Facing the next challenge: FTAA - Special Report: Sourcing - Free Trade Area of the Americas

Early talks will reveal what the U.S. can and cannot gain minus fast-track authority

The United States has sat on the sidelines as other Western Hemisphere countries have forged free trade agreements that crisscross the Americas. With input and supports from the U.S. business community, however, the Free Trade Area of the Americas negotiations offer the opportunity to gain some ground.

The United States really started something when it implemented NAFTA on Jan. 1, 1994. Since then, new trade agreements - some fashioned after NAFTA - have cropped up throughout the Americas and beyond, spurring commerce and economic development across many borders. Unfortunately for the United States, however, much of the new trade that has been born in NAFTA's wake seems to be benefiting everyone else in this hemisphere but the United States.

While NAFTA has expanded trade among the United States, Mexico and Canada, there is a whole other realm of trade within the Western Hemisphere that has exploded, with few benefits for U.S. companies. Since 1994, there have been a plethora of trade agreements, for instance, between and among the Caribbean and Latin American countries and Canada. The United States has been excluded, and as a result, disadvantaged, largely because of the lack of so-called fast-track negotiating authority of the U.S. executive branch - the authority to negotiate terms that can be rejected altogether but cannot be changed by Congress.

There are renewed indications, however, that this could change as a result of the launch of negotiations this past September in Miami, FL, to create a Free Trade Area of the Americas (FTAA). The FTAA, agreed upon nearly four years ago at the Summit of the Americas, is intended to be a Western Hemisphere-wide trade agreement, encompassing 34 countries. While the target date for completion of the agreement is a seemingly far off 2005, participating countries have agreed that there should be "concrete progress" by the year 2000, with a goal of reaching an agreement on business facilitation by that date.

Whether U.S. interests can be advanced in this hemisphere through FTAA negotiations, with or without fast-track, may depend most on the level of interest, involvement and creativity of the U.S. business community. It's up to the industry to tell the administration what it wants.

Why NAFTA Isn't Necessarily Enough

There's no question that many in the U.S. textile and apparel sectors have been utilizing NAFTA to their advantage in the years since the agreement's inception. U.S. fabric sales have been buoyed by the benefits available for "originating" goods moving among the three NAFTA countries. Likewise, more and more U.S. apparel firms are opting to reap the benefits of Mexican labor to simultaneously maintain price competitiveness, expand production and meet retailers' demands for just-in-time inventory systems.

Indeed, despite the anti-NAFTA stance of many U.S. apparel contractors, among others, the perception in Washington is that the apparel and textile sectors are tremendously satisfied with NAFTA. In fact, a review of NAFTA's textile and apparel origin rules, which was to have been completed by the end of this year, is not likely to happen at all. Those rules determine which products are considered "originating" and therefore eligible for preferential treatment, including reduced duties or no duties. As stringent as those rules are - requiring that all production processes, even as far back as fiber production, in some cases, occur within a NAFTA country - companies have found NAFTA benefits sufficiently compelling, and have been willing to adapt.

Astute companies, however, recognize that they can't count on NAFTA's three-country scope alone in today's very global marketplace, especially considering that the protections of the quota system are set to end the same year the FTAA is supposed to be in force.

The trade agreements that have been established among so many other players in the Western Hemisphere also increase the pressure on the United States to take an active role in the FTAA negotiations. For every trade agreement that excludes the United States, there are incentives for others to do business without U.S. partners. Consider the following deals that have been negotiated since 1995, while the United States sat on the sidelines with its fast-track authority expired.

Mercosur, the Southern Cone Common Market, was established Jan. 1, 1995, as a customs union with a relatively high common external tariff and duty-free movement of goods among its member countries: Brazil, Argentina, Paraguay and Uruguay. Additionally, Chile and Bolivia are associate members, enjoying free trade benefits with the Mercosur members although not applying the same common external tariff. Mercosur also is discussing associate memberships with Canada, Mexico, Venezuela and the entire Andean Community.

The Andean Community is another customs union, composed of Bolivia, Colombia, Ecuador, Peru and Venezuela. Goods produced within these member countries move duty-free, while products made outside the bloc are subject to the external tariffs of the member countries.

Moreover, the same day Mercosur was signed, Mexico became a member of the Group of Three (G-3), a free trade arrangement with Venezuela and Colombia patterned on NAFTA. Mexico also has negotiated NAFTA-like agreements with Costa Pica, Nicaragua, Guatemala, Honduras, El Salvador, Bolivia and Chile.

Chile, which had originally been viewed by the United States as the most logical country to join NAFTA, has now negotiated trade deals with everyone in this hemisphere but the United States. Thus, besides its role in Mercosur and deal with Mexico, Chile has entered into bilateral trade pacts with Venezuela, Ecuador and Colombia. Also, just this year, Chile and Canada negotiated a NAFTA-like arrangement.

There is also the Central American Common Market (CACM), which encompasses Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua. Under the CACM, duties are not imposed on most products moving among the member countries, and there is a common external tariff on products of non-CACM origin. The CACM also has a trade and investment cooperation agreement with Mercosur.

In addition, the European Union is engaged in discussions toward trade liberalization agreements with Mercosur and Mexico.

The practical consequence of these deals for U.S. companies is measurable. For example, in some instances, the common external tariffs applicable to non-members of these arrangements have been increased since the agreements were first negotiated. Also, the NAFTA-like agreement between Canada and Chile means that Chile's 11 percent tariff either does not apply or is being gradually eliminated for Canadian-made products entering that market. Similarly, Mexico has a distinct advantage over the United States in selling into Venezuela and Colombia because duties for Mexican-made products are, at most, half what the duties are for U.S.made products.

In conclusion, the array of arrangements among Latin American countries provides a tremendous incentive for investment to be placed in one of the participating countries rather than the United States, in order to maximize the preferences, and cost advantages available.

U.S. Plays Catch-Up in FTAA Negotiations

Catching up is not going to be easy for the United States, especially since the myriad of pre-existing relationships and trading blocs may give others greater leverage in the FTAA negotiations. Under the ground rules established so far for the FTAA talks, countries will have the choice of negotiating as blocs, such as Mercosur or Andean Community, or individually. [ILLUSTRATION FOR FIGURE 1 OMITTED] Given the overlapping memberships in these groups, some countries effectively will have several bites at the apple in pressing for their positions and priorities in the FTAA talks.

It's significant that the negotiators have agreed that they should reach an agreement on business facilitation of the FTAA by 2000 because it provides a basis of interest in these otherwise seemingly unwieldy and extended talks.

One of the most important negotiating points for the United States - customs procedures - is encompassed within the topic of business facilitation. For many U.S. companies trying to do business in Latin America, the development of uniform customs procedures is close to, if not at the top of, their priority lists, right next to duty reductions. Even more significantly, from a U.S. perspective, changes in customs procedures - unlike changes in tariff rates should not require any changes in U.S. legislation. In other words, the administration's lack of fast-track authority doesn't matter as much because it won't need Congress' approval if no U.S. laws are being changed.

Among the objectives being suggested by U.S. companies are:

* the collective adoption of internationally accepted customs forms and procedures;

* advance classification rulings systems to provide certainty regarding classification prior to importation;

* uniform procedures for the duty-free movement of samples which are entering a country only temporarily; and

* transparent appeals processes to permit challenges to Customs decisions.

Many of these things are a given for goods entering the U.S. market, but the lack of such certainty at Latin American ports of entry has created tremendous obstacles for U.S. goods.

Whether Latin American and Caribbean negotiators will be willing to meet the demands of the U.S. business community on customs procedures remains to be seen. Considering the U.S. administration's relatively weak negotiating authority, it is not clear that other countries have much to gain by acquiescing.

The greatest leverage of U.S. companies may be their willingness to press for fast-track authority for the U.S. administration, so that it could address the issue of greatest interest to the other 33 countries at the negotiations: lower U.S. tariffs. If the other FTAA members see a real possibility that lower tariffs on their goods entering the vast U.S. market could be available at the end of the day, they may be more willing to make concessions on uniform and transparent customs procedures.

The fate of the United States' unilateral trade preferences also may impact the interest of Latin American and Caribbean countries in the FTAA business facilitation negotiations. To date, the Caribbean countries have been rebuffed in their attempts to obtain U.S.-legislated "parity" with Mexico. This is largely because the U.S. textile industry has insisted that benefits unilaterally granted by the United States be limited to products subject to much more stringent origin rules than those applied to products under NAFTA. The end result is there is no incentive for investment in textile production facilities in the Caribbean. A bilateral negotiation process, on the other hand, could offer the opportunity to obtain origin rules akin to NAFTA's rules.

Moreover, the Andean countries, which also want parity if the Caribbean countries get it, are facing renewal in 2001 of the U.S. Andean Trade Preference Act, which grants them unilateral trading benefits. The willingness of the U.S. business community to support and press for an extension of this legislation as well as for some form of Caribbean parity may be another form of leverage for progress on the FTAA business facilitation issues.

Ultimately, trade negotiations are conducted on a government-to-government basis. But the determination of the urgency of those negotiations and their priorities can be affected by the business community. The opportunity for the U,S. sewn products industry to influence the FTAA process, both within the United States and throughout the hemisphere, is now at hand.

Brenda A. Jacobs is Of Counsel in the customs and international trade group of the law firm of Powell, Goldstein, Frazer & Murphy, in its Washington, D.C., office. She may be reached at tel.: 202-347-0066, by e-mail at bjacobs@pgfm.com or on the Web at www.pgfm.com.

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