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Probable Economic Effect of Modifications to DR-CAFTA Rules of Origin and Tariffs for Certain Apparel Goods

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Probable Economic Effect of Modifications to DR-CAFTA Rules of Origin and Tariffs for Certain Apparel Goods U.S. International Trade Commission COMMISSIONERS Daniel R. Pearson, Chairman Shara L. Aranoff, Vice Chairman Deanna Tanner Okun Charlotte R. Lane Irving A. Williamson Dean A. Pinkert Robert A. Rogowsky Director of Operations Karen Laney-Cummings Director, Office of Industries This report was prepared principally by the Office of Industries George Serletis, Co-Project Leader Laura Rodriguez, Co--Project Leader Joanna Bonarriva, Dan Cook, and Kimberlie Freund Primary Reviewers Mark Paulson and Jan Summers Office of Economics James Fetzer Administrative Support Phyllis Boone and Brenda Carroll Under the direction of: Dennis Rapkins, Chief Chemicals and Textiles Division Address all communications to Secretary to the Commission United States International Trade Commission Washington, DC 20436 U.S. International Trade Commission Washington, DC 20436 www.usitc.gov Probable Economic Effect of Modifications to DR-CAFTA Rules of Origin and Tariffs for Certain Apparel Goods Investigation No. DR-CAFTA-103-16 Publication 3946 September 2007 ABSTRACT This report assesses the probable economic effect (PE) of modifications to the rules of origin and tariff treatment in the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (DR-CAFTA) on certain apparel goods, as set forth in letters of understanding signed in 2006 with the Dominican Republic and Costa Rica. Overall, the modifications will likely have a negligible impact on U.S. production and trade in the subject apparel goods because the DR-CAFTA region is not a major source of the subject apparel goods and these goods typically do not compete with domestically produced articles. The rules change requiring the use of pocket bag fabric produced in the territory of one or more of the Parties to the FTA, however, will likely help slow the decline in existing U.S. production and exports of pocket bag fabric to the DR-CAFTA region (Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua). It will also possibly help slow the growth in U.S. imports from Chinese and other lower-priced Asian suppliers that accelerated with the elimination of quotas on textile and apparel goods on January 1, 2005. i CONTENTS Page Abstract ............................................................... i Executive Summary ............................................... v Chapter 1 Introduction .......................................... 1-1 Product and industry coverage ............................................ 1-1 Analytical approach .................................................... 1-1 Chapter 2 Probable Economic Effect Advice ............. 2-1 Pocket bag fabric....................................................... 2-1 Existing rules of origin and modification.................................. 2-2 Description of subject products ......................................... 2-2 U.S. industry and market conditions ..................................... 2-3 Views of interested parties .......................................... 2-5 Single transformation for certain apparel items ............................... 2-6 Single transformation modification and subject products ..................... 2-6 U.S. industry and market conditions ..................................... 2-7 Tariff treatment of certain non-originating items .............................. 2-8 Tariff modification and subject products ................................. 2-9 U.S. industry and market conditions ..................................... 2-9 Costa Rica wool tariff preference level...................................... 2-12 Existing TPL provisions and modifications ................................ 2-12 Description of subject products ......................................... 2-13 U.S. industry and market conditions ..................................... 2-14 Effects of changes to the existing TPL limit for certain wool apparel ........ 2-14 Apparel....................................................... 2-16 Fabric ........................................................ 2-17 Effects of new TPL for certain coarse-micron worsted wool apparel .......... 2-17 Apparel....................................................... 2-17 Fabric ........................................................ 2-18 Swimwear TPL for Costa Rica ............................................ 2-20 Modification and subject products ....................................... 2-20 U.S. industry and market conditions ..................................... 2-21 Cumulation for wool.................................................... 2-23 Existing cumulation provisions and modifications .......................... 2-23 Description of subject products ......................................... 2-24 U.S. industry and market conditions ..................................... 2-26 Apparel ......................................................... 2-26 Fabric........................................................... 2-27 iii CONTENTS–Continued Page Chapter 2 Probable Economic Effect Advice-Continued Modification to chapter rules for new single transformation items .................. 2-28 Existing rules of origin and modification.................................... 2-28 Description of subject products ........................................... 2-29 U.S. industry and market conditions ....................................... 2-34 Bibliography Bibliography............................................................ Bibl-1 Appendixes A.Request Letter from USTR .................................................... A-1 B. Federal Register Notice....................................................... B-1 C. Company Contacts........................................................... C-1 D. Description of Modeling ...................................................... D-1 Tables ES-1. Summary of advice concerning modifications to the DR-CAFTA rules of origin and tariffs for certain apparel goods ........................................ vi 1-1. DR-CAFTA modifications by product ........................................ 1-2 2-1. Summary of advice concerning modification of the rules of origin for apparel containing pocket bag fabric.............................................. 2-1 2-2. Summary of advice concerning single transformation treatment for certain apparel items................................................................ 2-6 2-3. Single transformation modification: product description and tariff rates .............. 2-7 2-4. Summary of advice concerning tariff treatment of certain non-originating items ....... 2-9 2-5. Modification to tariff treatment for certain non-originating items: description of subject products and tariff rates ........................................... 2-10 2-6. Summary of advice concerning modifications to the Costa Rica wool TPL ........... 2-13 2-7. Existing Costa Rica wool TPL: OTEXA textile categories and product description ..... 2-14 2-8. New Costa Rica wool TPL: product description and tariff rates .................... 2-15 2-9. Summary of advice concerning creation of separate TPL for certain swimwear from Costa Rica ....................................................... 2-20 2-10. Summary of advice concerning modification to cumulation for wool................ 2-23 2-11. Existing cumulation provision for wool: OTEXA textile categories and product description ....................................................... 2-25 2-12. Modification to cumulation provision for wool: product description and tariff rates ..... 2-25 2-13. Summary of advice concerning modification to chapter rules for new single transformation items...................................................... 2-29 2-14. Single transformation modification: product description and tariff rates .............. 2-30 iv EXECUTIVE SUMMARY This report assesses the probable economic effect (PE) of modifications to the rules of origin and tariff treatment in the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (DR-CAFTA) on certain apparel goods, as set forth in letters of understanding signed in 2006 with the Dominican Republic and Costa Rica. Overall, the modifications will likely have a negligible impact on U.S. production and trade in the subject apparel goods (table ES-1). The rules change for pocket bag fabric, however, may help to slow the decline in existing domestic production and exports of pocket bag fabric to the DR- CAFTA region (Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua) and possibly help slow the growth in U.S. imports from Chinese and other lower-priced Asian suppliers that accelerated with the elimination of quotas on textile and apparel goods on January 1, 2005. The other rules of origin changes to DR-CAFTA, i.e., the single transformation provision (also known as the “cut and sew rule”), the tariff reductions for certain non-originating apparel goods, the Costa Rica wool tariff preference level (TPL) changes, the new Costa Rica TPL for post-mastectomy women’s/girls’ knit swimwear, and the cumulation provision for wool apparel, will likely have a negligible impact on total U.S. trade and production. Although the rules of origin changes and tariff reductions (except the pocket bag fabric requirement) are liberalizing, any increase in U.S. imports of these goods from the region is expected to be negligible because the rules of origin changes affect only small volumes of apparel goods from the DR-CAFTA region and the tariff reductions are minor. Furthermore,
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