By  on January 3, 2006

WASHINGTON - Implementation of the Central American Free Trade Agreement by all seven signatory countries is up in the air, and the uncertainty has thrown a wrench into sourcing plans for apparel importers and retailers poised to take advantage of the newly minted deal.

A spokesman for the Office of the U.S. Trade Representative said Friday that none of the countries was ready to implement the trade accord by the Sunday target date.

"Several countries are close to being ready to implement, but none has completed all of their internal procedures," the spokesman said in a statement.

He noted that the U.S. will implement the agreement with the CAFTA countries on a "rolling basis as countries make sufficient progress to complete their commitments under the agreement."

Negotiators from the U.S. and CAFTA nations had been targeting Jan. 1 for starting up the accord, which reduces or eliminates tariffs on goods flowing between the U.S. and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. Costa Rica has not even ratified the trade accord and is well behind the other countries in terms of implementation.

El Salvador is the closest to meeting all the obligations under the agreement and implementing it, the USTR spokesman said, noting that El Salvador's Congress passed a legislative package to implement the trade accord on Dec. 15.

"Once the Congress sends the legislation to President Saca for signature in early January, El Salvador will have the ability to issue further regulations and complete its internal steps and the final CAFTA implementation review process with the United States," the spokesman stated.

He also said the U.S. will work closely with the other five countries to help facilitate implementation as quickly as possible.

"At the same time, the implementation process should not be rushed," he said. "Otherwise, the benefits of CAFTA-DR to farmers, workers, businesses and consumers of the United States and of its CAFTA-DR partners could be jeopardized."

House Democrats are angry at the way the Republican leadership handled the tight CAFTA vote in late July and vigorously opposed the act's labor provisions, which they deemed inadequate.

Rep. Charles Rangel (D., N.Y.) on Thursday accused the Bush administration of negotiating a "flawed" CAFTA with double standards that ultimately caused a start-up delay."Rather than take a consistent position that countries must change their laws in all areas covered by the agreement, USTR took a high-profile position that the countries did not need to adopt labor laws that reflect the basic standards of the International Labor Organization," said Rangel, who is the ranking member of the House Ways & Means Committee, in a statement.

The six CAFTA nations exported $9.37 billion worth of apparel and textiles to the U.S. in 2004, while the U.S. exported more than $4 billion in textiles to the region in 2004. The six countries - taken as a group - account for 18 percent of the U.S. apparel import market, second only to China, which controls 22.6 percent.

Importers, retailers and some textile companies have been gearing up to take advantage of less restrictive rules of origin included in the pact that allow the use of regional fabrics and yarns, as well as some foreign fabrics and yarns, in garment production.

"Obviously, this is incredibly disruptive and a huge disappointment to everyone in the industry, particularly those companies who made plans for new sourcing or new investment in the region," said Julia Hughes, vice president of international trade at the U.S. Association of Importers of Textiles & Apparel.

Hughes said the sourcing picture for importers will rapidly become more complicated, because if there is a rollout of CAFTA eligibility, some countries will be operating under the new CAFTA rules while the others will still have to adhere to the stricter rules under the existing preferential trade program known as the Caribbean Basin Trade Partnership Act.

Sourcing in the region could become complicated, she said, because a lot of co-production exists among the six countries. The U.S. will have to determine whether fabric made in Guatemala, for example, but assembled in Honduras, qualifies for duty-free treatment based on which countries are operating under CAFTA and which countries are still operating under CBTPA.

Stephen Lamar, senior vice president at the American Apparel & Footwear Association, contended that failure to meet the target date for implementation would not be disruptive to U.S. apparel manufacturers and importers.

Lamar also noted that there is a retroactivity clause in the trade deal that allows companies to get refunds on duties that were applied to some apparel made under CBTPA as far back as Jan. 1, 2004, as long as they qualify under CAFTA's looser rules of origin."If CAFTA doesn't get implemented in a month or two period, the retroactivity grows," he said. "We are not sacrificing the duty-free opportunities to double check and make sure countries' affairs are in order before we push the start date on CAFTA."

However, Lamar said a long delay by any or all of the countries could start to have an impact.

"If all countries come on in fairly short order, we will not see a disruption," Lamar said. "But if it is delayed over a number of months, you could start to see that disruption in fabric production and in co-production in the region. One of the benefits of the agreement is it's a region moving together, and to the extent we can maximize that region as a whole, the more valuable it is for the industry."

Meanwhile, unfinished side deals crafted outside of the original agreement and designed to protect existing U.S. textile business have created another level of complexity and uncertainty.

U.S. textile manufacturers have been closely monitoring discussions between the U.S. and the other CAFTA countries to resolve apparel and textile side deals, some of which will require legislative action. The Bush administration made commitments to House textile-state lawmakers in order to secure enough votes for passage, including one that seeks to preserve pocketing and lining business in the U.S., and another intended to protect U.S. cotton and the man-made trouser business in Nicaragua.

The U.S. is holding talks with the six CAFTA countries, but it is still unclear what concessions might have to be made to secure the commitments to help preserve existing U.S. export business in the region. CAFTA opponents have voiced alarm over the U.S. making too many concessions, but have said they plan to work diligently to get the side deals instituted.

"There is definitely still uncertainty around the side deals," said Karl Spilhaus, president of the National Textile Association. "We hope [U.S. trade officials] don't give anything else up."

Missy Branson, senior vice president at the National Council of Textile Organizations, said a delay in implementation will give the textile industry and negotiators more time to finalize the side deals."From that perspective, it's a benefit to us," she said. "I understand that very good progress has been made in the negotiations and a few countries need to finalize [the deals], and they think they can do that in January."

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