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close this bookThe Courier N 127 May - June 1991- Dossier 'New' ACP Export Products - Country Reports Cape Verde - Namibia (EC Courier, 1991, 104 p.)
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View the document‘New’ ACP export products
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View the documentZimbabwe - rhe expansion of non-traditional exports: general explanation
View the documentGhana - diversifying the export base problems and strategies
View the documentThe growth of non-traditional exports in the Caribbean
View the documentJamaica - manufacturing: almost exclusively for export
View the documentJamaica’s Preferential Trade Arrangements
View the documentPromoting export of ACP manufactures - The role of CDI

Jamaica’s Preferential Trade Arrangements

United States import policy

Item 807

The growth of Jamaican clothing exports to the US is undoubtedly the result of US trade policy. The principal instrument has been Item 807 of the Tariff Schedules of the United States Annotated (TSUSA), as amended by various measures under the Caribbean Basin Initiative (CBI). 807 encourages outward processing by US companies. It is thus akin to the provisions in the EC’s bilateral agreements with the Southern Mediterranean countries, but is much more complex and directive.

Although 807 applies to a range of manufacturing sectors, it is garment making that has been the prime beneficiary. Some of the largest and most efficient US clothing manufacturers and distributors have demonstrated interest in the scheme, suggesting that it is genuinely attractive to the US industry. 807 shipments have come to account for a significant proportion of US clothing imports: up to 10% in 1987.

Under the standard 807 procedure, when US manufacturers assemble goods overseas from components manufactured in the USA and then reimport the goods, they do not have to pay import duty on the value of the US content of the finished product. The benefits of 807 are purely fiscal; the provision does not formally ease the quantitative restrictions imposed by the USA on clothing and textile imports under the Multifibre Arrangement (MFA). In practice, however, countries supplying under 807 are less likely to have a quota imposed on a particular product or, if one is imposed, it is likely to be larger than would otherwise apply. To benefit from 807 the cloth must have been cut within the USA, but not necessarily from US-produced fabric.

‘Super 807’

The 807 provision has been amended in several respects for Caribbean countries falling under the CBI. As originally announced in 1983, the CBI would have covered textile products, but these were then excluded following a dispute within the US administration between the Departments of State and Commerce. To fill the gap, the US finally approved a CBI Textile Program, which was announced by President Reagan in February 1986. This invited CBI States to enter into special bilateral textile trade agreements with the US that would provide additional market access opportunities. At the same time, the US tightened its quota restriction on imports from the Far East, thus increasing the incentive for Asian exporters to relocate to a quota-free country.

Countries establishing bilateral textile agreements with the US under the CBI Textile Program became eligible for what is now known as ‘Super 807’. For the textile industry the significant feature of Super 807 is that it increases the US content of the final product. As under 807, the role of the host country is limited to the assembly of pre-cut pieces but, to benefit from Super 807, the pieces must have been cut from US fabric (defined to include wholly-US material and fabrics woven or knitted in the USA from imported yarn). For the host country, Super 807 offers some relief from MFA quotas. For goods falling under the Super 807 rules of origin, the USA has negotiated guaranteed access levels (GALs) which, though formally a quota, are set at a level at which they will not normally be binding.

At the same time, however, restrictions on goods falling foul of the Super 807 rules of origin were tightened. The object was to encourage manufacturers to export under Super 807, i.e. using US-made fabric. Goods not qualifying for GAL treatment were subject to either designated consultation levels (DCLs) or specific limitations (SLs), for which quotas were set at much lower levels than the corresponding GALs.

Early implementation of Super 807 was hindered by major bureaucratic problems, together with a difficulty in sourcing some of the required materials within the USA. More fundamentally, the Caribbean States complained that the provisions made it impossible for participating countries to build up substantial clothing industries which were not simply offshore assembly operations. This fundamental criticism would have been addressed to a certain extent by the provisions of the Caribbean Basin Economic Recovery Expansion Bill. But this bill had a difficult passage to the statute book. When it was passed finally, in August 1990, it excluded preferential treatment for textiles and clothing.

Twin plants

One further item of US trade policy with importance for the Jamaican clothing industry is Section 936 of the US internal Revenue Code. As a result of negotiations between the US government and Puerto Rico over the use of this section, Puerto Rico offers low-cost loans from 936 deposits in the island’s banks to finance the establishment of so-called ‘twin plants’ in CBI countries. A number of such plants have been established in Jamaica, although Costa Rica and the Dominican Republic are more preferred locations, partly because of language.

Agreements with Jamaica

Jamaica was the first Caribbean country to respond to the invitation by the US to enter into bilateral textile programmes, although it is not the largest regional supplier under 807 (the Dominican Republic and Mexico hold the top two positions). Under the agreement of August 1986 three groups of products were established: group 1 (GALs for Super 807); group 2 (DCLs for non-Super 807 products); and group 3 (for other products not subject to restriction but liable to tee ‘celled’ under the market disruption provisions of the agreement). The items placed in these three categories, and the quotas to which they were subject, have been revised three times - in March 1987, September 1987 and in the Montego Amendment of April 1988.

In most cases the GALs have been nonbinding: only the knitted shirts/blouses and hosiery quotas were exceeded in 1988. These agreements apply only to simple assembly and sewing of pre-cut pieces, not to more complex processes such as ‘Cut, Make and Trim’ (CMT). US import controls on CMT goods are more severe. Nonetheless, even on CMT the US is by no means significantly less liberal than is the EC. Although quotas do exist for CMT goods they have not been binding in most cases. There has been a problem only with sweaters.

The Lomonvention

Jamaica is an original signatory of the Lomonvention and, hence, has benefited, at least in theory, from duty-free access to the European market for the past 15 years. Evidently, this has not resulted in a surge of exports! Part of the reason for this is to be found in government policies during the 1970s that tended to discourage exports. And part is also due to movements in exchange rates. Trade with the EC is particularly vulnerable to exchange rate movements. Not only is it affected by Jamaican government policies that increase the real effective exchange rate of the Jamaican dollar, but it is also influenced strongly by the US dollar - ecu relationship. Even when the government is pursuing a ‘realistic’ exchange rate policy, the foreign currency with which the Jamaican dollar is aligned is the US dollar. Given the high proportion of Jamaica’s trade that takes place with the US this is inevitable. However, one consequence is that when the US dollar appreciates against the ecu, Jamaican exports cannot avoid becoming more expensive in terms of the European currencies. During the first part of the 1980s, of course, the US dollar appreciated very substantially against the ecu, as did the Jamaican dollar. It is therefore not surprising to find that Jamaican exports of manufactures to Europe did not take off.

In addition to these supply side’ problems, however, exporting to the EC faces one major ‘demand side’ obstacle: the rules of origin. Their impact on clothing exports has been particularly noticeable. The requirement in the rules of origin that woven clothing be produced either from yarn or from cloth imported from the EC has effectively prevented the development of woven clothing exports to Europe. Jamaica has one textile mill, but it does not produce a quality of cloth suitable for export clothing. Because of Jamaica’s distance from Europe and, no doubt, the dominance of US and Far Eastern companies, the import of cloth from the EC is considered financially unviable. The EC rules of origin are more stringent than those applied by either the USA or Canada. Whereas Super 807 does require Jamaican exporters to use US-made fabric, it is complemented by standard 807 treatment which can use non-originating materials.

The rules of origin do not only inhibit clothing exports. Two biscuit manufacturers have attempted to export to the EC under the Lomonvention. Neither has succeeded in obtaining duty-free access, although one is able to continue to export to the ethnic market in the UK even when it has to pay duties.

The two companies have faced different problems. The first uses Jamaican domestically-milled flour in all of its biscuit production. The Lomules of origin specify that biscuits qualify for duty-free treatment only if the wheat from which the flour is milled is produced either in the ACP or the EC.

Under LomII, biscuits were included in List A of Annexe II, which meant that more than one process had to be undertaken in an ACP state to qualify under the rules of origin. The standard test for whether a product originates in an ACP state or not is that the Customs Tariff Heading Number under which it is classified is different from the numbers applying to any of its component parts. However, for the products covered in List A, this ‘change of tariff heading’ criterion is insufficient. The list specifies the additional processing that has to be undertaken in order to confer originating status. In the case of biscuits, it is specified that the process of manufacture from flour is not of itself sufficient, and, hence, the country of origin of the raw materials determines whether or not the final product benefits from the Lomreference. Jamaica produces no wheat. All of the wheat supplied to its mills is in the form of US food aid under PL 480. This does not prevent the biscuits receiving preferential access to the Canadian market under Caribcan, even though Canada is in a position exactly analogous to that of the EC of wishing to encourage its own wheat exports rather than those of the US. The company considers it not feasible to obtain an EC-originating raw material. This would require it to import flour on its own account solely for the biscuits intended for the UK market. This is considered to be both impractical and financially unviable.

The second company is willing to purchase European flour. Its normal policy is to import the flour for its export biscuits rather than to purchase locally because the PL 480 wheat is of variable quality. However, its usual source is Canada rather than the EC. Nonetheless, it considers that it is financially viable to buy European flour for the purposes of manufacturing biscuits for export to the UK.

A first shipment of these biscuits was made in January 1989, in the belief that they qualified for duty-free access under the rules of origin. On arrival in the UK the customs imposed a 35% levy on the grounds that the product did not qualify for Lomreatment. EC import duties on biscuits are in two parts - a fixed component and a variable component. The Lomonvention provides for the fixed component to be waived on imports of all types of biscuits from the ACP. But the variable component is waived only on certain biscuits, primarily those with a high starch content (over 50% in some cases and over 65% in others). The biscuit in question was a sweet biscuit with a starch content of only 45.66%. The imposition of the levy made the transaction financially unviable, the company lost money, and no further exports to the EC are likely unless either an appeal against the levy is eventually successful or the rules are changed.

Provisions exist under the Lomonvention for ‘derogations’ (i.e. temporary exemptions) from the Rules of Origin. Under Lom11 such exemptions could be granted for a period of three years in the case of middle-income countries like Jamaica, with a possibility of renewals for a maximum period of two years. Neither of the biscuit manufacturers has sought recourse to the derogation procedure, which has been widely criticised because the EC has tended to interpret the rules narrowly and their administration has been slow and costly. Few derogations have been sought anywhere in the ACP, although all the applications that have been made have eventually been granted - albeit with certain amendments. From the evidence available it would appear that neither biscuit manufacturer had a particularly strong case for a derogation. This is because of the essential temporary nature of the waiver: applicants must show that they will be able to fulfil the normal rules of origin after the end of the transition period. The problem for Jamaica is that the logistics of flour supply require a permanent, not a temporary, waiver.

Under LomV the derogation procedures have been improved, in terms both of their administration and the criteria for approval. Of potential importance to Jamaica is that derogations will now be approved automatically if there is a minimum level of value added in an ACP state of 45%, provided that this does not cause ‘serious injury’ to an established Community industry. Since no applications have yet been made under the new derogation procedure it is premature to assess the extent to which the amendments of LomV will benefit Jamaica. However, this is clearly an area for scrutiny.

Canada’s Cariban

In addition to its preferential access to the US market under the CBI/807, and the EC market under the Lomonvention, Jamaica, along with the other Commonwealth countries in the Caribbean, has signed with Canada, a special trade agreement known as Cariban. Under it, Jamaica enjoys duty-free access for its exports into the Canadian market, apart from a number of excluded products, provided that rules of origin are met. The rules of origin specify that a minimum of 60% of the ex-factory price of the goods must originate in Jamaica, in other Caribcan beneficiaries, or in Canada. This value added threshold is not as high as might appear at first sight since the ex-factory price includes overheads and a reasonable level of profit. Unfortunately for the Jamaican garment industry, the exclusions from Caribcan include both textiles and clothing, together with footwear, luggage, handbags, leather garments, lubricating oils and methanol. These products benefit only from the generalised system of preferences, if at all.