California Apparel News

Sourcing apparel from Central America can be daunting without a basic understanding of the rules of the Dominican Republic–Central American Free Trade Agreement, also known as DR-CAFTA or CAFTA. CAFTA was signed on Aug. 5, 2004. It has gone into effect in all of the countries except Costa Rica. It is widely expected that Costa Rica will be implementing it in the near future.

To ensure that your goods qualify for CAFTA status, you should have each garment reviewed by a customs specialist. Doing this also fulfils your basic requirements as an importer to exercise “reasonable care” when you import, as well as following “informed compliance.”

CAFTA has been implemented in different phases over the past four years. The duty-free provisions go back to the date of signing the agreement.It is therefore possible that you’ve imported goods from Central America and paid duties that could be refunded back to you. This is especially the case if you have been importing apparel from Costa Rica.

What do you need to qualify for CAFTA duty-free status? Generally speaking, the fabric needs to originate in CAFTA countries. CAFTA has a “yarn forward” rule that says the fabric has to be made from yarn from the CAFTA countries. Can you use foreign fabric and still qualify for duty-free status? The answer is yes, no and maybe.

Right now, Nicaragua is the only country that can use foreign fabric (without special and approved circumstances). Nicaragua is limited by a “tariff rate quota,” also known as a “tariff preference level” (TPL). This TPL for Nicaragua is limited to 100 million-square-meter equivalents (SMEs) a year. Any production beyond the quota will not be allowed into the United States duty-free. The TPL currently is more than 28 percent filled.

If you wish to produce a garment from a fabric that is hard to find from a qualifying process, or is not available, you can still possibly qualify your garment for duty-free status. You can do this by filing a “short-supply petition.” If it is accepted, you will be able to enjoy the benefits of CAFTA while producing your garment in any of the CAFTA countries (with the current exception of Costa Rica).

CAFTA also has a provision for “cumulation” of woven fabrics.Cumulation allows for a limited amount of NAFTA-qualified fabric (e.g., fabric produced in Canada or Mexico) to be transformed into garments in any of the CAFTA countries (again, with the current exception of Costa Rica.) While cumulation is currently not in effect, it is expected to go into effect in the very near future. (See related story, here.)

CAFTA has a textile safeguard provision. This safeguard allows for U.S. industry to file a petition with the Committee for the Implementation of Textile Agreements (CITA) if the industry feels it is being injured by a surge of imports of a particular item. Such a petition was filed, and on April 25, 2008, CITA impossed a 5 percent duty on cotton socks made in Honduras. This tariff goes into effect on all cotton socks (regardless of U.S. content) entered on or after July 1, 2008. It is interesting to note that CITA cited that the expiration date, Dec. 31, 2008, was the same date as the expiration of quota from China.

Discussions about CAFTA are incomplete without a mention of customs enforcement. CAFTA has strict enforcement provisions, even more so than NAFTA. Customs has the right to make surprise factory visits. U.S. importers need to be vigilant about guarding against goods being produced in third countries being declared as CAFTA goods.

One of the benefits of dealing with Central America is its proximity to the United States. Transit times from the principal ports in the region (such as Puerto Quetzal in Guatemala or Acajutca in El Salvador) to Los Angeles are only six to eight days. Space, both north and southbound, is generally available. Airfreight space is also usually readily available. Ocean freight rates are about 25 percent higher than from China. This is because there are fewer carriers servicing Central America, compared with Asian routes to North America. The ocean carriers are also partly exempt from antitrust legislation.

In conclusion, manufacturing apparel in Central America can be quite rewarding for companies that are looking to turn their garments quickly and enjoy duty-free status. To reap the benefits of the quicker production cycles and shorter supply chains, importers should pay close attention to each and every component of the garments. To bring the garments back to the United States even faster and with minimal examinations, importers should consider joining the Customs and Trade Partnership Against Terrorism (C-TPAT).

Robert Krieger is president of Krieger Worldwide, a supply-chain management company headquartered in Los Angeles. Krieger is a licensed customs broker. For more information, visit www.nkinc.com.