Doha Round of trade negotiations in serious trouble, the administration plans to put
more emphasis on regional and bilateral trade agreements. US Trade Representative Susan C. Schwab
said, “We have a very ambitious agenda in terms of bilaterals and regional negotiations, and we
will have to see how that plays out.”

Textile Mills Can Import Raw Cotton

Although Congress has eliminated the direct payments to textile companies and cotton merchants
under the Cotton Competitiveness Program, textile mills still are permitted to import a limited
amount of raw cotton when the US price is higher than world prices. After the World Trade
Organization ruled the cotton subsidies paid to mills under the so-called Step 2 of the
competitiveness program amounted to an illegal subsidy, Congress repealed the step. However, Step 3
remains intact. Under Step 3, when the Friday-through-Thursday weekly average US price for Northern
Europe delivery exceeds the Northern Europe price by more than 1.25 cents per pound for any four
consecutive weeks, a special import quota is triggered. That has happened recently, and a series of
import quotas based on roughly one week’s mill use of upland cotton has been opened. US mills are
free to import cotton up to the level of the quota.

Prior to enactment of the competitiveness program in 1991, US mills were strictly prohibited
from importing raw cotton under a law passed in the 1930s to encourage development of a strong US
cotton industry. The competitiveness program helped mills compete against low-cost overseas textile
and apparel manufacturers. They reportedly received more than $2 billion in payments. While Step 3
was available from the outset, mills and merchants preferred the direct payments. As a result of
elimination of the direct payments, imports will play a more important role in the future.

September/October 2006