WASHINGTON — Wrapping up the second round of trade negotiations with five Central American countries in Cincinnati on Friday, the U.S. proposed a strict yarn-forward rule of origin for apparel and textiles that allows for no exceptions.

This story first appeared in the March 3, 2003 issue of WWD. Subscribe Today.

The yarn-forward rule requires apparel to be made of yarn and fabric sourced within the free-trade area and among the free-trade partners. For example, yarn could come from Guatemala and be woven into fabric in Honduras or El Salvador, then assembled into apparel in Costa Rica or Nicaragua. About 16 percent of all apparel imported into the U.S. comes from the five Central American countries in negotiations. In 2002, imports from the five countries totaled 2.86 billion square meters equivalent, according to the Commerce Department. U.S. exports to the five countries last year amounted to about $9 billion in goods. Of that, more than $4 billion was textiles.

U.S. officials did not, however, allow for the use of fabric or yarn exceptions outside of the free-trade area in the form of tariff preference levels, which importers were advocating.

In addition, the U.S. proposal does not allow for links with other free-trade pacts or preferential programs. Importers, along with apparel and textile trade and lobbying groups in Central America, oppose the strict rule of origin and are pushing for a deal that would allow the signatories to use fabric and yarns from other countries with which the U.S. has trade deals, including Canada and Mexico, and the four Andean countries — Peru, Bolivia, Ecuador and Colombia — and still receive duty-free treatment.

The five Central American countries will now have an opportunity to offer counter proposals on rules of origin, which could change throughout negotiations of the trade pact, which is slated for completion by the end of the year.

Assistant U.S. Trade Representative Regina Vargo said the U.S. will make a market-access proposal on tariff reductions during the fourth round of negotiations. Vargo, who was joined at a news conference in Cincinnati by her five Central American counterparts, also said the parties are still discussing the issue of a labor provision and had not yet reached any conclusions.

Importers were not satisfied with the initial proposal on rules of origin, according to Julia Hughes, vice president of international trade at the U.S. Association of Importers of Apparel & Textiles.

“We are very disappointed if the U.S. position did not include [trade preference levels], since the administration said the Chile FTA was a model for these negotiations and Chile includes TPLs,” said Hughes. “We all recognize that most of the products done under CAFTA will use U.S. or regional inputs, but sometimes you need to have alternative sources whether it’s due to quantity issues or availability issues.”

Stephen Lamar, senior vice president at the American Apparel & Footwear Association, said he was pleased negotiators were tackling rules of origin early on, but noted a strict yarn-forward rule of origin in the CAFTA would not be commercially viable.

“We don’t see the yarn-forward formulation working in CAFTA,” said Lamar. “Mexico is really losing market share dramatically, which is partially due to the rigidity of its [yarn-forward] rules of origin.”

On the opposite side of the debate, the American Textile Manufacturers Institute welcomed the proposed strict rule of origin.

“TPLs are not needed,” argued Charles Bremer, vice president of international trade at ATMI. “The Central Americans will do just fine with our fabric and their own regional fabric.”

However, Bremer questioned whether the benefits the five Central American countries receive under CAFTA would supercede the benefits they already receive under the Caribbean Basin Trade Partnership Act.

CBTPA beneficiary countries must use U.S. yarn to receive duty-free treatment. Under the current CAFTA proposal, the five Central American countries could use regional yarn.

Jock Nash, Washington trade counsel for Milliken & Co., noted trade agreements encourage investment in the area granted preferences and in the case of apparel and textiles, that is damaging to the domestic industry.

“We currently have hemispheric overcapacity, which is driving many American firms into bankruptcy because they have no pricing power due to oversupply, which is due to overcapacity,” said Nash. “Creating further preferential arrangements that encourage further investment in new capacity shows a striking lack of understanding.”

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