WASHINGTON — Beneath the bigger issues of international cohesion, lower prices and lost jobs, free trade agreements are complex pacts filled with legal nuances and details that can translate into big opportunities or major threats.
Understanding those fine points is vital if importers are going to take advantage of reduced duty rates provided by the trade deals.
“As the patchwork of these free trade agreements comes together, the most important element is the rule of origin,” said Natalie Hanson, vice president of International Development Systems, a trade consulting firm here.
The rule of origin dictates where the raw materials can come from for goods to be eligible for duty-free treatment. The standard is yarn forward, which means the yarn used in the imports must come from one of the countries in the agreement.
However, even agreements with similar rules of origin can be quite different in practice, given the varying exceptions baked into each deal.
Trade preference levels, which often allow quantities of some raw materials to come from countries outside the accord, are one kind of important and frequent exception.
“Of what we have right now, the most liberal rule of origin is the one used for the Israel and Jordan free trade agreements,” said Hanson. “That rule does away with the need for a tariff preference level.”
It is the U.S. Trade Representative’s office that hammers out these details and signs a treaty that gets presented to Congress for approval. Once Congress signs off on the pact and the President gives his OK, the countries often have to make some final tweaks, such as adjusting certain laws, before the agreement is implemented.
The number of agreements has expanded significantly under the Bush administration, which this month said it would begin talks for an FTA with South Korea. With two-way trade of about $70 billion a year, an agreement would be the largest since the North American FTA.
Agreements already exist with Australia, Chile, Israel, Jordan, Morocco and Singapore, as well as the North American Free Trade Agreement with Mexico and Canada. Here’s a primer to the agreements in the works, put together by WWD and International Development Systems.
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- Andean Trade Promotion Agreement
Peru, Colombia and Ecuador
Talks wrapped up with Peru in December 2005 and are ongoing with Colombia and Ecuador.
Rule of Origin: Yarn forward (for Peru)
Trade Preference Level: No (for Peru)
Total apparel and textile imports: $1.5 billion (for region) - Bahrain Free Trade Agreement
Waiting to be implemented
Rule of Origin: Yarn forward
Trade Preference Level: 10-year TPLs for fabrics, cotton, man-made fiber apparel, made-ups (sheets, towels)
Most apparel and textile items will be duty-free upon implementation.
Total apparel and textile imports: $173 million - Central American Free Trade Agreement
Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua
Waiting to be implemented
Rule of Origin: Yarn forward
Trade Preference Level: 10-year TPL for cotton and man-made fiber from Nicaragua and a two-year TPL for woven tailored wool apparel from Costa Rica.
Duty-free treatment is retroactive to January 2004.
Total apparel and textile imports: $9.3 billion - South African Customs Union Free Trade Agreement
Botswana, Lesotho, Namibia, South Africa and Swaziland
Negotiations began June 2003.
Total apparel and textile imports: $735 million - South Korea Free Trade Agreement
On Feb. 2, the U.S. and South Korea said they would begin negotiations after a mandatory 90-day waiting period, which gives Congress a chance to weigh in before talks start.
Total apparel and textile imports: $1.9 billion - Thailand Free Trade Agreement
Negotiations began June 2004.
Total apparel and textile imports: $2.1 billion - Oman Free Trade Agreement
Waiting for Congressional approval
Rule of Origin: Yarn forward
Trade Preference Level: Cotton and man-made fiber apparel
Total apparel and textile imports: $61 million - United Arab Emirates Free Trade Agreement
Negotiations began in March 2005.
Total apparel and textile imports: $251 million
(Import figures are for the 12 months ended November 2005.)