Impact of Origin Rules for Textiles and Clothing on Developing Countries
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December 2007 ICTSD Programme on Competitiveness and Sustainable Development ICTSD Series on Trade-Supported Strategies for Sustainable Development Impact of Origin Rules for Textiles and Clothing on Developing Countries By M unir Ahmad Executive Director, International Textiles and Clothing Bureau Issue Paper No. 3
December 2007 l ICTSD Programme on Competitiveness and Sustainable Development Impact of Origin Rules for Textiles and Clothing on Developing Countries By M unir Ahmad Executive Director, International Textiles and Clothing Bureau ICTSD Issue Paper No. 3
ii Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries Published by International Centre for Trade and Sustainable Development (ICTSD) International Envrionment House 2 7 Chemin de Balexert; 1219 Geneva, Switzerland Tel: +41 22 917 8492 Fax: +41 22 917 8093 E-mail: email@example.com Internet: www.ictsd.org Chief Executive: Ricardo Meléndez-Ortiz Programmes Director: Christophe Bellmann Acknowledgments This paper was prepared by Mr. Munir Ahmad, Executive Director, International Textiles and Clothing Bureau (ITCB) at the request of the International Centre for Trade and Sustainable Development (ICTSD). Mr. Ahmad received invaluable assistance from his ITCB colleagues, Ms. Dinora Diaz and Mr. Guan Weigang. The views expressed in the paper do not necessarily represent that of the ITCB or that of its members. ICTSD is grateful for support for this project, provided by the Dutch Ministry of Foreign Affairs (DGIS) and the UK Department for International Development (DFID). For more information about ICTSD’s Programme on Competitiveness and Sustainable Development, visit our website at www.ictsd.org ICTSD welcomes feedback and comments on this document. These can be forwarded to Gloria Carrion at firstname.lastname@example.org Citation: Ahmad, Munir (2007). Impact of Origin Rules for Textiles and Clothing on Developing Countries, ICTSD Programme on Competitiveness and Sustainable Development, International Centre for Trade and Sustainable Development, Geneva, Switzerland. Copyright ICTSD, 2007. Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-Noncommercial-No-Derivative Works 3.0 License. To view a copy of this license, visit http://creativecommons.org/licenses/by- nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. The views expressed in this publication are those of the author(s) and do not necessarily reflect the views of ICTSD or the funding institutions. ISSN 1995-6932
ICTSD Programme on Competitiveness and Sustainable Development iii TABLE OF CONTENTS LIST OF BOXES AND TABLES iv LIST OF CHARTS v ABBREVIATIONS/ACRONYMS vi INTRODUCTION 1 I. THE MAKING OF TEXTILE-RELATED ORIGIN RULES 2 A. Non-preferential Origin Rules 2 B. Preferential Origin Rules 5 II. PREFERENTIAL TRADE ARANGEMENTS WITH TEXTILE- SPECIFIC ORIGIN RULES 8 A. Preferential Tariff Arrangements 8 B. Typical Textile-specific Origin Rules in Preferential Arrangements 9 III. HE NEXUS BETWEEN ORIGIN RULES AND TRADE UNDER T PREFERENTIAL ARRANGEMENTS 15 A. Textile Trade Has Been Subject to Persistent Policy Changes 15 B. Recent Developments in Textile Trade 16 C. Trade Flows under Preferential Arrangements 19 D. Sourcing of Raw Materials by Preference- Receiving Countries 20 IV. ORIGIN RULES AND DISTORTIONS IN TEXTILE TRADE 30 A. Little Evidence of Origin Rules Promoting Vertical Integration 30 B. Origin Rules and Sub-optimal Utilization of Preferences 31 C. Impediment to Development of South-South Trade 33 D. Impact on NAMA Negotiations 39 E. The Need to Fix the Rules of Origin Conundrum 39 V. CONCLUDING REMARKS 41 ENDNOTES 43 References 46 Appendix 47
iv Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries LIST OF BOXES Box 1. U s Textiles and Clothing* Imports from Cbi, Agoa and Andean Countries (US Versus Non-Us Content) 12 Box 2. US/EU-25/Canada Textiles and Clothing Imports from Selected Preferential Partners 19 LIST of TABLES Table 1. US Imports of Textiles and Clothing from Top 30 and Preferential Suppliers (1990–2006) 17 Table 2. EU-25 Imports of Textiles and Clothing from Top 30 and Preferential Suppliers (1995–2006) 18 Table 3. United States Textile and Clothing Exports – Composition and Main Destinations 22 Table 4. EU-25 Textiles and Clothing Exports – Composition and Main Destinations 23 Table 5. Main Sources of Jordan and Selected AGOA Countries’ Textiles Imports (US $1000) 35 Table 6. Main Sources of EU Preferential Partners’ Textiles Imports, 2005 (US $1000) 36 Table 7A. Bangladesh Textiles Imports by Source (US $1000) 37 Table 7B. Cambodia Textiles Imports by Source (US $1000) 38 Appendix Table: Countries covered by non-reciprocal preference schemes 47
ICTSD Programme on Competitiveness and Sustainable Development v LIST OF CHARTS Chart 1. US Exports of Textile Mill Products to Mexico and CBI Countries 6 Chart 2. Canada Clothing Imports from Least-Developed Countries 14 Chart 3A. US Exports of Textiles and Clothing to Preferential Partners 21 Chart 3B. EU Exports of Textiles and Clothing to Main Preferential Partners 21 Chart 4. US Imports from Mexico Versus Us Exports to Mexico 25 Chart 5. US Imports from CBI Versus US Exports to CBI Countries 25 Chart 7. US Imports from Andean Versus US Exports to Andean Countries 26 Chart 8. EU-25 Imports from Romania Versus EU-25 Exports to Romania 27 Chart 9. EU-25 Imports from Tunisia Versus EU-25 Exports to Tunisia 27 Chart 10. EU-25 Imports from Morocco Versus EU-Exports to Morocco 28 Chart 11. EU-25 Imports from Bulgaria Versus EU-25 Exports to Bulgaria 28 Chart 12. EU-25 Imports from Bangladesh Versus EU-25 Exports to Bangladesh 29 Chart 13. EU-25 Imports from Cambodia Versus EU-25 Exports to Cambodia 29 Chart 14. US Imports Of Textiles and Clothing from CBI and US Textile Mill Product Exports to CBI Countries 30 Chart 15. EU GSP Utilization Rates by Bangladesh 31 Chart 16. EU-25 and US Clothing Imports from African Least-Developed Countries 33 Chart 17. US Exports of Textiles and Clothing to Preferential Partners 33 Appendix Chart 1. US Imports from Dominican Republic Versus US Exports to Dominican Republic 49 Appendix Chart 2. US Imports from El Salvador Versus US Exports to El Salvador 49 Appendix Chart 3. US Imports from Honduras Versus US Exports to Honduras 50 Appendix Chart 4. US Imports from Jordan Versus US Exports to Jordan 50
vi Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries ABBREVIATIONS/ACRONYMS ACP African, Caribbean and Pacific Island group of countries AGOA Africa Growth and Opportunity Act (of the United States) ASEAN Association of Southeast Asian Nations ATC Agreement on Textiles and Clothing ATPA Andean Trade Preference Act (of the United States) ATPDEA Andean Trade Promotion and Drug Eradication Act (of the United States) CAFTA–DR US/Central America–Dominican Republic Free Trade Agreement CBERA Caribbean Basin Economic Recovery Act (trade vehicle under CBI of the United States) CBI Caribbean Basin Initiative (US programme to assist countries of the Caribbean and Central America) CBTPA Caribbean Basin Trade Promotion Act (of the United States in modification of CBERA) CTG Council for Trade in Goods of the WTO EBA Everything-But-Arms (initiative of the EU granting quota-free, duty-free treatment to least-developed countries) EU European Union FTA Free Trade Agreement GALs Guaranteed Access Levels (system establish by the United States providing additional MFA quotas for CBI countries) GATT General Agreement on Tariffs and Trade (forerunner of the WTO) GSP Generalized System of Trade Preferences HS Harmonized Commodity Description and Coding System (classification system devised by World Customs Organization) ICTSD International Centre for Trade and Sustainable Development ITCB International Textiles and Clothing Bureau LDCs Least-developed countries MFA Multi-Fibre Arrangement MFN Most-Favoured-Nation treatment NAFTA North American Free Trade Agreement (between Canada, Mexico and the United States of America) NAMA Non-Agricultural Market Access (negotiations under Doha Round) OPT Outward processing trade QIZ Qualifying Industrial Zones (US programme of duty-free treatment for imports from Jordan and Egypt) SAARC South Asian Association for Regional Cooperation SITC Standard International Trade Classification (classification system devised by the UN) TPLs Tariff Preference Levels (under US free trade agreements) TRQ Tariff Rate Quota US United States of America WTO World Trade Organization
ICTSD Programme on Competitiveness and Sustainable Development 1 INTRODUCTION Rules of origin are an essential for the conduct of international trade. They are needed to determine the nationality of traded products, which, in turn, is used for a whole variety of commercial policy purposes: to collect trade statistics; to apply import tariffs; to impose countervailing or anti-dumping duties on unfairly traded products; to apply safeguard measures for temporary protection to domestic industries in times of need; to administer requirements with respect to marking of products to help consumers to distinguish between them depending on their source. Origin rules are also required for administering preferential trade agreements to ensure that only the intended countries benefit from those preferences. Textile and clothing are no exception to these essentials. Over time, however, origin rules in this sector have so evolved as to serve as conditions on access to markets or to provide protection to domestic textile industries. And, in the context of preferential arrangements, these rules have increasingly been designed to provide advantage to textile producers in preference-granting countries. While, on the one hand, this situation limits the possibility for preference-receiving countries to derive full benefit from preference schemes, on the other it has led to the creation of new distortions to trade in the sector. Origin rules are also a major factor behind concerns about the sustainability of many developing countries’ exports following the expiry of quota restrictions. This paper is intended as an input to policy-makers and other stakeholders. It aims to provide an analysis of the working of various origin schemes in as simple and user-friendly a manner as possible. To this end, the first section gives a brief background to the making and evolution of present-day origin rules relating to textiles and clothing in some major economies, both in the context of normal most- favoured-nation (MFN) trade and preferential trading arrangements which now account for a large portion of trade in the sector. Section II identifies the main preferential trade arrangements in which textile-related origin rules play a significant role. It also brings out the aspects of these rules that condition the utilization of preferential access by preference-receiving countries to the use of inputs from preference-giving countries. Section III gives a short account of recent developments in textile trade in general and its evolution under preferential trade arrangements in particular. It then maps the binding influence of origin rules on the sourcing of raw materials by various groups of preference- receiving countries. It shows the nexus between origin rules and trade and how preferential origin rules constrain many countries’ trade prospects, contrasting their situation with those countries that are not bound by these rules and have been better able to cope with competition due to the flexibility of their sourcing options. Section IV highlights how restrictive origin rules constitute a source of continuing distortions in textile and clothing trade. Section V offers some concluding reflections.
2 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries I. THE MAKING OF TEXTILE-RELATED ORIGIN RULES A. Non-preferential Origin Rules (i) The context of quota restrictions United States law however did not provide for any specific definition of the ‘substantial Trade in textiles and clothing has long been transformation’ standard. Following court controversial. For over four decades, markets in rulings, it was interpreted as a process that developed countries were shielded from imports created a new and different article of commerce by a series of international arrangements that “having a distinctive name, character or use.” authorized developed countries to impose limits on the quantities that could be exported to their In response to complaints that textiles and markets from particular exporting countries. clothing were being imported by getting around Beginning with the “Short Term” Arrangement the applicable quotas, in May 1984 2 President Regarding International Trade in Cotton Textiles Reagan directed the Secretary of the Treasury in 1961, it evolved into the Arrangement to issue new country of origin regulations for Regarding International Trade in Textiles, usually textiles and apparel. Pursuant to this, interim called the Multi-Fibre Arrangement or MFA, in regulations were published in August 1984 and final 1974 until it was replaced by the Uruguay Round regulations in March 1985.3 They provided that a Agreement on Textiles and Clothing (ATC) from textile or apparel product will be considered to January 1995.1 The ATC itself expired at the end have undergone a substantial transformation if it of 2004 and, with it, came the end of the system had been transformed by means of “substantial of quota restrictions. manufacturing or processing operations” into a new and different article of commerce. Neither these arrangements nor GATT rules set out any specific criteria to determine the origin The concept of substantial manufacturing or of imported products. Not surprisingly, exporters processing operations thus came to be added to and importers would attempt to maximize trade in the interpretation of ‘substantial transformation’. whatever ways the regime would permit. One way Following these regulations, until the conclusion was to ship unfinished or semi-finished products of the Uruguay Round, US Customs conferred to countries that were not covered by restraints origin to an apparel article on the basis of where or could not fully use their available quotas. its components were cut to shape or, in the case The transformation of unfinished products in the of apparel of knitted fabric, where the knit second country would confer origin on the second panels were sewn together. However, as even country and would thus free the final product from this standard afforded possibilities of quota quota limits imposed on the first country. Much of utilization by parcelling out the assembly of this development had to be a natural evolution components to a different location, on the eve of production methods in a globalizing world. of implementation of the Uruguay Round results Notwithstanding, however, it inflamed the textile the US textile industry extracted a concession industries in importing countries which sought the from the US Administration and succeeded in protection of quotas and brought persistent calls getting the origin rules relating to textile and for plugging the loopholes. clothing products to be significantly changed and formally codified in law. This was accomplished (ii) The United States by Section 334 of the US Uruguay Round Agreements Act. The actual implementation of In general, the rule-of-thumb standard for these changes came into effect in July 1996.4 origin determination had long been ‘substantial transformation’, i.e., to deem a product as The modifications effected through this law originating in a place where it had undergone substantially departed from the previous substantial transformation in its making. The US practice, particularly insofar as the
ICTSD Programme on Competitiveness and Sustainable Development 3 determination of origin of finished fabrics, However this same rule does not apply to made-up articles, apparel assembled in fabrics made of wool. In other words, for different locations, and apparel made from fabrics of wool, origin remains where the knit-to-shape panels was concerned. It was now basic fabric is formed. provided that such manufacturing operations as dyeing/printing of fabric, a multitude of (b) For made-up articles: For 16 specified operations in the making of made-up articles categories of made-up articles, the July 1996 from fabric, cutting to shape of apparel, and change established the origin as the country sewing together of knit-to-shape panels would where the constituent greige fabric was no more be deemed to confer origin. formed by weaving or knitting, regardless of any further processing such as dyeing and Thus, for example, even if greige fabric imported printing of fabric, and subsequent conversion from developing countries was further processed of fabric to made-up articles. by dyeing, printing and other finishing operations in, say, a European country and then exported The 2000 changes with respect to some from that European country to the United States, (not all) of these 16 articles resulted in its origin remained the developing country where the following: the greige fabric was originally made. Likewise, flat goods (bed linen, kitchen linen, table line, (i) For non-cotton and non-wool made-up toilet linen, curtains, bedspreads and other articles (i.e., only those of silk, man-made furnishing articles, sacks and bags, tarpaulins, fibres or other vegetable fibres), the rule tents, sails, and similar other articles) imported now recognizes dyeing and printing as into the United States, say, from a European origin conferring. Therefore the origin is country (where fabrics imported from quota- the country where the constituent fabric restrained developing countries were dyed, is dyed and printed and undergoes two or printed and subjected to other operations) also more finishing operations. came to be treated as originating in the developing country where the fabric was originally made, not However, if these same products are the European country where the fabric had been made of cotton or wool fabric, the subjected to further processing and making into origin continues to be deemed to be the various flat goods. country where the constituent cotton or wool fabric is formed. This gave rise to disruption of established patterns of trade and to loud protests from (ii) For all made-up articles, contrary to a wide cross-section of stakeholders. Under pre-ATC rules, the new rule continues to pressure, especially from the European Union, disregard such processing operations as the US relented and enacted an amendment to its designing, cutting, hemming, sewing that Uruguay Round Agreements Act 5 which resulted in are necessary to be undertaken on the further modifications, essentially accommodating fabric to convert it to made-up articles. the EU concerns. Under these amendments: (c) For apparel products: No modification (a) For processed fabrics: The origin reverted was effected in 2000. Consequently, origin to the pre-July 1996 rule so that fabrics continues to be determined on the basis are now conferred origin of the country of rules as modified and implemented where they are both dyed and printed with effect from July 1996, i.e., designing and, in addition, undergo two or more and cutting to shape of apparel is no more of the following finishing operations: deemed to be origin conferring; nor are the bleaching, shrinking, fulling, napping, sewing together of knit-to-shape panels and decating, permanent stiffening, weighting, a variety of finishing operations that are permanent embossing or moireing. commonly undertaken for the final product.
4 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries (iii) The European Union exceed 40 percent of the ex-works price of the final product. In the case of the European Union, the concept of substantial transformation, insofar as textile In fact, the annex listing the origin criteria for and clothing products falling under Section XI textile and clothing products is spread over of the Harmonized Commodity Description and more than five pages. By contrast, the annex Coding System (HS) are concerned, has been pertaining to all other products (including reflected in detailed rules specifying the criteria agricultural products) consists of less than four for each main group of products. This method of pages. Such has been the attention devoted to determining origin is sometimes also referred to origin rules for textiles and clothing! as the ‘list system’. (iv) Some other jurisdictions In general, under this method, origin is conferred to an imported product if it was so transformed While several other countries including Japan, by working or processing in the exporting country Norway and Switzerland follow the change-in- as to fall under a different tariff heading.6 The tariff-heading method, in some other jurisdictions relevant EU Regulation provides a listing of the the origin rules are based on prescribed minimum working or processing operations that must be proportions of value addition. For example, carried out on non-originating materials. Canadian rules confer origin if at least 50 percent of the cost of imported good was incurred in the With respect to textiles and clothing, the practical exporting country and was finished there in the reflection of the above principle is contained form in which it is imported into Canada. in a specific annex to an EU Regulation,7 item by item. Thus, for example, printed or dyed (v) Harmonization of non-preferential woven fabric, classifiable under chapters 50 to origin rules 56 of the HS, qualifies to receive origin status if it was manufactured from yarn, or was printed It was in recognition of such diversity of origin or dyed from unbleached or pre-bleached fabric criteria (admittedly not just in textiles but and had undergone two preparatory or finishing other sectors as well) that the WTO Membership operations in the exporting country. Thus, printing reached an interim agreement during the Uruguay or dying of fabric by itself is also accepted as Round to harmonize non-preferential origin rules origin conferring, provided, however, that it is on the basis of the principle that they “should accompanied by two preparatory or finishing provide for the origin of a particular good to operations. Non-printed or non-dyed fabric is be either the country where the good had been considered as originating in the exporting country wholly obtained or, when more than one country only if it was manufactured there from yarn. is concerned in the production of the good, the country where the last substantial transformation Finished or complete apparel of woven fabrics had been carried out” (the Agreement on Rules classified under HS Chapter 62 receives origin of Origin). The practical reflection of this if it received ‘complete making up’ in the otherwise simple principle, however, continues exporting country. Complete making up is, in to defy resolution and has remained a source turn, defined as “all operations following the of contention in WTO negotiations for over ten cutting of the fabric.” However, shawls, scarves, years (although, admittedly, not just on textiles mufflers and veils which are also classified under but a number of other sectors as well). The work the same Chapter 62 receive origin only if they aimed at harmonizing non-preferential origin were manufactured from yarn. But if these rules has therefore yet to be finalized. articles are embroidered, they receive origin either if they were manufactured from yarn or Although non-preferential origin rules remain were manufactured from unembroidered fabric, important, in particular concerning possible provided that the value of the fabric does not application of any new safeguard actions under
ICTSD Programme on Competitiveness and Sustainable Development 5 normal GATT rules and disciplines, countervailing that varying origin criteria remain responsible or anti-dumping duties, or marking of the origin for creating unnecessary confusion in data on of imported products, they do not enjoy the level textile and clothing trade because, as it happens, of significance that they used to have under the some export shipments made to particular MFA or the ATC. Now that quota restrictions have countries actually end up being shown in import gone, it matters little, for example, if bed linen figures from elsewhere and for something else. exported from, say, Indonesia to the United Consequently, it is not uncommon to find large States had only been assembled in Indonesia differences between export figures of certain from fabric imported from Chinese Taipei and countries and the counterpart import data of gets classified in the United States as originating their partner importing economies. in Chinese Taipei. Even so, it is to be recognized B. Preferential Origin Rules (i) The quota system loomed large differential treatment to re-imports into a participating [importing] country of textile Like non-preferential origin rules, the evolution products which that country has exported to of the making of present-day preferential another participating country for processing origin rules for textiles and clothing can also and subsequent re-importation in the light of be traced to the strong influence of quota the special nature of such trade …” 8 restrictions in the sector as brought out in the following sub-sections. On the back of this provision, the EC provided additional quota entitlements for outward (a) Outward processing trade (OPT) processing trade. Although, with the passage of time, the possibility of OPT quotas was offered Outward processing had long been an established on a more generalized basis, as a matter of feature of trade, especially in Europe. In textile sheer economic logic it was of the greatest and clothing, given the labour-intensive nature significance to some of the EC member states of sewing and other operations required in themselves inasmuch as it enabled their yarn the making of clothing products, it essentially and fabric makers to find convenient outlets involved the shipping of fabric and cut or for their products and also to economize on the unfinished parts of apparel from high-wage cost of labour. It also provided the much-needed importing countries to neighbouring low- export prospects for some exporting countries wage developing economies for making up with surplus pools of available labour. Besides into garments and re-importing the finished Yugoslavia, the more successful examples garments. The practice initially developed in were Morocco and Tunisia. As subsequent some EC member states, especially Germany developments (discussed in the following and France, on the one hand, and former section) were to show, the system proved to be Yugoslavia, on the other. With passage of time, a boon in creating ready availability of markets it received added significance and was extended for developed countries’ textile producers but to countries of the Mediterranean, especially, could not promote the long-term viability of Tunisia and Morocco. industries in developing exporting countries. To take advantage of the opportunities offered On the other side of the Atlantic, the United by outward processing trade a provision was States also established (in 1988) a similar “Special included in the Multi-Fibre Arrangement of Regime” for most apparel and selected made- 1974, even though it effectively involved up textiles from Mexico whereby a significant a further departure from the general GATT portion of Mexico’s quotas was set aside for rule of non-discrimination. It provided that export of articles assembled from fabrics wholly “Consideration shall be given to special and formed and cut in the United States.9
6 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries (b) United States System of Guaranteed disruption notwithstanding. After all, they Access Levels ensured the use of US textile materials! The concurrent sweetener of duty concession, albeit The same concept, in essence, had already been as exemption of duty only on the value of US adapted by the United States to its Caribbean content in the exported product, provided the Basin Initiative (CBI).10 Aimed to assist the added bait. development of countries in its neighbouring region, this initiative was first launched from A stage was thus set for US textile makers to make January 1984. It granted duty free treatment use of Mexico and the neighbouring Caribbean and to a group of products, which did not, however, Central American countries as additional markets include textiles and clothing. This exclusion for their yarns and fabrics and for apparel makers notwithstanding, some enterprises were taking to outsource more labour-intensive operations advantage of a US customs provision which to these low-wage locations. Apparel import exempted import duties to the extent of the under these programmes grew swiftly making value of US content contained in import products it possible for US producers to also make a rich (the so-called 807 trade) and were shipping killing and increase their exports of yarns, fabrics garments by assembling them from components and unfinished or semi-finished clothing ready made in the United States. As the rates of tariff for assembly into finished apparel. For the US on clothing were quite substantial, there was textile industry, it produced spectacular results economic benefit to derive even if the duty so much so that, by 2004, some 53.3 percent of saving was only on the value of US content in the all US textile mill product exports were destined exported product. to the CBI countries and Mexico, versus a mere 18.9 percent in 1990. 11 In 1986, the US launched a “special access programme” for the CBI countries, referred In fact these textile mill product data do not to as 807-A or Super 807. The emphasis of this include figures with respect to cut or unfinished programme was on providing additional quota clothing parts which were/are a sizable part access for apparel assembled from fabric of US export shipments to these countries. As produced and cut in the United States. They unfinished or semi-finished articles are classified were invited to enter into bilateral agreements under the same HS headings as for finished or that established guaranteed access levels (GALs), fully assembled clothing,12 information about this as distinct from normal MFA quotas. These trade cannot be disaggregated from the data. But guaranteed access levels could be increased for this, the true extent of US industry’s exports to almost unlimited amounts on request, the to these captive countries was/is much greater oft-trumpeted industry concerns about market than could be captured in Chart 1. Chart 1. US Exports of Textile Mill Products to Mexico and CBI Countries Percent of World
ICTSD Programme on Competitiveness and Sustainable Development 7 And, during 1984–87, the US-made content agreements. The phenomenon, euphemistically averaged 64 percent of the value of apparel called the “local content requirement”, has thus imports from these countries versus only 20 become the central plank of US preferential percent for all other sectors combined.13 This, origin rules found today. because of the high average tariff of over 20 percent on apparel compared to only 3.5 percent As the main purpose of this short paper is not to for all other product categories. trace the evolution of the making of origin rules in all its details, in the following Section we turn The attraction held out by this mode of trade had to the identification of the main preferential subsequently to become the focus of lobbying trade arrangements in which textile-related efforts by domestic industry groups as the origin rules play a significant role. Suffice to say, core basis for origin rules in most preferential the origin rules in preferential arrangements arrangements, irrespective of whether these have been heavily influenced by the experience were in the context of autonomous non-reciprocal of the quota regime. schemes or bilateral or regional free trade
8 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries II. PREFERENTIAL TRADE ARANGEMENTS WITH TEXTILE-SPECIFIC ORIGIN RULES A. Preferential Tariff Arrangements Presently, all major developed economies provide (ii) The United States tariff preferences on import of textiles and apparel from a variety of developing countries. Non-reciprocal Some of these programmes are autonomous in nature and do not require reciprocal concessions • Caribbean Basin Initiative (CBI),15 the in return. Others are bilateral or regional free group of Caribbean countries, of whom trade agreements. In almost all cases, these Haiti is now the largest exporter. (The list programmes or agreements provide for specific of CBI eligible countries is provided in the origin criteria for textile exports to be able to Appendix table.) benefit from duty concession or preference. • Africa Growth and Opportunity Act (AGOA), under which Botswana, Kenya, The principal programmes under which textile Lesotho, Madagascar, Mauritius, Namibia, and clothing exports from developing economies South Africa and Swaziland are significant are provided tariff preference by developed exporters of apparel. (The list of all AGOA economies are: countries is also provided in the Appendix table.) (i) The European Union • Andean Countries (ATPA), of whom Colombia and Peru are significant apparel exporters. Non-reciprocal • Qualifying Industrial Zones (QIZ) schemes: for Jordan and Egypt. • Generalized System of Preferences framework for developing and least- Reciprocal developed countries.14 (A list of least- developed countries is provided in the • North American Free Trade Agreement Appendix.) (NAFTA), under which Mexico is a substantial • The partnership agreement with African, exporter of textile and apparel to the US. Caribbean and Pacific Island countries (ACP) • US/Central American Free Trade Agreement in the framework of the Cotonou (formerly (CAFTA-DR): Costa Rica, Dominican Lome) Convention. (The list of the ACP group Republic, El Salvador, Guatemala, Honduras of countries is given in the Appendix.) and Nicaragua, all of which have sizeable apparel exports to the US. Reciprocal • Other US Free Trade Agreements: with Australia, Jordan, Israel, Morocco, Bahrain, • EU–Turkey Customs Union. Chile and Singapore. • European Association agreements with Bulgaria and Romania (These two have since (iii) Canada joined the EU as full members and have had large apparel exports to the other EU • Generalized System of Preferences (GSP) member states.) (especially duty-free access to least- • Stabilization and Association Agreements developed countries in its framework). with Western Balkan countries. • Euro-Mediterranean Association Agreements with Algeria, Morocco, Tunisia, Israel, Palestinian Authority, Egypt, Jordan, Lebanon and Syria.
ICTSD Programme on Competitiveness and Sustainable Development 9 (iv) Japan (v) Australia • Generalized System of Preferences. • Duty-free access to least-developed countries in the framework of Generalized System of Trade Preferences. B. Typical Textile-specific Origin Rules in Preferential Arrangements In the scope of this short paper, it seems Typically the criteria require the final product unnecessary to provide detailed descriptions to undergo particular manufacturing operations of all origin schemes, with all their twists and expressed as change from a specified tariff shades. The following account therefore brings heading to a different heading. The change of out only the main features with emphasis on tariff headings is also defined at various degrees those aspects that have a significant impact on of aggregation. developing countries’ trade prospects. In general, the EU rules also provide for the (i) The European Union possibility of use of materials or components produced in other countries specified in the EU preferential origin rules are specified in each particular arrangement or with which the EU has preferential arrangement or agreement. The free trade arrangements. Known as ‘cumulation’, basic architecture of these rules is substantially it allows producers from preference-benefiting the same irrespective of whether they pertain to countries to import non-originating materials non-reciprocal schemes in the framework of the from other beneficiaries without affecting the GSP or they relate to reciprocal preferences under final product’s originating status and therefore the free trade area agreements (FTAs). In general, possibility of benefiting from duty concession. they are based on a scheme of ‘list rules’ which are in turn organized according to the structure There are four types of cumulation criteria: of HS classification. The criteria for determining bilateral cumulation, diagonal cumulation, the origin of various products are listed against regional cumulation and full cumulation. each product category, setting out the minimum amount of working or processing required on non- Bilateral cumulation is the most common form originating materials in order for the resulting and applies to trade between two partners in a product to obtain originating status. preference scheme. It stipulates that producers in beneficiary country A may use inputs from the Generally, two broad criteria are used to preference-giving country B without affecting the identify origin: final good’s originating status. • The ‘wholly-obtained or produced’ criterion Under diagonal cumulation, beneficiary countries applies in cases in which the product is included in the same programme can use materials manufactured in the country from inputs that originate in another beneficiary country – as that are also wholly obtained within the if the materials were originating in the country country; it thereby precludes the use of where further processing is undertaken. As with second-country components. bilateral cumulation, only products or materials • The more complex ‘substantial originating in the parties to these agreements transformation’ criterion, which is used can benefit from diagonal cumulation. Although in the majority of cases as most products more than one country can be involved in the contain varying amounts of imported inputs, manufacture of a product, it will have the origin of defines various levels of requisite working the country where the last working or processing or processing to receive origin status. operation took place, provided that it was more
10 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries than a prescribed minimal operation. Diagonal Romania, Tunisia etc., given that these countries cumulation operates between the European also possess only limited textile manufacturing Community and the countries of the so-called capacities. ‘pan-European cumulation zone’. The practical effect of EU origin criteria for Regional cumulation: Regional cumulation is a preferential arrangements is thus two-fold. In form of diagonal cumulation, which only exists the case of least-developed countries, the actual under the GSP and operates between members utilization of preferential access is much less of a regional group of beneficiary countries (e.g. than optimal. In the case of the countries of the ASEAN and the South Asian Association for Regional Maghreb (Morocco, Tunisia, etc.) and Central Cooperation/SAARC). and East European countries, by sheer economic logic, their producers and exporters are obliged to Finally, under full cumulation, all processing import their raw material (yarns and fabrics, etc.) or transformation of a product within a set of from the EU member states. These phenomena beneficiary countries can be counted as qualifying are brought out at some length in Section III of content, regardless of whether the processing the paper. is sufficient to confer originating status to the materials themselves. Full cumulation is less (ii) The United States common than diagonal but is applied by the EU in its agreements with Algeria, Morocco and Tunisia (a) Free trade agreements and in the Cotonou Agreements. It allows for greater flexibility in production processes. With the exception of US/Jordan and US/Israel FTAs, the main benchmark for textile and clothing Leaving aside the somewhat technical description origin rules is the so-called ‘yarn forward’ of of origin criteria outlined above, in a nutshell the NAFTA. In fact, although it is generally described EU requires that, to be accorded duty concession as yarn forward, for many products it is actually under its GSP schemes, the product concerned ‘fibre forward’. Simply expressed, this rule must have undergone ‘double transformation’, makes duty-free treatment of textiles and i.e., “at least two manufacturing/processing clothing imports conditional on the requirement operations” in the country of export. Thus, for that the imported product is made within the example, for a woven shirt to benefit from duty free trade area from yarn (fibre) onward. In concession, it should have been assembled in other words, for a shirt to benefit from duty the exporting least-developed country from concession it must be manufactured with yarn as fabric made in that country. Consequently, most well as fabric that is produced or sourced in any least-developed countries are unable to take of the NAFTA member countries, or effectively a full advantage of the facility, lacking as they triple transformation process. For fabric, it must are in textile manufacturing capacity due to the have been manufactured with yarn that was also highly capital-intensive nature of this segment produced in the FTA partner concerned. of textile and clothing production. Moreover, a significant portion of clothing is made with Typically, the US free-trade agreements contain fabrics of new fibres with technologies patented two main exceptions from the general yarn in the developed world. forward standard. First, they provide for the so-called Tariff Preference Levels (TPLs) that Likewise, although the origin criteria under other stipulate import of specified maximum quantities preference programmes allow relatively more at preferential rates of duty even if the products flexibility in the use of components made outside concerned are made with material that does not the Union (but from within the wider cumulation otherwise qualify under the prescribed origin areas), yet, effectively, these criteria necessitate criteria. Second, they provide for a process for the use of EU materials and components by major determination of inputs (yarns and fabrics) that clothing exporters such as Bulgaria, Morocco, may not be available in commercial quantities
ICTSD Programme on Competitiveness and Sustainable Development 11 within the United States and may therefore be is the so-called local content requirement. As sourced from non-FTA partners. However, there in the case of free trade agreements, there are is no uniformity as to the existence of these a few deviations permitted from this general exceptions across all FTAs to which the United principle, but subject to strict criteria including States is a party. limits on the maximum quantities that may benefit from duty concession. (b) Non-reciprocal preferential programmes Perhaps the simplest way to understand the The criteria in US non-reciprocal preference origin criteria under non-reciprocal preference arrangements under the Caribbean Basin schemes of the United States is to see the Initiative (CBI), Africa Growth and Opportunity specific conditions under which duty-free access Act (AGOA) and Andean Trade Promotion Act is available under these programmes (Box 1 (ATPA) are in, some respects, even stricter. They below). For convenience sake, and to avoid stipulate duty benefit for apparel imports from repetition in later sections of the paper, the these countries mainly if the component inputs volumes of imports benefiting from preferential are sourced from the United States itself. This access under various criteria are also indicated.
12 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries Box 1. U s Textiles and Clothing* Imports from Cbi, Agoa and Andean Countries (US Versus Non-Us Content) CBI Countries (Caribbean Basin Trade Partnership Act) 2005 Total Imports (Million US$) 9 661.20 Subject to US content Apparel assembled from US cut fabric from US yarn 16.00% Knit apparel from US fabric, yarn and thread 15.90% Knit apparel from regional or US fabric from US yarn (TRQ) 13.40% Apparel cut and assembled from US fabric, yarn & thread 12.70% Articles assembled from any fabric cut in the United States 9.80% Brassieres cut and assembled in the US and/or CBI 3.50% T-shirts made of regional fabric from US yarn (TRQ) 2.10% Apparel assembled from US cut fabric & yarn, further processed 1.60% Apparel assembled with US thread and fabric (mixed cutting) 1.30% Total above 76.40% With no US content or under MFN duty Apparel from fabric or yarn determined as not available in US 1.50% Outside the preference programme (i.e., subject to MFN duty) 22.10% Total above 23.60% AGOA Countries (African Growth and Opportunity Act) Total Imports (Million US$) 1 481.90 Subject to US content Apparel assembled from US cut fabric & yarn, further processed 0.30% With no US content or under MFN duty Apparel made in a lesser-developed AGOA with non-US fabric 83.40% Apparel from regional fabric from US or African yarn 7.40% Apparel from fabric or yarn determined as not available in US 4.40% Cashmere sweaters, knit-to-shape 0.30% Outside the preference programme (i.e., subject to MFN duty) 4.30% Total above 99.70% Andean Countries (Andean Trade Promotion and Drug Eradication Act) Total Imports (Million US$) 1 495.30 Subject to US content Apparel assembled from US fabric (finishing in US) 10.60% Brassieres cut and assembled in the US and/or an ATPDEA country 0.20% Total above 10.90% With no US content or under MFN duty Apparel assembled from ANDEAN fabric/yarn 74.90% Apparel, chief value of llama, alpaca, etc. (i.e., Andean components) 1.90% Apparel from fabric or yarn determined as not available in US 0.30% Outside the preference programme (i.e., subject to MFN duty) 12.00% Total above 89.10% * Product coverage: MFA Source: Compiled from US Department of Commerce data.
ICTSD Programme on Competitiveness and Sustainable Development 13 The design of AGOA and Andean preference In the case of Jordanian QIZs, the product must programme is also essentially the same as that be a substantially transformed good, with at least for the CBI, the main difference being that, under 35 percent of its value added generated in Israel, AGOA, there is an exception which allows duty- a Jordanian QIZ or the West Bank/Gaza. Of that free treatment to apparel made in designated 35 percent, a minimum of 11.7 percent must be lesser-developed countries16 regardless of the added in a Jordanian QIZ, 8 percent in Israel, source of fabric or yarn, subject to prescribed and the remaining 15.3 percent can come from a annual quantitative limits. Similar to AGOA, the Jordanian QIZ, Israel or the West Bank/Gaza.19 Andean programme permits duty-free entry of apparel assembled in the beneficiary countries It is worth noting that the United States also from fabric made in the [Andean] region from has a free trade agreement with Jordan. The US or regional yarn. Luckily, for Colombia and FTA, however, does not supersede or eliminate Peru, both have had substantial indigenous the QIZ programme. Indeed, currently, the yarn and fabric production capacities and are bulk of Jordanian apparel export is under the therefore able to make do without using US QIZ programme because it offers immediate made yarns. tariff and quota-free access to the US market to goods that are produced in the QIZs and meet The relative flexibility of origin rules for these the specific rules of origin requirements. Under programmes can be gleaned from the percentages the US–Jordan FTA, on the other hand, tariffs of imports accounted for by US content or and quotas for many goods are phasing out over otherwise. The largest share of imports under time, and rules of origin require 35 percent the CBI programme (over 76 percent) is with Jordanian content. Thus for some high-tariff US components because they do not have the goods, producing in QIZs continues to offer a possibility of enjoying duty benefit unless they better advantage. For instance, many apparel use US textile materials. On the other side, goods face US tariffs of up to 30 percent. Under the largest shares under AGOA and Andean the FTA, tariffs on these goods are to be reduced programmes are against those exceptions that over ten years, and Jordanian exports would do not require the use of US inputs. Thus little have to meet the 35 percent Jordanian content of imports from AGOA countries are made with level. Under the QIZ initiative, those same US content. For Andean countries, too, 89 goods enjoy immediate elimination of tariffs and percent is outside the US-content requirement. quotas and require a lower level of Jordanian Unfortunately, however, those provisions are value-addition. time-limited 17 and are also subject to prescribed limits as to the maximum annual quantities that In the case of the QIZs in Egypt, industrial could be entered duty-free. products, including textiles and apparel, are authorized duty-free entry into the US if these Qualifying Industrial Zones (QIZs) products comply with rules of origin requirements. The required rules state that 35 percent of the In 1996 the United States Congress established commodity’s value must be manufactured in an the Qualifying Industrial Zones (QIZ) initiative Egyptian QIZ, with a minimum of 11.7 percent of to support the peace process in the Middle Israeli inputs.20 The Israeli content requirement East.18 These zones are designated industrial is fulfilled if a factory’s cumulative export in parks in Egypt, Israel or Jordan, from which each quarter satisfies the agreed-upon ratio. goods can be exported to the United States duty free. The QIZ initiative does not have any Furthermore, unlike under some elements in expiration date; nor is it required to be renewed the CBI and AGOA programmes, duty-free access by Congress every few years like the Generalized under the QIZ arrangements is not limited by System of Preferences or other trade legislations any quotas on quantities that could benefit from such as certain provisions of AGOA. duty-free treatment.
14 Munir Ahmad — Impact of Origin Rules for Textiles and Clothing on Developing Countries (iii) Canada From 1 January 2003, Canada substantially In other words, the LDC exports to Canada are now modified its GSP scheme for least developed duty-free provided they fulfill any of the following countries, extending full duty-free access to origin criteria: (i) the exported apparel are made imports of textile and clothing products.21 It also with inputs from any least-developed country or significantly relaxed the origin rules pertaining Canada; (ii) the exported apparel contain at least to these imports. Under these rules, apparel 25 per cent value-added in the least-developed products exported from least-developed countries country concerned even when the inputs are were made eligible for duty-free treatment if sourced from other developing countries. they were cut, or knit to shape, and sewn from inputs from any of the 48 eligible LDCs. This relaxation compares very favourably with 40 percent value-added required for most of More significantly, apparel products were also the other non-textiles and clothing items and made eligible for duty-free treatment even when 60 percent under the normal GSP for developing they used inputs from other developing countries, countries. Little wonder that this revised the only condition being that at least 25 per cent dispensation resulted in major improvements in of value addition on the apparel product must the rates of utilization and, thereby, exports from have taken place in the LDC exporting country. Any several least-developed countries to Canada (see Canadian input materials used in the manufacture Chart 2 and Box 2). of apparel exported from the LDCs are also deemed to originate in the LDC concerned. Chart 2. Canada Clothing Imports from Least-Developed Countries (iv) Japan treatment to imports from least-developed countries, but with effect from 1 July 2003. Rules The Japanese GSP regime includes duty-free of origin require local content to be 50 percent of treatment for covered textile and clothing from total factory cost and that the last manufacture least-developed countries and duty concession take place in the LDC. A fairly broad definition of at different rates for other developing countries. local content is provided to meet the 50 percent There is a complex system of ceilings beyond target. An LDC can include input from other LDCs, which duty concessions do not apply. developing countries, Pacific Island countries and Australia in calculating the 50 percent content. (v) Australia Within this, non-LDC developing country content is, however, subject to a maximum of 25 percent Like Canada, Australia also extended duty-free of manufacturing cost.22
ICTSD Programme on Competitiveness and Sustainable Development 15 III. HE NEXUS BETWEEN ORIGIN RULES AND TRADE UNDER T PREFERENTIAL ARRANGEMENTS For years, then, trade in textiles and clothing has This section is designed to map the development been subject to the influence of policy intervention of trade in textiles and clothing, especially in through three main policy tools: (i) quota the context of preferential arrangements and restrictions, (ii) tariff preferences, and (iii) origin the role of origin rules in linking the sourcing of rules including, especially those that condition the textile inputs by preference-receiving countries access to preferences to the sourcing of textile from preference-granting countries. inputs from preference-giving countries. A. Textile Trade Has Been Subject to Persistent Policy Changes Interpreting textile and clothing trade data is As noted in the previous section, Mexico was also fraught with complications. It does not lend itself provided special access quotas from 1988 linking to broad-brushed generalizations. For one thing, this access to the use of “fabrics wholly formed and all preferential schemes were not launched at cut in the United States”.24 The added advantage the same time. For another, over time, changes of duty concession in the form of remission of duty have been introduced to the extent and quality of on the value of US content was also available as in preferences under some preferential programmes. the case of the Caribbean countries. From 1994, Further still, the origin rules pertaining to various Mexico got on to a faster track – complete duty preference schemes have been far from uniform. free access – pursuant to NAFTA. The US CBI initiative has been on the go since The AGOA included a time-bound exception to 1984; NAFTA became effective from 1994; AGOA the general origin rule so that it provided duty- from late 2000; the US programme of Qualifying free access for specified quantities of apparel Industrial Zones (QIZs) in respect of Jordan and from designated lesser-developed Sub-Saharan Egypt from 2001 and 2005 respectively; and the African countries regardless of the source of Andean preferences from 2002. 23 fabric or yarn.25 This so-called ‘third country fabric’ provision has since been extended through As to the quality of preference, the Caribbean September 2012.26 Basin Economic Recovery Act (which covered the trade elements of the umbrella programme, CBI) Origin rules under Jordanian and Egyptian QIZ did not include textiles and clothing for duty-free schemes did not tie the duty-free treatment to treatment. Traders could only take advantage of a the use of US materials. US Customs provision that provided duty exemption on the value of US inputs incorporated in the On the EU side, too, Bulgaria and Romania became imported products. In 1986, the US established entitled to duty exemption from different times. the Special Access Programme for CBI countries, Prior to that, both these countries also used to the accent of which was on extending additional be subject to MFA/ATC quotas. In the case of (virtually unlimited) quota access for textiles and the countries of the Maghreb, the preferential apparel provided the additional quotas were used treatment had been in effect for much longer. in conjunction with US inputs. The Trade Act of 2000 accorded complete duty-free treatment to And Canada and Australia extended duty-free CBI apparel subject of course to prescribed origin access to least-developed countries with vastly rules requiring, in most cases, that the products liberal origin rules only from 2003.27 are made with US yarns and fabrics. The Andean programme was brought at par with that for the In a nutshell, aside from the implementation of CBI beneficiaries only from 2002. various preferential programmes from different
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