Neville Peterson LLP: Customs and International Trade Law

June 5, 2000
M E M O R A N D U M
TO:	Clients and Friends of the Firm
FROM:	Maria E. Celis John M. Peterson Neville Peterson LLP
RE:	H.R. 434, the Trade and Development Act of 2000: New Trade Policy for Caribbean and Sub-Saharan African Nations

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I. INTRODUCTION
     President Clinton recently signed into law H.R. 434, the Trade and Development Act of 2000 (hereinafter, the "Act"), which expands duty-free trade access to the United States market for products of sub-Saharan African (SSA) and Caribbean Basin countries. The Act incorporates the African Growth and Opportunity Act and the United States-Caribbean Basin Trade Partnership Act. This memorandum discusses the provisions of this new legislation.

II. EXECUTIVE SUMMARY
     The African Growth and Opportunity Act, (§§101-117 of the Act) was originally introduced by Representative Crane in February 2, 1999 to: encourage increased trade and investment between the United States and sub-Saharan Africa; reduce tariff and nontariff barriers; expand United States assistance to sub-Saharan Africa's regional integration; negotiate reciprocal and mutually beneficial trade agreements; focus on countries committed to democracy; strengthen and expand the private sector in sub-Saharan Africa; and establish a United States Sub-Saharan African Economic Cooperation Forum.

     A. Tariff Benefits

     Section 107 of the Act defines sub-Saharan Africa by listing 48 at countries below the Sahara desert in Africa which are eligible for the proposed trade benefits. These sub-Saharan African countries have been designated for certain benefits in order to support and establish a market-based economy, a democratic society, an open trading system, economic policies to reduce poverty, and a system to combat corruption and bribery. However each country must provide for the above listed goals in order for the country to become a beneficiary. H.R. 434, 106th Cong. § 104 (2000). Further, the President will monitor and review the trade and investment policies of each country listed in Section 107 in order to determine whether the Act is being implemented and the current eligibility of each country to be designated as a beneficiary of sub-Saharan Africa. See id. at §106.

     The African Growth and Opportunity Act, which amends Title V of the Trade Act of 1974 [19 U.S.C. § 2461 et seq.] authorizes the President to provide eligible SSA countries with certain enhanced duty-free benefits under the GSP program effective from October 1, 2000 through September 30, 2006. H.R. 434, 106th Cong. § 111(2000). Duty-free treatment has been awarded for any article described in section 503(b)(1)(B) through (G) of the Trade Act of 1974 (except for textile luggage) that is the growth, product, or manufacture of a beneficiary sub-Saharan African country, if after advice from the International Trade Commission(ITC), the President determines that such article is not import-sensitive in the context of imports from beneficiary sub-Saharan African countries. See id. and 19 U.S.C. § 2463(b) (1999). The ITC recently commenced an information study under Section 332 of the Tariff Act to examine the possible economic impact of expanding GSP benefits in this manner.

     In order to qualify for duty-free treatment under the GSP, a product of a designated SSA country must satisfy the rules of origin for GSP set forth in § 503(a)(2) of the Trade Act of 1974 [19 U.S.C. § 2463(a)(2)]. That statute provides for duty free entry where goods (1) are the growth, product or manufacture of a beneficiary country (i.e., result from a "substantial transformation" performed in that country, (2) satisfy a 35% "value added" test, in which the cost of beneficiary country materials, plus the "direct cost of processing operations" performed in the beneficiary country equal at least 35% of the appraised value of the good, and (3) are "directly imported" from the beneficiary country to the United States. However, the Act also provides that -

(A) the cost or value of materials produced in the customs territory of the United States may be counted against the "35% value added" requirement, up to 15 percent of the appraised value of the article;¹ and

(B) the cost or value of the materials included with respect to that article are produced in one or more beneficiary sub-Saharan African countries shall be applied in determining such percentage.

H.R. 434, 106th Cong. §111, (2000). Thus, the product must have been primarily made in the beneficiary country, must have a qualifying content (of materials or direct processing costs) equal to or exceeding 35% of the appraised value of the article at the time of entry, and United States-origin materials may be counted against the 35% value added criterion, up to 15% of total entered value.

     B. Textile and Apparel Quotas

     The Act also provides that textile and apparel articles imported from SSA may enter the United States free of duty and free of any quantitative limitations (quotas) if certain conditions are met, and certain rules of origin are observed.

     A SSA beneficiary country may qualify for the preferential entry of its textile and apparel products if:

(1) the country adopts an efficient visa system to guard against unlawful transshipment of textile and apparel goods and the use of counterfeit documents;

(2) the country enacts legislation that would allow U.S. Customs Service verification teams to have the access necessary to investigate transshipment through such country;

(3) at the request of Customs, the country agrees to report total exports and imports into that country of covered articles as well as the country of origin of the articles;

(4)the country agrees to cooperate fully with the United States pursuant to Article 5 of the World Trade Organization (WTO) Agreement on Textiles and Clothing; and

(5) the country agrees to require all producers and exporters of covered articles to maintain complete records of production and export for two years.

H.R. 434, 106th Cong. §§112 and 113 (2000). The President is also empowered to provide duty and quota free treatment for goods from Kenya and Mauritius provided they adopt a visa system.

Preferential treatment shall apply only to the following textile and apparel products:

1) Apparel articles assembled in beneficiary SSA Countries from fabric wholly formed and cut in the United States²;

2) Apparel articles cut and assembled in beneficiary SSA countries, from fabric wholly formed and cut in the United States, if such articles are assembled in one or more beneficiary SSA countries with thread formed in the United States;

3) Apparel articles cut and assembled in one or more beneficiary SSA countries from yarn originating either in the United States or one or more beneficiary SSA countries.

H.R. 434, 106th Cong. §112 (2000).

     Treatment under paragraph (3), above, shall be extended in the one year period beginning October 1, 2000, and these imports may only be in an amount not to exceed 1.5%, the applicable percentage, of total U.S. imports. In each of the 7 succeeding 1-year periods of imports of these apparel articles, the applicable percentage (1.5%) shall increase by increments of 1.5% and shall result, by October 1, 2007 in a percentage of no greater than 3.5% of total U.S. imports. For apparel articles from lesser developed countries,³ preferential treatment shall be extended through September 30, 2004, subject to the applicable percentage cap. Apparel articles in this case, gain preferential treatment regardless of country of origin of the fabric.

     The Secretary of Commerce shall monitor imports of paragraph (3) articles on a monthly basis to determine if there has been a surge of imports of such articles. Duty-free treatment shall be suspended if the Secretary finds a surge of imports that causes damage or threatens damage to U.S. manufacturers of such apparel articles.

     Apparel articles wholly assembled from fabric or yarn not available in commercial quantities in the United States or knit-to-shape sweaters of cashmere, or merino wool sweaters⁴ that are both cut or knit-to-shape and sewn in one or more beneficiary SSA countries without regard to the source of the fabric or yarn (pursuant to Annex 401 of NAFTA) shall enter the United States duty and quota free. Hand-loomed or handmade articles of a beneficiary SSA country are also duty free and quota free.

     An SSA garment which features "foreign"- origin findings or trimmings may be awarded preferential treatment if the cost of such trimming does not exceed 25% of the cost of the components of the assembled article. Further, an article may be eligible for special treatment if the article contains no more than 7% of the total weight of fibers not wholly formed in the U.S. or one or more beneficiary SSA countries.

     The Act provides substantial penalties for exporters who unlawfully transship textile or apparel articles from an SSA beneficiary country. Transshipment has been described as the false claiming of country of origin, manufacture, processing, or assembly of an article or any of its components.

     The President is required to deny all benefits under section 112 of the Act to all violators for a period of 5 years. H.R. 434, 106th Cong. §113(2000). Further, the Customs Service is required to send production verification teams to at least 4 SSA countries each year; and to the extent feasible place SSA countries on the Electronic Visa Verification Program (ELVIS).

     Other benefits include the formation of free trade agreements with SSA countries. The President is authorized to engage in negotiations to enter into free trade agreements, and to develop a plan for the purpose of negotiating and entering into one or more trade agreements with interested SSA countries. H.R. 434, §116 (2000). Further an Assistant U.S. Trade Representative for African Affairs shall be appointed, and instructed to expand trade between the U.S. and Africa and to direct and coordinate interagency activities on U.S.-Africa trade policy. H.R. 434, §117 (2000).

III. TRADE BENEFITS FOR COUNTRIES OF THE CARIBBEAN BASIN
     The United States-Caribbean Basin Trade Partnership Act (referred to as "CBTPA", and set forth at §§201-214 of the Act) has been established to offer Caribbean Basin beneficiary countries willing to become part of the Free Trade Area of Americans (FTAA)⁵ tariff treatment equivalent to that of products of North American Free Trade Agreement (NAFTA) countries.

     As a result of the CBTPA, section 213(b) of the Caribbean Basin Economic Recovery Act has been amended to allow duty-free treatment of certain textile and apparel articles such as:

i) Apparel articles assembled in a beneficiary country of the United States- Caribbean Basin Trade Enhancement Area (CBTPA) that are entered under subheading 9802.00.80 of the HTS or entered under chapters 61 or 62, if after such assembly the articles would have qualified for entry under subheading 9802.00.80 of the HTS but for the fact that the articles were embroidered or subject to stone-washing, enzyme-washing, acid washing, perma-pressing, oven-baking, bleaching, garment-dyeing, screen printing, or other similar processes.

ii) Apparel articles cut and assembled in beneficiary countries of U.S.-CBTPA from fabric wholly formed in the United States and from yarns wholly formed in the United States, if such articles are assembled with thread from the United States.

iii) Handloomed, handmade and folklore articles that is certified as such by a competent authority.

iv) Textile luggage which is assembled in a beneficiary CBTPA country from fabric wholly formed in the United States from yarns formed in the United States.

H.R. 434, 106th Cong. § 211 (2000). Such treatment shall apply during the transition period from October 1, 2000 and end, the earlier of: September 30, 2008 or the date on which the FTAA or another free trade agreement enters into force.

     Duty free treatment for some apparel and textile articles is limited by quantitative restrictions. Thus, apparel articles knit to shape or knit apparel articles (other than socks or t-shirts) cut and wholly assembled in one or more CBTPA countries from fabric wholly formed in the U.S. may enter duty free in amounts not exceeding 250,000 square meter equivalents (SME) during the first year beginning October 1, 2000 and increasing by 16% (compounded annually) for the next 4 years. Duties will be eliminated for outerwear T-shirts classifiable under HTS subheadings 6109.10.00 and 6109.90.10, made from regional fabric, up to 4.2 million dozen for the same period. The same growth rates will be permitted in the next four years.

     Brassieres and similar articles cut and sewn in the U.S. or one or more of the CBTPA beneficiary countries, or both, will be duty free between October 1, 2000 to September 31, 2001. To obtain duty free treatment after this period, the articles must contain U.S. fabric equal to or greater than 75% of the aggregate declared customs value of the fabric contained in such articles.

     Apparel articles wholly assembled from fiber, fabric, or yarn not available in commercial quantities in the United States that are both cut (or knit-to-shape) and sewn in one or more beneficiary CBTPA countries without regard to the source of the fabric or yarn (pursuant to Annex 401 of NAFTA) shall enter the United States duty and quota free.

     An article may be awarded preferential treatment if it contains foreign origin findings and trimmings which do not exceed 25% of the cost of the components of the assembled article. Further, an article may be eligible for special treatment if the article contains no more than 7% by weight of fibers not wholly formed in the U.S. or one or more beneficiary CBTPA countries, except for elastomeric yarns. Certain nylon filament yarn (other than elastomeric yarn) may be eligible for treatment if the yarn is from Israel, Mexico, or Canada.

     Finally, the duty-free trade benefits provided for goods of Caribbean Basin countries do not apply to certain textile and apparel articles, footwear, tuna, petroleum, and watch and watch parts.

     The law provides for the assessment of penalties in the event of transshipments of any goods for purposes of duty-free shipment. If the President determines that transshipment has occurred, he is authorized to reduce the quantities of textile and apparel articles that may be imported duty free by an amount equal to three times the quantity of goods found to have been illegally transshipped, to the extent such action is consistent with the obligations of the United States under World Trade Organization (WTO) agreements.

     The President may take bilateral emergency tariff actions of a kind described in section 4 of the NAFTA, Annex 300-B with respect to any apparel article imported from CBTPA country if application of tariff treatment results in conditions such as damage to the domestic industry, pricing, market share, as prescribed in section 4 of Annex 300-B of NAFTA. See NAFTA, Dec. 17, 1992, Canada-Mexico-U.S., Annex 300-B.

     Any importer that claims preferential treatment shall comply with customs procedures similar in all respects to the requirements of Article 502(1) NAFTA.

     The President may withdraw or suspend the designation of any country as a CBTPA beneficiary country or withdraw or suspend, or limit the application of preferential treatment if the President determines that the beneficiary country has not: fully cooperated with the United States, penalized those involved in circumvention of U.S. law, undertaken its obligations under the World Trade Organization ("WTO") agreements, on or ahead of schedule; participated in negotiations toward the completion of the FTAA or a comparable trade agreement; or undertaken other steps necessary for that country to become a party to the FTAA or a comparable trade agreement. See id. Further the President will review to what extent the beneficiary country follows accepted rules of international trade, provides protection of intellectual property rights, provides protections to investors and investments, and provides the United States and other WTO members with nondiscriminatory, equitable, and reasonable market access. H.R. 434, 106th Cong. § 211 (2000).

     Finally, the President will review the extent to which the country provides internationally recognized workers' rights (including the right of association, right to organize, the prohibition on the use of any form of coerced or child labor, acceptable conditions for work), to which the country has met with counter-narcotics certification requirements, and follows the rules of GATT, WTO and the FTAA. See id.

     The effect of this program, including the performance of each beneficiary country or CBTPA beneficiary country, will be reviewed by the United States Trade Representative and the United States International Trade Commission ("ITC"). The United States Trade Representative shall submit to Congress a report regarding the operation of this title not later than December 31, 2001 and every 2 years, thereafter. H.R. 434, 106th Cong. § 211 (2000). The ITC shall submit to Congress and the President biennial reports regarding the economic impact of this title on United States industries and consumers and on the economy of the beneficiary countries. The first report shall be submitted no later than September 30, 2001. See id.

IV. AMENDMENTS OF OTHER LAWS
     In addition to providing expanded tariff and quota access to the United States market for Sub-Saharan African and Caribbean goods, the Act contains a number of amendments to other Customs laws which are of importance.

     Weekly Entry Procedures for Foreign Trade Zone Operations
     The Act provides for the weekly entry of goods withdrawn from all United States Foreign Trade Zones and subzones, regardless of whether those facilities are engaged in manufacturing operations. The Tariff Act is amended to provide that all merchandise with drawn from an FTZ⁶ during any seven day period shall, at the option of the operator or user of the zone, be the subject of a single estimated entry or release filed on or before the first day of the seven day period in which the merchandise is to be withdrawn from the zone. H.R. 434, 106th Cong. § 410 (2000). The Secretary of the Treasury may require that the operator or user of the zone use an electronic data interchange approved by the Customs Service to file entries and to pay the applicable duties, fees, and taxes with respect to the entries. H.R. 434, 106th Cong. § 410 (2000). Further the Secretary may require the importer to verify that their accounting, transportation, and other controls over the merchandise are adequate to protect the revenue and meet the requirements of the Federal agencies. See id.

     This weekly entry procedure shall not apply to merchandise whose entry is prohibited by law, or merchandise for which the filing of an entry summary is required before the merchandise is released from customs custody (e.g., quota-class textile goods).

     Finally, the law provides that weekly entries will be subject to any per-entry limitations applicable to collections of merchandise processing fees and similar taxes or charges, including the current $485 per entry "cap" on the merchandise processing fee (MPF).

     The law essentially codifies and makes permanent a U.S. Customs Service pilot program which allowed weekly entry for goods withdrawn from non-manufacturing FTZ sites. The program was hugely popular with FTZ users, but was discontinued by Customs based on concerns that the growth in FTZ activity would result in a reduction in MPF collections.

     Imports of Certain Wool Articles
     Four provisions will be added to the HTSUS that will cover worsted wool: (1) HTS, 9902.51.11, fabrics of, worsted wool, with average fiber diameters greater than 18.5 microns in diameter; (2) HTS, 9902.51.12, fabrics of worsted wool, with average fiber diameters less than 18.5 microns; (3) HTS, 9902.51.13, Yarn of combed wool, not put up for retail sale; and (4) HTS 9902.51.14, wool fiber, waste, garnetted stock, combed wool, or wool top. Duties for worsted wool fabric of yarn greater than 18.5 microns in diameter will be reduced to 19.3% with an import restriction of 2.5 million square meter equivalents, or such other quantity proclaimed by the President. Duties for worsted wool fabric of yarn less than 18.5 microns will be equivalent to the MFN rate applicable to such Canadian fabrics with an import restriction of 1.5 million square meter equivalents, or such other quantity proclaimed by the President. The duty rates for HTS 9902.51.13 and 9902.51.14 will be duty free. This will take effect on January 1, 2001. H.R. 434, 106th Cong. § 501 (2000).

     The President shall proclaim 8-digit tariff categories, without changes in duty rates, in chapters 51 and 62 of the HTSUS in order to provide separate tariff treatment for wool yarn and fabric made of wool fiber with an average fiber diameter of 18.5 microns or less, and for men's or boys' suits made of wool yarn having an average fiber diameter of 18.5 microns or less. Refunds of duties paid may be made concerning 1999 imports of worsted wool fabric or yarn and men's or boys' suits of worsted wool fabric. They will be repaid in equal amounts over a three year period. H.R. 434, 106th Cong. § 501 (2000).

     "Carousel" Application of Trade Retaliation Measures
     The Act also implements the controversial "carousel" provision regarding trade retaliation by the U.S. It provides that, where the United States initiates a retaliation list or takes any action which suspends benefits or imposes duties against the goods of a foreign country or countries because of the failure of such country or countries to implement the recommendation made pursuant to a dispute settlement under the WTO, the Trade Representative shall periodically revise the retaliation list or take other measures to affect the goods from the insubordinate country. H.R. 434, 106th Cong. §407 (2000).

     Changes in Textile Rules of Origin
     The Act also makes numerous changes to Section 334 of the Uruguay Round Agreements Act (URAA), which provides rules of origin for textile and apparel articles imported from all foreign countries. A separate memorandum discussing these complex changes is available from our offices.

     Our firm stands ready to furnish any additional information or assistance which may be required concerning the important changes effected by the Trade and Development Act of 2000.

1.     A similar "15% rule" is included in the Caribbean Basin Economic Recovery Act.

2.     This provision of the Act is intended to parallel the Guaranteed Access Limitation (GAL) and Special Regime programs which have provided substantially identical quota-free access for textile products made in Caribbean Basin Initiative countries and Mexico using textile parts "formed and cut" in the United States.

3.     "Lesser developed beneficiary SSA country" means a country that had a per capita gross national product of less than $1,500 a year in 1998, as measured by the World Bank.

4.     Cashmere sweaters are defined as sweaters, in chief weight of cashmere, knit-to-shape in one or more beneficiary sub-Saharan African countries and classifiable under subheading 6110.10 of the Harmonized Tariff Schedule of the United States; Merino wool sweaters are sweaters, composed 50% or more by weight of wool measuring 18.5 microns in diameter or finer, knit-to-shape in one or more beneficiary sub-Saharan countries.

5.     Thirty-four democratically elected leaders agreed at the 1994 Summit of the Americas to conclude negotiation of a Free Trade Area of the Americas ("FTAA") by the year 2005. The FTAA offers temporary benefits to Caribbean Basin countries and enhances trade between the United States and the Caribbean Basin.

6.     The term 'foreign trade zone' and 'zone' mean a zone established pursuant to the Act of June 18, 1934, commonly known as the Foreign Trade Zones Act (19 U.S.C. 81a et seq.).

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