Overview Of The Dominican Republic-Central America – United States Free Trade Agreement
Jon Fee, Diego Marquez And Bj Shannon, Alston & Bird Llp

September 2, 2014

Introduction

The United States President signed legislation to implement the Dominican Republic - Central America – United States Free Trade Agreement (CAFTA-DR) on August 2, 2005. The parties implemented CAFTA-DR on different dates until Costa Rica, the last party to implement CAFTA-DR, put the agreement into effect on January 1, 2009. The parties are Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and the United States. CAFTA-DR gives immediate duty free treatment to most goods, including all textiles and apparel. At the request of U.S. legislators during the votes on the agreement's passage in the U.S. House and Senate, changes to the CAFTA-DR text were subsequently negotiated to restrict the origin of pocket bag fabric in CAFTA-DR apparel and to grant concessions to the other CAFTA-DR parties in return for agreement to the pocketing rule. Additionally, the so-called "CAFTA-DR fixes," which affected the CAFTA-DR sewing thread rule and short supply rules, as well as the scope of the single transformation rule for sleepwear and the sublimits for cumulation of Mexican inputs, took effect on October 13, 2013. Both the pocketing concessions and the CAFTA-DR fixes are incorporated in the following summary.

Yarn Forward and Other Tariff Shift Rules

All apparel articles can be duty-free originating goods from all CAFTA-DR countries if they satisfy CAFTA-DR's preferential rules of origin. They will be originating if they are wholly obtained or produced entirely in one or more of the CAFTA-DR countries, meaning that all the fiber, yarn and fabric are produced in the CAFTA-DR territory and the apparel articles are cut or knit to shape and sewn or otherwise assembled in the CAFTA-DR territory. But the origin rules more often applicable to apparel articles are known as tariff shift rules. The most common is the yarn forward rule that first appeared in NAFTA. Yarn forward means that the component determining classification must be woven or knit in one or more CAFTA-DR countries with yarn spun or extruded in one or more of the CAFTA-DR countries, and that the apparel article must be cut or knit to shape and sewn or otherwise assembled in one or more of the CAFTA-DR countries. For example, a cotton t-shirt containing foreign cotton fiber will be originating if the yarn is spun, the fabric is knit and the t-shirt is cut and sewn in the CAFTA-DR territory. Since the United States is itself a CAFTA-DR country, any of the processes required to be performed in one or more of the CAFTA-DR countries can be performed in the United States.

CAFTA-DR provides that apparel articles of yarns and fabrics not generally produced in the United States or the other CAFTA-DR countries, such as apparel articles of silk or linen, are subject to a more lenient single transformation rule, under which they are treated as originating goods if they are cut and sewn (or knit to shape) in CAFTA-DR countries from fabric and yarn of any origin. Brassieres of any fabric are similarly subject to a single transformation rule. CAFTA-DR also applies a single transformation rule to certain pajamas and sleepwear.  The CAFTA-DR fixes clarified the scope of this single transformation rule and extended it to include additional tariff subheadings for women’s and girls’ woven sleep pants.  Additionally, under CAFTA-DR, wool apparel articles are originating if they are fabric forward, meaning that the yarn can be of any origin. CAFTA-DR also allows a single transformation origin rule for men's and boys' woven boxer shorts and woven pajamas, women's and girls' woven pajamas and negligees and certain woven girls' dresses.

The CAFTA-DR countries also agreed to apply this more lenient single transformation rule to additional classifications of apparel articles to compensate for the stricter rule for pocketing, discussed below. These single transformation rules and the pocketing rule took effect on August 15, 2008. The additional apparel articles that are subject to a single transformation rule include certain women’s and girls’ cotton coats and cotton and man-made fiber suits; infant dresses; women’s and girls’ man-made and other fiber ensembles; men’s and boys’ cotton and man-made fiber woven dress shirts; women’s, girls’, men’s and boys’ suit jackets of selected fibers; and women’s wool anoraks.

Application of Tariff Shift Rules to the Component Determining Classification

For apparel, tariff shift rules only apply to the component that determines the classification of the good (subject to the exceptions, described below, for visible linings, pocketing, sewing thread, and narrow elastic fabric). This is usually the fabric component that gives the apparel article its essential character, which is most often the fabric forming the apparel article's outer shell. Incidental fabric in the apparel article is therefore not subject to the applicable tariff shift rule and can originate in non-CAFTA-DR countries. This exception eliminates the need for a findings and trimmings rule like the one found in CBTPA and ATPDEA. This rule only allows CBTPA and ATPDEA apparel articles to incorporate very few, specific foreign articles, up to 25 percent of the value of all components (e.g., hooks and eyes, snaps or buttons); but CAFTA-DR generally allows unlimited foreign components, except that the fabric component determining classification must of course be yarn forward or meet the otherwise relevant origin rule.

Additional Requirements for Visible Linings, Pocketing, Sewing Thread, and Narrow Elastic Fabric

For many apparel articles with visible linings, a separate rule requires that certain types of visible lining fabric must be woven or knitted in one or more of the CAFTA-DR countries. Additionally, since August 15, 2008, pocketing must be woven or knitted in one or more of the CAFTA-DR countries from yarn spun or extruded in one or more of the CAFTA-DR countries. For apparel containing sewing thread of cotton, man-made filament or man-made staple, or for single-ply synthetic filament yarn used as sewing thread, the sewing thread or yarn used as sewing thread must be formed and finished in one or more of the CAFTA-DR countries. For apparel containing certain narrow woven or knitted elastic fabric of five percent or more elastomeric yarn, such fabric must be formed from yarn and finished in one or more of the CAFTA-DR countries.

Apparel articles made with short supply yarns or fabrics and apparel articles subject to the single transformation rules that were negotiated in exchange for the pocketing rule are not subject to the visible lining, pocketing, sewing thread, or narrow elastic fabric rules.

De Minimis

Generally, up to 10 percent by weight of the fibers or yarns in apparel articles can be non-originating without causing the finished article to lose its originating status. For apparel articles containing more than one component, the de minimis allowance is 10 percent by weight of the component determining classification. As an exception to the de minimis allowance, CAFTA-DR provides that a good containing elastomeric yarn (except latex) will not be originating unless all elastomeric yarn in the component determining classification is originating, meaning that any elastomeric yarn in the component determining classification must be spun or extruded in one or more of the CAFTA-DR countries.

Short Supply

Several yarns and fabrics were identified in CAFTA-DR as short supply materials that are not commercially available in the CAFTA-DR countries. These materials can be used without disqualifying the apparel article from CAFTA-DR originating status. The list was a composite that included yarns and fabrics designated as such in NAFTA, ATPDEA, and CBTPA, plus yarns and fabrics that were added in the CAFTA-DR negotiations.

CAFTA-DR also provides for the designation of new short supply yarns and fabrics at the request of interested entities. Such requests are approved by the U.S. Committee for the Implementation of Textile Agreements (CITA) upon findings that such materials are not available in commercial quantities in a timely manner in the United States or the other CAFTA-DR countries, or in the absence of any objection from other interested entities. Information about new commercial availability determinations and an updated list of all short supply materials are available on CITA's website at www.otexa.ita.doc.gov.

Apparel articles will be treated as originating if they are cut or knit to shape and sewn or otherwise assembled in one or more of the CAFTA-DR countries, and if the fabric of the outer shell, exclusive of collars, cuffs, and ribbed waistbands (only if the ribbed waistband is present in combination with cuffs of identical fabric construction) is wholly of one or more of the following:

  • Short supply fabric;
  • Fabric that is formed in one or more of the CAFTA-DR countries with short supply yarns; or
  • Any combination of the foregoing fabrics and originating fabrics, which originating fabrics can contain de minimis yarns.

The 2013 CAFTA-DR fixes eliminated the requirement that elastomeric yarn contained in any of the foregoing fabrics must be formed in one or more of the CAFTA parties. Elastomeric yarn contained in these fabrics now may be of any origin.

The CAFTA-DR fixes also allow for the designation of visible lining fabric, narrow elastic fabric, sewing thread or yarn of heading 5402 used as sewing thread, and pocket bag fabric as short supply materials.

Nicaragua Tariff Preference Level (TPL)

Nicaragua was granted a very broad TPL for certain non-originating apparel articles of cotton and man-made fibers, with a small sub-limit for certain non-originating men's wool sport coats that was added to the TPL in exchange for Nicaragua's agreement to the pocketing rules, but the TPL will expire at the end of 2014.

For the remainder of 2014, if goods subject to the TPL meet all other preferential treatment requirements in CAFTA-DR, and are both cut or knit to shape and sewn or otherwise assembled in Nicaragua, then they are treated as though they are originating even if the apparel is made from fabric or yarn produced or obtained outside the territory of the CAFTA-DR countries. The limit on imports into the United States from Nicaragua under this TPL is 100 million square meter equivalents (SME). The wool sport coats covered by the TPL have a sub-limit of 1.5 million SME within the overall TPL.

At the time of Nicaragua's implementation of CAFTA-DR, Nicaragua and the United States agreed that, up to specified limits, for each SME of certain cotton or man-made fiber woven trousers exported to the United States under the TPL, Nicaragua must export an equal quantity of trousers made with U.S. formed fabric of U.S. formed yarn. The trousers of U.S. fabric and the trousers of foreign fabric need not be of the same type of fabric, as long as both are covered by the applicable trousers classifications. When Nicaragua did not meet the one-for-one requirement, the United States has been permitted to decrease the total TPL available for the following year.  For the period from April 1 to December 31, 2014, this one-to-one purchasing rule should apply to the first 50 million SME of cotton trousers exported under the TPL, but the United States cannot enforce this requirement by reducing a future TPL, because the program expires at the end of 2014.

CAFTA-DR producers and exporters have argued that expiration of the TPL will be detrimental to Nicaraguan apparel producers and to U.S. fabric and yarn producers.  CAFTA-DR does not permit “extension” of the TPL, but two pending bills would legislatively re-create a TPL.  In June 2013, Senator Feinstein introduced S. 1136 to provide for an identical TPL for ten more years.  In December 2013, Senator Hagan introduced S. 1183 to provide a TPL for ten more years, but only for 50 million SME of apparel (with the possibility of small increases over the ten years), only for certain woven trousers, breeches, and shorts, and only subject to a producer-specific one-for-one earned import allowance program.  A producer or entity controlling production would earn import allowance credits by exporting from the United States fabric wholly formed in the United States of yarns wholly formed in the United States and exported.  Both bills have been referred to the Senate Finance Committee and no further action has been taken.

Costa Rica Wool Provision

Costa Rica was granted a special allowance for certain wool apparel articles, including wool jackets, skirts, suits, and trousers. These apparel articles originally were eligible only for import at 50 percent of the general U.S. duty rates. But in exchange for Costa Rica's agreement to the pocketing rule, the United States agreed that the specified wool goods from Costa Rica would be eligible for duty free treatment. These apparel articles must be both cut and sewn or otherwise assembled in Costa Rica, and they must comply with CAFTA-DR's special rules for visible lining fabric, pocketing fabric, sewing thread, and narrow elastic fabric. The preferential treatment is limited to imports into the United States of 500,000 SME annually from 2009 through 2018.
Also in exchange for agreement to the pocketing rule, Costa Rica was granted a TPL for an additional 500,000 SME in each year from 2009 through 2018 of tailored wool apparel articles made of uncarded wool fiber or of wool yarn with a diameter of greater than 18.5 microns. Like apparel made under Nicaragua's TPL, these apparel articles must be cut and sewn or otherwise assembled in Costa Rica, but they are not subject to CAFTA-DR's visible lining fabric, pocketing fabric, sewing thread, or narrow elastic fabric rules. The United States and Costa Rica have agreed to meet before the end of 2018 to determine whether to extend or eliminate these programs.

Dominican Republic Two-for-One Rule

In exchange for the Dominican Republic's agreement to restrictions on the origin of pocketing fabric, the United States promised to pass legislation to implement a two-for-one rule for the Dominican Republic. Under this rule, which became effective November 25, 2008, one SME of qualifying apparel cut and sewn or otherwise assembled in the Dominican Republic from fabric of any origin may be imported free of duty into the United States from the Dominican Republic for every two SME of qualifying apparel produced in the Dominican Republic according to CAFTA-DR's ordinary yarn forward rules. Qualifying apparel articles, which must be cut and sewn or otherwise assembled in the Dominican Republic, include woven trousers, bib and brace overalls, breeches and shorts, skirts and divided skirts, suits, and suit-type jackets and trousers of chief weight of cotton (excluding denim).

Producers in the Dominican Republic may accumulate credits in an account with the U.S. Department of Commerce for the quantity of qualifying U.S. fabric that they purchase and export to the Dominican Republic on or after August 1, 2007. Producers may then exchange these credits for earned import allowance certificates for the duty-free entry of qualifying apparel articles.

Cumulation

Since August 15, 2008, cumulation has been allowed for Chapter 62 woven apparel articles containing materials produced in Mexico, if the Mexican components would have qualified as originating if they had been produced in the United States or one or more of the other CAFTA-DR countries. This means that, for articles exported from CAFTA-DR countries other than the Dominican Republic, wherever CAFTA-DR yarn or fabric is required for these apparel articles, yarn or fabric from Mexico can be used instead. Canada is also eligible to participate in cumulation, but the Canada has not yet reached an agreement with the United States and the other CAFTA-DR countries.

Two limits apply. First, not more than 100 million SME of cumulated apparel articles may be imported into the United States each year. The CAFTA-DR fixes would have increased the limitby 25 percent to account for the Dominican Republic, which joined CAFTA-DR after negotiation of cumulation provisions in the original agreement, but the Dominica Republic lost its eligibility to use the cumulation provisions effective March 1, 2012, because it failed to reach a reciprocal agreement with Mexico.

Second, within the overall limit, CAFTA-DR creates sub-limits of 45 million SME for certain cotton or man-made fiber trousers or skirts, excluding blue denim apparel articles, 20 million SME for certain blue denim apparel articles, and one million SME for certain wool apparel from the CAFTA-DR countries other than the Dominican Republic.

Co-Production Between the Dominican Republic and Haiti

A special provision in the U.S. implementing legislation covers co-production between the Dominican Republic and Haiti. Recognizing that co-production of apparel articles is an important feature of apparel production in the Dominican Republic and Haiti, the United States will provide CBTPA benefits for such production, notwithstanding the discontinuance of CBTPA benefits for other Dominican Republic merchandise.

Miscellaneous Textile and Apparel Rules

CAFTA-DR provides an alternative rule for apparel articles by which the United States will apply duty only to the value of an assembled good minus the value of the fabrics wholly formed in the United States or components knit to shape in the United States. Such goods must be sewn or otherwise assembled in CAFTA-DR countries from fabric wholly formed in the United States and cut in CAFTA-DR countries or knit to shape in the United States. Any sewing thread or single-ply synthetic filament yarn used as sewing thread used to assemble such apparel articles must be wholly formed in the United States. Yarn in such apparel articles can be of any origin. This generally means that such apparel articles will be dutiable only on the value added in CAFTA-DR countries.

For sets (generally consisting of two or more articles that go together and are packaged and marketed together, like a blouse with a matching scarf) to be originating, each good in the set must be an originating good, or the value of the non-originating components must not be more than 10 percent of the value of the set.

CAFTA-DR incorporates a feature of the ATPDEA under which the presence of nylon filament yarns originating in Canada, Israel, or Mexico will not disqualify a textile or apparel good that is otherwise eligible for CAFTA-DR preferential treatment.

Antex Knitting Buhler Quality Yarns Corp.Cap Yarns, Inc.Carolina Cotton Works, Inc. - CCWCentral Textiles/Cotswold IndustriesContempora FabricsFrontier Spinning Mills, Inc.Hamrick Mills, Inc.Keer America CorporationMilliken & CompanyParkdaleSwisstex DirectZagis USA