Our Work

PPI’s Trade Fact of the Week: Height of papers needed to qualify T-shirt as ‘CAFTA duty-free’: ~ four inches

• May 10, 2023
• Ed Gresser

FACT: Height of papers needed to qualify T-shirt as ‘CAFTA duty-free’: ~ four inches.

THE NUMBERS: U.S. clothing import growth, 2005-2022* –

* * Counting from completion of CAFTA/DR. See below for a more recent count of change 2012-2022.
** Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, and the Dominican Republic as a group.  More detail: Nicaragua +$2.0 billion, Honduras +$0.6 billion, El Salvador +$0.3 billion, Guatemala +$0.1 billion, Costa Rica -$0.5 billion, Dominican Republic -$1.2 billion.

WHAT THEY MEAN:

CBP’s “border encounter” statistics show about 34,000 Central Americans reaching the U.S.’ southern border each month so far this year. Ten years ago, following their trek north in his book The Beast* (2010) Salvadoran journalist Oscar Martinez recounts stories of gang kidnappings and extortion, rape and sexual abuse, fatal falls from the roofs of trains along the way, and likely arrest at the end. Asking himself in closing why anyone would make such a trip, Martinez decides that the largest cause is simple:

“They’re unable to accept that miserable routine of waking up at five in the morning to travel two hours on a dangerous public transit system to get to a fast-food restaurant or a market or a warehouse in San Salvador, or Tegucigalpa, or Guatemala City, where they spend the whole day toiling away at undignified work only to return to their small homes, dog-tired, making a measly minimum wage that barely lets them afford beans and tortillas for their children.”

Vice President Kamala Harris makes a similar comment in a February conference on the “Northern Triangle” (Guatemala, Honduras, and El Salvador):

“[P]eople generally do not want to leave home.  And when they do, it is because they are either fleeing some harm or because staying home will mean that they cannot satisfy the basic needs of their family and themselves.”

The conclusion drawn from their comments — that if the U.S. has a particular interest easing political stress and migration pressure in Central America, American policy should encourage investment and higher-quality employment — has a forty-year history. Four decades ago, the Ronald Reagan/Tip O’Neill “Caribbean Basin Initiative” aimed to encourage clothing-making in Central America by waiving U.S. tariffs under a complex legal formula known as “Section 807,” which offered buyers of Central American-made clothes duty-free treatment so long as the shirts, blouses, etc. were made of U.S.-produced fabric. The hope was that a growing garment industry would create many jobs, dampen the economic volatility arising from heavy reliance on fruit and coffee exports, reduce the social temperature, and so ease peace-making. A decade later, Central American maquiladora factories — long lines of sewing machines operated by young women; complementary male employment in factory repair, and transport — provided $4.8 billion of America’s $39.4 billion in clothing imports, or about eighth (by value) of the total.

After 20 years, the “CAFTA-DR” – the full and permanent Free Trade Agreement now joining the U.S. with Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, and the Dominican Republic – replaced the CBI in phases from 2005 through 2009. Its hope was that a permanent agreement would make the region more competitive and build buyer confidence. But in practice, this hasn’t exactly happened. Though Central America’s clothing trade has grown a bit in dollar terms, despite its tariff advantage the region’s share of U.S. imports has dropped from 12.3% in 2005 to 10.1% in 2022. Though CAFTA-DR clothes have no tariff, while as of 2022 Asian clothes were taxed at an average of 18.8%,** most new clothing imports in the last two decades have come from Asia. (China in the 2000s, Vietnam and Bangladesh in the 2010s and 2020s). Also a bit striking: imports from FTA partner Jordan and ‘preference’ beneficiary Haiti (which operates under another upgrade of CBI rather than a free trade agreement), though smaller overall, have grown much faster than imports from the CAFTA-DR countries.

Why?  A plausible explanation is the complexity and costliness of the CAFTA/DR agreement. Like its CBI predecessor, CAFTA-DR retains a clause — known as a “yarn-forward rule” in apparel-trade jargon — requiring nearly all of (say) a T-shirt’s cloth and yarn*** to be made in the U.S. or a CAFTA country to qualify it for duty-free status. This means very restricted supply options for garment factories — to cite FTA partners only, no high-quality Peruvian cotton, no Colombian cloth, no Korean yarn or thread. Furthermore, CAFTA/DR includes a 143-page list of “product-specific rules of origin” writing special provisions for individual products meant to suit the very specific business models of many individual U.S. firms as of 2005. As a case in point, the agreement’s denim rules were meant to guide Central American manufacturers to fabric from a particular U.S. mill in North Carolina. As a sample of the daunting legal language this entails, here’s a passage drawn from the 2007 “textile amendment” requiring users to monitor the width of wool in the lining of jackets and skirts down to the half-micron:

“Chapter Rule 1 Except for fabrics classified in tariff item 5408.22.aa, 5408.23.aa, 5408.23.bb, or 5408.24.aa, the fabrics identified in the following headings and subheadings, when used as visible lining material in certain men’s and women’s suits, suit-type jackets, skirts, overcoats, carcoats, anoraks, windbreakers, and similar articles, other than men’s and boys’ and women’s and girls’ suits, trousers, suit-type jackets and blazers, vests, and women’s and girls’ skirts of wool fabric, of subheadings 6203.11, 6203.31, 6203.41, 6204.11, 6204.31, 6204.51, 6204.61, 6211.39, or 6211.41, provided that such goods are not made of carded wool fabric or made from wool yarn having an average fiber diameter of less than or equal to 18.5 microns, must be both formed from yarn and finished in the territory of one or more of the Parties: 51.11 through 51.12, 5208.31 through 5208.59, 5209.31 through 5209.59, 5210.31 through 5210.59, 5211.31 through 5211.59, 5212.13 through 5212.15, 5212.23 through 5212.25, 5407.42 through 5407.44, 5407.52 through 5407.54, 5407.61, 5407.72 through 5407.74, 5407.82 through 5407.84, 5407.92 through 5407.94, 5408.22 through 5408.24, 5408.32 through 5408.34, 5512.19, 5512.29, 5512.99, 5513.21 through 5513.49, 5514.21 through 5515.99, 5516.12 through 5516.14, 5516.22 through 5516.24, 5516.32 through 5516.34, 5516.42 through 5516.44, 5516.92 through 5516.94, 6001.10, 6001.92, 6005.31 through 6005.44, or 6006.10 through 6006.44.

Compliance with these rules requires 31 classes of documents ranging from bills of lading and employee time-cards to contracts with dyers and finishers, invoices, proofs of payment and so on; the resulting sheaf of paper is said typically to be about four inches high. Apart from the cost and lawyer-hours involved in verifying all this, rules designed for specific products from particular factories tend to lose relevance over time. In the denim case, the plant in question closed after a chemical accident in 2017, and since then Guatemala, El Salvador, and Honduras have stopped selling jeans to the U.S.

Thus CAFTA producers have been treading water as full-tariff competitors in Southeast Asia boomed. The Jordan agreement and the Haiti programs, simpler as they require only a showing of local added value rather than requiring detailed sourcing, appear much more successful.

Turning back now to Martinez’ journalism and Vice President Harris’ observation, the main point – to lower social temperatures and reduce migration pressure — still seems like a strong one. With it in mind, can we do better?  Could individual pieces of the CAFTA/DR that are no longer relevant – perhaps the denim piece — be scrapped? Could Congress allow Central American factories to use cloth and yarn from FTA partners, or Latin America generally? Or perhaps the whole thing might be redone, merged with the “USMCA” and the string of smaller FTAs going south from Panama to Colombia, Peru, and Chile?

* A bit dated as a description of the migrant route around 2010, but still relevant. ‘The Beast’, La Bestia, is a migrant nickname for southern Mexican freight trains.
** Counting Chinese products, many of which are subject to the Trump administration’s additional “301” tariffs. The 2022 rate for Asian clothes excluding Chinese-made goods was 16.6%.
*** Using a cotton T-shirt because this (HTS 61091000) is the top import from the CAFTA/DR countries, at $2.8 billion of the U.S.’ $35 billion in total imports (everything, clothes, coffee, oil, mangoes, etc.) from these countries last year. 

FURTHER READING:

Harris on Central America strategy this February.

The White House’s “Root Causes of Migration” strategy document.

And Ronald Reagan’s 1982 Caribbean Basin Initiative message.

Book recs: 

On migrants: Martinez’ The Beast: Riding the Rails and Dodging Narcos on the Migrant Trail.

… and for clothing-trade background: (as with Martinez’ book, slightly dated but still full of insights), Pietra Rivoli’s Travels of a T-shirt in the Global Economy (2005).

Data:

Customs and Border Patrol tabulate border ‘encounters’.

Clothing and textile import data in various forms from the Commerce Department’s Office of Textiles and Apparel.

The CAFTA/DR:

Full agreement text for CAFTA/DR; see Chapter 4, Annex 4.1 and “Textiles Amendment” for clothing rules.

An alternative clothing-import table:

The chart at the top counts from the signature of CAFTA/DR in 2005. A more recent count, looking at the decade 2012 to 2022 would be somewhat different, with China down rather than up, Vietnam and Bangladesh getting almost 2/3 of all new imports, and slightly higher growth for the CAFTA/DR countries. Same table, though a bit shorter:

*Within CAFTA/DR, totals are Nicaragua +$1.4 billion, Guatemala +$0.7 billion, Honduras +$0.6 billion, El Salvador +$0.1billion, Dominican Republic unchanged, Costa Rica -$0.2 billion.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank Progressive Economy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007).  He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

Read the full email and sign up for the Trade Fact of the Week