Overview of the U.S.-Peru Trade Promotion Agreement

Jonathan Fee and BJ Shannon Alston & Bird LLP

The U.S.-Peru Trade Promotion Agreement (TPA) took effect February 1, 2009. The United States and Peru originally completed negotiations in December 2005. After Peru's government approved the TPA in June 2006, and the U.S. Congress approved the agreement in December 2007, however, Peru and the United States agreed in June 2007 to modifications of the TPA's treatment of issue such as labor standards, investment, environmental protection, and intellectual property rights. Accordingly, additional time was required for Peru to revise its laws to conform to the modified agreement.

The TPA grants immediate duty-free treatment to all originating goods, including textiles and apparel. Unlike the U.S.-Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), the TPA's textile and apparel provisions are not retroactive; they became effective only as of the implementation date of the TPA.

While the ATPDEA previously provided duty-free entry into the United States for many textile and apparel articles from Peru, the TPA covers a wider range of products and provides for duty-free importation of U.S. goods, including yarns and fabrics, into Peru. Moreover, the TPA will remain in effect indefinitely unless one of the parties withdraws, whereas the ATPDEA's benefits periodically require renewal by Congress.

Rules of Origin

The TPA covers all articles and permits unlimited use of U.S. or Peruvian inputs, whereas the ATPDEA only offers duty-free treatment in the United States for apparel articles and luggage made with U.S. yarn and fabric, or with regional yarn and fabric up to certain caps. Like most other U.S. free trade agreements, the TPA treats as originating articles that are wholly obtained or produced entirely in the United States and/or Peru, as well as articles for which non-originating inputs meet specific tariff shift rules.

Subject to additional rules applicable to certain components, discussed below, the tariff shift rules for most apparel articles are yarn forward, meaning that generally only staple fiber may be non-originating. While CAFTA-DR permits the use of foreign wool yarn in most garments, wool garments are generally yarn forward under the TPA. Under the yarn forward rules, the component determining classification must be woven or knit in Peru or the United States with yarn spun or extruded in Peru or the United States, and the garment must be cut (or knit to shape) and assembled in Peru or the United States. Unlike the ATPDEA, which applies origin rules to all components of a garment other than "findings and trimmings," the tariff shift rules under the TPA apply only to the component of a garment that determines its classification. And while the ATPDEA requires that dyeing, printing, and finishing occur in the United States, the TPA permits these operations to occur in the United States or Peru.

Short Supply

The TPA also provides for duty-free treatment of non-originating textiles and apparel that are composed of fibers, yarns, or fabrics that are not available in commercial quantities in the United States or Peru. At the time of the TPA's implementation, the short supply list included only 18 fabrics and yarns. The TPA provides for additions to the short supply list if the United States determines that a fiber, fabric, or yarn is commercially unavailable.

Under the TPA, the United States must make short supply determinations on a much shorter timeline than the timeline under the ATPDEA. The TPA also permits the addition of items to the short supply list in restricted quantities and permits removal of items from the short supply list if the United States determines that the items are no longer unavailable. Updated information about short supply is available at http://www.otexa.ita.doc.gov.

Additional Requirements for Originating Articles

Although the TPA's origin rules are in some respects more lenient than those in the ATPDEA, the TPA also contains an additional requirement for sewing thread, and, despite the general rule under the TPA that only the component that determines classification must meet the applicable origin rule, the TPA also includes rules for pocketing, narrow elastic fabrics, and visible linings.

First, sewing thread in apparel or other textile articles must be both formed and finished in one or more of the TPA parties. This rule, however, specifies particular sewing thread classifications in the Harmonized Tariff System (HTS). Because only multiple, folded, or cabled yarns may be classified as sewing thread under the HTS, single yarn sewing thread is not subject to the origin rule in the TPA. Sewing thread may also be designated as commercially unavailable pursuant to the TPA's procedures, in lieu of being formed and finished in one or both TPA countries. Furthermore, garments that qualify for duty-free treatment under the short supply rules are not subject to the sewing thread rule.

Second, the pocket bag fabric of any good of Chapter 61 or 62 that contains pockets must be formed and finished in one or more of the TPA parties from yarn wholly formed in one or more of the TPA parties. Short supply fabrics and yarns, although not formed and finished in the United States or Peru, may also be used for pocketing. Garments that qualify for duty-free treatment under the short supply rules are not subject to the pocketing rules.

Third, apparel articles that contain narrow elastic fabrics will be originating only if the narrow elastic fabrics are both formed from yarn and finished in one or more of the TPA countries. A narrow elastic fabric may also be designated as commercially unavailable pursuant to the TPA's procedures, and such fabric may be used in lieu of narrow elastic fabric formed and finished in the United States or Peru, so long as the elastomeric yarn in the fabric is formed and finished in the United States or Peru. Garments that qualify for duty-free treatment under the short supply rules are not subject to the restriction on the origin of narrow elastic fabrics.

Fourth, certain types of visible lining fabric in suits, suit jackets, skirts, overcoats, carcoats, anoraks, windbreakers, and similar articles must be both formed from yarn and finished in one or more TPA countries. Alternatively, short supply fabrics or yarns may be used to produce visible lining fabrics. Garments that qualify for duty-free treatment under the short supply provisions are not subject to the visible lining rules.

Single Transformation Rules

The TPA includes a rule like CAFTA-DR's that grants duty-free treatment to brassieres that are cut and sewn in the United States or Peru from foreign fabric. The unrestricted single transformation rule under the TPA is therefore simpler than the ATPDEA's brassiere rule, which incorporated a complicated rule under which 75 percent of the value of fabric used by any producer in the previous year's production had to be formed in the United States.

The TPA does not include several additional single transformation rules that are incorporated into CAFTA-DR. The TPA also does not have any tariff preference levels (TPLs), like those granted to certain goods from Nicaragua and Costa Rica under CAFTA-DR.

De Minimis Fibers and Yarns

An article is still originating under the TPA despite the presence of fibers or yarns in the component that determines the article's classification that do not meet the applicable tariff shirt rule, if these fibers or yarns account for ten percent or less of the total weight of all the fibers or yarns in the component that determines classification of the article. The exception to this rule is that a good containing any elastomeric yarns in the component of the good that determines its classification is not originating unless the elastomeric yarns are wholly formed in the United States or Peru.

Nylon Filament Yarn

Also, an article is still originating under the TPA despite the presence of yarns in the component that determines the article's classification that do not meet the applicable tariff shirt rule, if these yarns are certain nylon filament yarns produced in Canada, Mexico, or Israel. The ATPDEA contains a similar provision.

Cumulation

Unlike CAFTA-DR, which includes cumulation provisions that treat certain Mexican and Canadian inputs as if they were produced in CAFTA-DR countries, the TPA does not provide for cumulation of fabrics or yarns from any other countries, including the other ATPDEA countries. However, Peru has retained its status as an ATPDEA beneficiary country, even though the TPA is in effect. Therefore, inputs from Colombia and Ecuador will not disqualify goods from Peru from preferential treatment under the ATPDEA. Inputs from Bolivia are not permitted, because Bolovia's ATPDEA benefits were suspended as of December 15, 2008, and ATPDEA benefits for the other ATPDEA countries will expire December 31, 2009 unless Congress extends the program. The TPA also requires the United States and Peru to hold discussions within 6 months of the TPA's implementation to determine whether to permit cumulation of materials from other countries in the region.

Treatment of Sets

Sets, which generally consist of two or more articles that go together and are packaged and marketed together, like a blouse with a matching scarf, are only originating under the TPA if each good in the set is an originating good, or if the value of the non-originating components is not more than ten percent of the value of the set.

Safeguards

The TPA provides for safeguard measures to remove preferential duty benefits if textile or apparel imports increase to a level that causes or threatens to cause "serious damage" to domestic industry. Safeguards may not last more than two years (with an option for a one-year extension) or past the end of the "transition period," which is defined as five years after the entry into force of the agreement. Safeguards must be accompanied by concessions.