This article will continue my discussion of the African Growth and Opportunities Act (AGOA). As I mentioned in my last article, assuming that AGOA continues to be restrictively interpreted by US Customs, the only avenue to duty-free treatment under AGOA for sweaters made from third-country fabric would be to engineer their manufacture so that they are considered to be cut-and-sewn garments, not knit-to-shape garments. In that case, they could, as set out in the last article, receive duty-free treatment through September 30, 2004 if wholly assembled in a lesser developed beneficiary sub-Saharan countries (LDBC).

Several years ago there was controversy over the knit-to-shape vs. cut-and-sewn distinction in the case of sweaters (other than 845(2)/846(2)) that were knit in Hong Kong and linked and looped in China. Under the US origin rules, origin for knit-to-shape garments is conferred where the panels are knit. Thus, if the sweaters were knit in Hong Kong and were considered to be knit-to-shape, origin would lay in Hong Kong.

A concern was raised, however, because, after knitting, panels may require trimming and other contouring to achieve the final panel shape. If this trimming and contouring were excessive (at least in the eyes of Customs), it would result in the garment being considered cut-and-sewn instead of knit-to-shape. If so, in the Hong Kong/China scenario, the garment would be origin-China because the assembly, which confers origin for cut-and-sewn garments, would occur in China (site of linking and looping). This of course would have been a bad result because of the relative scarcity of China quota vs. Hong Kong quota.

In light of this controversy, Customs issued a bulletin to the trade concerning what characteristics of a garment (or more specifically, the knitting process) would render it knit-to-shape as opposed to cut-and-sewn.

Under the US rules, a garment will be knit-to-shape if 50% or more of its exterior surface area is formed by major parts (the panels) that have been knit-to-shape. This requires that each panel be examined in order to determine whether it is knit-to-shape. If panels constituting 50% of the exterior surface area of the garment are not considered to be knit-to-shape, then the garment will be cut-and-sewn. Thus, if we can "knock out" the front and back panel or two sleeves and a front or back panel, the garment will be cut-and-sewn. The same should be the case if we can knock out one sleeve and a front or a back panel assuming that the panels knocked out have the same surface area as the panels that are knit-to-shape.

This Customs bulletin lays out several bright-line rules as to when a panel is NOT considered to be knit-to-shape. For example, the bulletin states that, if a panel does not have a self-starting bottom, the panel can not be considered knit-to- shape. The bulletin also indicates that a panel, even with a self-starting bottom, would not be considered to be knit-to-shape if there was no shaping at the neck or armhole or if the lines of demarcation knit into the panel were not clear. In this sense, the bulletin is a cookbook as to the manufacturing features that one might employ in order to end up with a garment that is cut-and-sewn in order to take advantage of duty-free treatment under AGOA for garments wholly assembled in an LBDC. It is ironic because the bulletin's initial utility was to provide a clear path for the trade to end up with a knit-to-shape garment (in the Hong Kong/China scenario) whereas the goal in the context of AGOA is just the opposite.

Roy Ian Delbyck
Law Office of Roy Ian Delbyck

Disclaimer: The above article is not intended as legal advice. Please consult your lawyer should you seek advice on any of the matters discussed in this article.
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