The US is dividing the world into zones of duty preference by means of Free Trade Agreements (FTAs). Under an FTA, qualifying products from the preference jurisdiction, including textiles and apparel, may enter the US at zero duty or reduced duty rates. From an apparel perspective, a key component of any FTA is whether the preference jurisdiction enjoys a meaningful Tariff Preference Level (TPL), in addition to the usual short-supply provisions, under which the preference jurisdiction may use third country fabric or yarn to produce garments yet still obtain zero duty or reduced duties. An FTA often only contains limited TPLs. Aside from these limited TPLs and short-supply fabric/yarn provisions, an FTA typically will require all qualifying apparel to be produced from yarn that is the origin of the US or the preference jurisdiction. This may not be very attractive or feasible given the cost, quality and availability of yarn from the US and the preference jurisdiction.

Given this background, it is interesting to note that the US has just released a draft text of the Central American Free Trade Agreement (CAFTA), which contains a very generous grant of a 9-year duty-free TPL to Nicaragua for cotton and man-made fiber apparel.

The Nicaraguan TPL is 100 million square meter equivalents (SME) for years 1-5 of CAFTA, 80 million in year 6, 60 million in year 7, 40 million in year 8 and 20 million in year 9. This is quite substantial. To put this in perspective:

In addition to the TPL granted to Nicaragua, the draft CAFTA text also grants a TPL to Costa Rica. The Costa Rican TPL is much less generous, however. It covers only 500,000 SME, applies to certain wool apparel only, may turn out to not last for more than 2 years and provides for a 50% duty reduction instead of a 100% duty reduction.

President Bush recently notified Congress that he will sign CAFTA. It will then be up to Congress to approve CAFTA, the chances for which seem to be fairly good.

The Nicaraguan TPL in CAFTA and the TPL provisions in other FTAs that the US may enter into certainly bear watching, as if attractive enough they will determine sourcing decisions.