WASHINGTON — The Bush administration presented Congress with two proposals to fix a glitch in the Central American Free Trade Agreement that has frustrated producers in the region and kept the accord’s promise of duty-free trade out of reach.
The seven countries in the deal were expected to start implementing it simultaneously, but so far only the U.S. and El Salvador have done so.
Ratification of CAFTA pulled El Salvador out of the Caribbean Basin Initiative, a U.S. preference program that also offers reduced duties. That means goods made in El Salvador using materials from other countries yet to join CAFTA — Guatemala, Honduras, Nicaragua, the Dominican Republic and Costa Rica — are subject to duties that exceed 30 percent, in some cases.
That is the opposite of the accord’s intended effect. Honduras and Nicaragua might be ready to fully implement CAFTA next month, changing again how duties are applied to some goods from those or other countries in the region.
“It’s going to take a legislative fix,” said Scott Quesenberry, special textile negotiator in the office of the U.S. Trade Representative.
Quesenberry discussed two possible legislative changes with staff members from key Congressional committees via conference call Tuesday. One plan would amend CAFTA so that countries in the agreement get rebates on duties paid in the interim. This retroactive treatment now applies only to countries in the Caribbean Basin Initiative until they join CAFTA. This option has the advantage of being clearly retroactive, but does not become effective until a country enacts CAFTA, Quesenberry said.
The other solution would be to go back into the Caribbean preference program and change the definition of where countries may get materials and still qualify for duty-free treatment.
“That [fix] has the advantage of being able to be done immediately,” Quesenberry said. “The disadvantage is we will have to make it clear in the legislation that this is meant to have a retroactive effect.”
The problem won’t truly go away until the legislatures in all the CAFTA countries implement the deal — a goal complicated by Costa Rica, which has yet to even approve the pact.
Wilbur L. Ross, chairman of International Textile Group, which includes Burlington Industries and Cone Mills, put plans for a denim plant in the region on hold because of the uncertainty about implementing the pact. Ross had hoped to start construction on a denim mill in Nicaragua or Guatemala in January and had not ruled out building plants in both countries.
“We were quite far along,” he said. “We have a location picked, the plant design and the equipment. Everything is all laid out, but it doesn’t really work without a couple of the countries, in our case Nicaragua and Guatemala, joining CAFTA.”
Jim Chesnutt, president and chief executive officer of National Spinning Co. and chairman of the National Council of Textile Organizations, has had to pull his yarn dyeing out of Guatemala and bring it back to North Carolina.
Chesnutt, who was sending his yarn to Guatemala for dyeing and on to El Salvador for sweater production, was almost forced to pay a 32.6 percent duty on 150,000 sweaters produced in El Salvador because Guatemala has not officially been cleared to enact CAFTA. He was able to get his shipment to the U.S. before El Salvador’s entry into CAFTA on March 1.
“I had it commissioned-dyed in Guatemala, but now I have to dye it in Burlington, N.C., and it takes away my flexibility,” Chesnutt said. “I have to dye it here now and wait until I get another order to fill a container, or ship a partial container to El Salvador, which is more costly. It has caused people to go elsewhere rather than trying to do business under a confused scenario.”
Even companies committed to the region have pulled back to some degree.
“We’ve had a slight shift out of there toward Asia, but nothing really that significant,” said Jim Calo, senior vice president of operations for VF Sportswear Inc., a division of VF Corp.
Calo said the company would keep production in the region because of its ability to get goods to the U.S. quickly and the cost savings that duty-free treatment will eventually create.
“We’re still hopeful that we’re going to be able to reach back into what we’ve done so far this year and be able to get that stuff duty free,” said Calo. “Unfortunately, you have to pay that duty up front, so there’s a cash lag.”
The wait for CAFTA to become a reality has been too much for some, said Erik Autor, vice president and international trade counsel at the National Retail Federation.
“A number of retailers have probably thrown up their hands in disgust and said, ‘That’s it, I’m going to Asia,'” he said. “It has just been incredibly frustrating for retailers. It’s too bad. I think people initially were very excited. It’s just been so botched.”