New Trade Programs/New Lingo

The terminology and requirements behind the Trade and Development Act of 2000 are important considerations for U.S. manufacturers and importers.

The recent enactment of the Trade and Development Act of 2000 has resulted in significant new business options for U.S. yarn spinners, fabric mills and apparel firms, as well as apparel makers in the developing countries affected by the legislation.

Specifically, the legislation, which includes duty-free and quota-free benefits for garments made in the Caribbean, Central America and Sub-Saharan Africa, should promote the use of U.S. yarns and fabrics. However, the terminology being used to describe these new opportunities is extremely confusing.

There are now a variety of special trade programs for textile and apparel (mostly apparel) goods that use U.S. inputs, and while they have similar names, they have some very different requirements. Knowing which program requires what is essential to ensuring that participating in these programs brings profits and not penalties and lawsuits. And because the Trade and Development Act of 2000 is based upon some earlier legislation, it will be helpful to build an outline of the different programs from the ground up.

In Review

"807" refers to a duty reduction benefit available whenever "U.S. fabricated components" are included in a product that is manufactured/assembled outside of the United States. The number comes from the old U.S. Tariff Schedule. Under the current Harmonized Tariff Schedule, the subheading number is 9802, but the old 807 moniker is more popular.

In the context of textiles and apparel, 807 typically means that fabric is cut to shape in the United States and then exported abroad, where it is assembled into a final product that is then imported back into the United States. The fabric can be made anywhere; it only matters that it is cut to shape in the United States and exported ready to be assembled. (That is what makes a "U.S.-fabricated component.") Duty is owed only on the value added abroad, namely the labor costs and the value of any non-U.S. components.

The duty reduction is dependent upon only assembly operations and operations "incidental to assembly" being performed abroad on U.S.-cut parts. Additional operations that are not considered "incidental to assembly" will result in disqualification for the duty break for either portions of the garment or the entire garment. For example, stone washing of denim jeans assembled abroad from U.S.-cut components would cause the entire garment to be dutiable because stone washing is not considered incidental to assembly. Embroidering a pocket abroad would mean that the pocket does not qualify for 807-type treatment, but the rest of the garment may still qualify. There is no quota benefit associated with plain-vanilla 807.

"807A" refers to a special access apparel program originally created for the Caribbean Basin Initiative (CBI) region in 1986. It was later expanded in 1988 to cover Mexico, where it is called the Special Regime program, and also to the Andean countries.

There are some similarities and differences between the 807A program for the CBI and Andean countries and the 807A (or Special Regime) program for Mexico, largely as a result of the North American Free Trade Agreement (NAFTA). For example, both 807A programs cover goods assembled abroad from fabric that is formed (knit or woven) in the United States and cut to shape in the United States.

Under the original CBI-only program, wherever there was a quota on an apparel category, the United States offered to create a "guaranteed access level" for apparel assembled in that category from fabric cut and formed in the United States. In other words, the duty benefit is the same as for regular 807, but under 807A, virtually quota-free access also is provided.

Further, for quota-free purposes under 807A, it is acceptable to perform certain "non-incidental" operations abroad, such as stone washing, perma-pressing and other similar finishing processes. However, the duty benefit is lost if those processes occur in a Caribbean, Central American or Andean country However, as a result of NAFTA, both quota-free access and duty-free access are provided for Mexican-assembled goods that have been stone washed or perma-pressed following the assembly operations, regardless of whether there is a quota on a particular product category Also, NAFTA does not limit the duty-free and quota-free benefit to apparel: Any textile product assembled in Mexico from fabric that is formed and cut in the United States can qualify.

These 807A programs permit the use of some foreign "findings and trimmings," as long as those non-U.S. inputs do not account for more than 25 percent of the cost of the components of the garment. Findings and trimmings are items such as bow buds, decorative lace trim, zippers, zipper tapes, snaps, thread, fabric labels and elastic strips (as long as they are only for bra straps). By historical practice, neither pocketing nor interlining is considered a finding or trimming, although there is a special exception for some types of interlinings that are not currently produced in the United States. Such foreign interlining, however, is counted against the 25 percent cost limit for foreign findings and trimmings.

"809" is the newest creation of the U.S. Textile Quota Program, and it is a number which did not exist in the old U.S. Tariff Schedule. The 809 name was dreamed up much later simply to denote a "step up" from 807. Under 809, bolts of U.S.-formed fabric can be shipped abroad and then cut and sewn abroad and imported into the United States quota-free Foreign findings and trimmings may be incorporated, as long as .they do not account for mote than 25 percent of the cost of the U.S. fabric. A formal bilateral agreement between the United States and a participating country is required. So far, only two countries -- Romania and Macedonia -- have 809 programs with the United States, and only for wool apparel. Moreover, there is no duty benefit applicable to 809.

"The Trade and Development Act of 2000" -- more often referred to as the CBI parity or Africa legislation -- builds upon the traditional 807A and 809 programs. The new law provides a few more benefits, but also establishes more requirements. For that reason, it seems logical to refer to its programs as a combination of "807A+" and "809+." Under this legislation, both quota-free and duty-free treatment should be available for qualifying products on Oct. 1, provided that the Clinton administration has designated the participating countries as eligible beneficiaries.

807A+ means that the fabric must be formed in the United States from U.S.-spun yarns, and the fabric then must be cut to shape in the United States. Only apparel products (and textile luggage in the case of qualifying CBI countries) will qualify and they must be assembled in a participating beneficiary country in the CBI region or in Sub-Saharan Africa. Foreign-made findings and trimmings are permissible, but again cannot account for more than 25 percent of the costs of the garment components. The law permits stone washing and other such finishing operations to be performed in the country of assembly, plus screenprinting and embroidery (which are not authorized under 807 or 807A). Qualifying goods enter the United States duty-free and quota-free.

809+ means that bolts of fabric formed in the United States from U.S.-spun yarns may be shipped to participating countries, finished in those countries (undergoing processes such as dyeing and printing), cut and sewn in those countries, and then imported into the United States as duty- and quota-free finished apparel. The apparel also must be assembled with U.S.-formed thread. That means that thread is not an eligible foreign finding and trimming for the purposes of this program.

Figure 1 will help clarify some of the subtle distinctions among the programs.

The Nitty-Gritty

Participating in any of the 807A and 809 programs, with or without the pluses, creates significant record-keeping responsibilities. For example, under the 807A and 809 programs the following documents must be maintained for three years and made available for review by the U.S. Customs Service and the Committee for the Implementation of Textile Agreements (CITA):

* entry documents;

* design style costing sheets or similar documents providing a complete description of the assembled products;

* cutting tickets (if the fabric is cut in the United States), including the name and location of the cutting facility or facilities;

* mill invoices, including the name of the mill where the fabric was formed. The participant must also obtain a signed statement (directly on the invoice or on a separate document that relates to each specific shipment of fabric) from a principal at the mill that the fabric is of U.S. origin. Vertically integrated participants -- i.e., companies that both form and cut fabric -- must retain an internal transfer document or other documentary proof that they formed the fabric(s) in the United States;

* transportation documents if fabric is cut in the United States (i.e., from the mill to the cutting facility or from the cutting facility to the border/assembler); and

* export documentation.

Expect Customs to require no less for 807A+ and 809+. And failure to abide by the requirements carries with it the possibility that future participation in these cost-lowering programs may be barred for an extended period of time. In addition, U.S. Customs may seek to levy penalties against the importer for false statements at the time of entry. Moreover, while entry may not be denied if duty-free benefits are wrongly claimed under these programs, at the very least duties will be assessed -- thereby upsetting price structures and profit assumptions.

For the knowledgeable company, these new programs can be a tremendous boon. The key is careful understanding and adherence to the rules and obligations.

Brenda A. Jacobs is a partner in the Customs and Trade group of Powell, Goldstein, Frazer & Murphy LLP, with offices in Washington, DC, Atlanta, GA, and Geneva, Switzerland.

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