Nicaragua TPL and TPP

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1 ALSTON&BIRD LLP Nicaragua TPL and TPP New York June 10, 2014 Copyright 2014 Jon Fee All Rights Reserved

2 Items of interest Nicaragua TPL extension Trans-Pacific Partnership (TPP) Trade Promotion Authority (TPA) Textile and apparel features Timing of TPA and TPP The trade and political context

3 Nicaragua TPL Nicaragua TPL is a CAFTA feature allowing duty-free treatment of limited quantities of cotton, man-made fiber and certain wool apparel made from foreign, non-cafta fabric and yarn The TPL is limited to 100 million SMEs per year (with a sublimit of 1.5 million SMEs for certain men s wool sport coats)

4 Nicaragua TPL For woven trousers, Nicaragua must export an equal quantity of originating trousers to the United States, up to a cap of 50 million SMEs Any shortfall is subtracted from the TPL for the succeeding year The TPL expires at the end of 2014!

5 Nicaragua TPL Last summer, Sen. Feinstein (D- CA) introduced legislation to extend the TPL through 2024 Extension is opposed by some producers in other CAFTA countries and their U.S. customers, who enjoy no similar advantage, and by U.S. textile interests who say Nicaragua has sufficiently developed its apparel exports so that it no longer needs this benefit

6 Nicaragua TPL Sen. Hagan (D-NC) introduced a more modest bill in December that would extend the TPL for ten years only as to woven trousers and shorts, subject to an earned import allowance program Participating producers or entities controlling production would establish accounts with U.S. Commerce and would get credit for exports of fabric wholly formed in the United States of yarns wholly formed in the United States

7 Nicaragua TPL The SMEs of eligible apparel the producer or entity could receive each year could not exceed the credits in his account The program would be limited to 50 million SMEs per year; but it could generally be increased in 10 percent increments per year if 90 percent utilized in the previous year

8 Nicaragua TPL Prospects for passage of either the Feinstein or Hagan bill are uncertain In some ways the damage of expiration has already been done because participants can t plan past 2014 with confidence And uncertainty is the last thing Nicaraguan producers need right now with TPP looming in the future

9 TPP generally Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam Comprehensive, ambitious, high-standard, 21 st -century FTA US pivot, rebalancing toward Asia 40 percent of US goods trade

10 Vietnamese apparel and TPP

11 Vietnam Vietnam is a formidable supplier of apparel to the United States It s second behind China Kim Glas, formerly of CITA, says that textile and apparel imports from Vietnam have increased 40 percent since TPP talks began in percent increase in first quarter 2014 compared to first quarter 2013

12 Vietnam s China problem Vietnam doesn t produce much yarn or fabric (that may change!) It gets lots of yarn and fabric from China; but apparel containing that fabric would not be yarn forward that s why Vietnam doesn t like yarn forward And think about Korea, which provides one-third of Vietnam s yarn and fabric!

13 Central America and TPP??

14 Yarn Forward?? Vietnam doesn t like it Malaysia likes it (but with lots of single transformation exceptions) US retailers and US importer trade associations (AAFA, USFIA) don t like it US domestic industry (NCTO) likes it US negotiators (USTR and CITA) like it a lot!

15 Yarn forward The TPP apparel origin rule will almost certainly be yarn forward for most apparel Preferential treatment will be allowed if the component determining classification is knitted or woven in TPP countries from yarn spun or extruded in TPP countries and the apparel is cut or knit to shape and assembled in TPP countries

16 What form of preferential treatment? Central America, Colombia, Peru, Panama and Korea got duty free treatment right away But remember Mexico, under NAFTA? For some NAFTA garments, duties were phased out in stages over 5 or more years Expect the same for TPP

17 Baskets for TPP tariff relief United States has proposed three baskets First, apparel in a nonsensitive basket would be duty-free right away Second, apparel in a middle basket would be subject to a linear duty phase-out (20 percent each year) over five years And

18 The X basket an X basket of sensitive apparel classifications would be treated specially Duty rates on X basket apparel would be cut by some percentage (35 to 50 percent?) for an initial period of several (ten or 15?) years before they would be reduced to Free

19 X basket X basket will likely cover shirts, sweaters and trousers of cotton and synthetic fiber Importers from TPP countries that already have FTAs with the United States (Australia, Canada, Mexico and Peru) could continue to use Free rates available under those FTAs rather than the X basket rates

20 TPP short supply Not like CAFTA more like the original NAFTA (but without NAFTA s cumbersome, little-used short supply feature that theoretically allows new designations) Remember how some single transformation features were written into NAFTA for selected garments of hard-tofind fabrics? That s how TPP will work

21 TPP short supply Interested persons were invited to suggest (or oppose) short supply fabrics and yarns on a website operated by USTR and OTEXA Some non-sensitive apparel articles will be temporarily (three years) or permanently duty-free (or eligible for reduced duty rates) even though they incorporate foreign, non TPP fabrics or yarns

22 TPP short supply The list of short supply apparel will be fixed by the terms of the TPP Interested persons won t be allowed to request new designations after the TPP effective date as they are able to do under CAFTA Mexico (a TPP member), seeks to shorten the list to protect its access to the U.S. market

23 TPP short supply U.S. policy perpetuates two myths First (remember the quota system?) temporary short supply features will give U.S. and TPP industries breathing room to catch up and start producing inputs and apparel they don t make now Second, CAFTA short supply is unsuccessful

24 TPP short supply Will TPP short supply be an advantage for Central American apparel manufacturers? Consider: a new designation under CAFTA will never get short supply treatment under TPP And, a short supply fabric or yarn will be available for any apparel article and not limited to certain apparel like TPP

25 TPA TPA is fast track trade negotiation authority under which Congress gives the President authority to negotiate FTAs that Congress can approve or disapprove, under expedited procedures, but can t amend or filibuster Last TPA expired in 2007 President Obama has negotiated TPP as though TPA were still in effect, gambling that Congress will pass TPA legislation while TPP negotiations are ongoing

26 TPA Bipartisan TPA proposed in early 2014 Democrats complained it didn t allow sufficient Congressional oversight of the final TPP terms Slowed when key cosigner Sen. Baucus (D-MT) left the Senate to become ambassador to China Slowed further when House Minority Leader Pelosi said Democrats couldn t support TPA as written

27 Other issues in Congress Senate Finance Committee Chairman Widen (D-OR) wants to do TPA quickly; but doesn t want to just throw something together Ranking Republican Hatch (UT) recently said, the political clock is ticking and there isn t much time left this year Sixty senators and 230 House members want currency manipulation addressed in TPP

28 And then there s Congress TPA will likely not move until after the 2014 elections, maybe in a lame duck session, when Democrats learn whether Republicans gain control of the Senate and have their last chance to control the content of the bill After that, the Presidential election comes into play TPP could be delayed until the next administration

29 So don t hold your breath for either

30 Jon Fee Alston & Bird LLP 950 F Street, N.W. Washington, D.C jon.fee@alston.com