By Mark Neville email
| bio
In this first article in my new column devoted to Free
Trade Agreements (FTAs), I thought it wise to give a strategic
overview of FTAs and their impact on trade and, in particular,
the impact on the individual company or trade professional.
The important point to remember about FTAs is that they
all have two things in common. The good news is that a FTA
confers the benefit of duty-free or reduced-duty treatment
to qualifying importations. The bad news is that the U.S.
Customs and Border Protection (CBP) views FTAs as "give
backs," and they take a very conservative view and
are strict about the documentation needed to qualify an
imported product. In a related bit of further bad news,
safeguard legislation is in place to re-impose trade barriers
if the FTA proves to be too much of a good thing.
Scope of FTAs
It is also important to realize just how many FTAs there
are. Prior to the U.S.-Canada agreement on automobile trade
(1965), there were no FTAs. Thereafter, we saw the U.S.-Israel
FTA (1985) and U.S.-Canada FTA (1989), which was the precursor
to NAFTA, and NAFTA itself (1993).
With the new millennium, FTAs have sprouted in such profusion
that it is a task to keep track of them all. As this is
being written, the United States is negotiating FTAs with
such diverse trading partners as Korea, Thailand, the United
Arab Emirates, Panama and the five-nation Southern African
Customs Union. These would join a network of FTAs in place
ranging from NAFTA to CAFTA-DR (Costa Rica, Dominican Republic,
El Salvador, Guatemala, Honduras and Nicaragua), Australia,
Singapore, Chile, Morocco, Israel, Jordan, Bahrain and sub-Saharan
Africa.
In addition, the U.S. has negotiated FTAs with Bolivia,
Colombia, Peru and Ecuador, but they await Congressional
approval before they become effective. If taken together,
the countries with which FTAs have been implemented or are
in negotiation represent the United State’s third
largest export market and the world’s third largest
economy.
Expanded Access to Duty-Free Treatment
Because the list of FTAs is in flux, the calculus for sourcing
products from overseas is in flux as well. For example,
a few years ago, a company might have decided to buy products
from a vendor in Thailand rather than Australia.
The quality, price and logistics offered by the two sourcing
options might have been identical, but Thailand-origin products
may have offered a break on customs duty through its eligibility
for Generalized System of Preferences (GSP). Or it could
have been that Thailand’s GSP eligibility and the
ensuing duty-free treatment for the product imported into
the United States were enough to outweigh price, quality
or other advantages arising from the Australian vendor’s
offer. With the accession of the U.S.-Australia FTA in 2004,
however, the Australian product might now also be eligible
for duty-free treatment.
This introduces another aspect of the FTA program: while
trade preference programs such as GSP or the Andean Trade
Preference Act provide for duty-free access from beneficiary
developing countries, the FTAs provide the same access for
products from some trade partners, e.g., Australia, Singapore
and Korea, which are clearly not developing countries. By
expanding duty-free access to the United States market regardless
of the state of development in the country of origin, the
U.S. has widened the range of choices for companies looking
offshore for their sourcing.
So much for the good news.
Narrow Read by CBP
Recent empirical evidence is in: CBP doesn’t like
FTAs. Make no mistake about the continuing role of CBP as
a revenue agency, even in this post-9/11 world.
Before the introduction of the federal income tax in 1913,
customs duties furnished the lion’s share of revenue
for the federal government. While the roughly $21 billion
in duties and fees collected by CBP annually is dwarfed
by the $1.5 trillion in income tax collections, the level
of duties the U.S. government is collecting has remained
steady in spite of the proliferation of FTAs and trade preferences
and the zero duties assigned to specific products, e.g.,
toys, furniture and pharmaceuticals.
CBP has taken a very narrow approach to NAFTA, for example,
claiming that Ford Motors was not entitled to NAFTA benefits
because it did not have documentary proof for the imported
articles’ eligibility. That dispute is now before
a federal court in Texas. If CBP prevails, it will mean
that importers may not be able to rely on the certificates
of origin issued by the exporter of the product.
In similar fashion, CBP auditors are raising the stakes
for importers claiming GSP. Importers are routinely required
to come up with the same level of detailed cost accounting
for production as would be the case if there were a computed
value appraisement or if CBP was alleging transshipment.
CBP is calling upon importers to come up with a dizzying
pile of costed bills of materials, detailed time records
for production line workers, records of utilities’
expenses and the like. Bearing in mind that many of the
producers are small enterprises and are unrelated to the
importer and that their business sophistication may be at
a level consistent with their local standards in, say, Jordan
or Costa Rica, and one can imagine the difficulties. Many
CBP auditors demand to see production records even if the
importer seeks to qualify goods on the basis of material
costs alone.
Each of the FTAs has rules of origin that are unique, so
we should not overly generalize. But we can predict that
CBP will take the same post-entry audit approach for all
FTAs. U.S. companies may be unable to take advantage of
the reduced duties under a particular FTA not because the
goods don’t qualify under the FTA, but because importers
are unable to satisfy CBP’s documentary tests.
Finally, there lurks in the background the specter of what
happens if the FTA is simply too much of a good thing. What
happens if importers using an FTA are too successful in
gaining market share in the United States? The FTAs provide
their own answers.
Just as the safeguards provision in the U.S.-China trade
context resulted in the reintroduction of quota on Chinese
apparel and textiles to stem the tide of the import surge,
so too is there the risk that the safeguard provisions in
a given FTA will provide statutory authority. Each FTA sets
up a procedure so domestic competitors can petition the
International Trade Commission to impose duties at the column
1 rates on the affected items.
Summary
FTAs are a good thing, but the CBP or a domestic competitor
may stand in your way.
