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How to Take Advantage of Trade Preferences for Duty Free Sourcing

In opening a panel at the Sourcing Summit 2015 this month, Gail Strickler, soon to be former Assistant U.S. Trade Representative for Textiles at the Office of the U.S. Trade Representatives, confirmed her move to step down from the USTR position before discussing how to use certain trade preference programs to save on duty rates that can reach as high as 32 percent.

Now that the Trans-Pacific Partnership (TPP) is more or less done, at least for her part, Strickler said, she would be stepping down from her official government capacity in favor of a role in the private sector.

But before her departure, Strickler took the opportunity to share the details and benefits of some of the trade preference programs she worked on during her tenure, including the U.S.-authorized Qualifying Industrial Zone (QIZ) program between Egypt and Israel, and the recently extended Haiti HOPE/HELP deal and African Growth and Opportunity Act (AGOA).

Textile and apparel imports to the U.S. last year totaled more than $107 billion and companies are paying $14 billion in duties on those goods.

The looming TPP could divert attention from these existing trade preference programs, but as Strickler and other trade experts noted at the Summit, benefits from TPP won’t be realized any time soon, so the trade preference programs at present have the prime savings potential.

“There are going to be huge opportunities when TPP does go into effect,” Strickler said, adding however, that some products will have long phase-outs and small tariff reductions, so programs like AGOA, QIZ, and Haiti HOPE/HELP could be the avenues for saving the average 16.8% duty companies are currently paying.

In terms of what the trade preference programs have in common, “No. 1, they’re all duty free, No. 2, they’re all significantly underutilized,” Strickler said, adding, “About 3 percent of what you’re buying right now come under one of these programs.”

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The Lowdown on AGOA

In June, AGOA was renewed for 10 years, whereas before, renewals were at most five years, sometimes renewed retroactively, sometimes with a third-party fabric provision (which allows factories to use any fabric from any country and still qualify for duty free privileges), sometimes without, so there was little consistency and little room for long-term strategy.

“The 10-year AGOA really means for the first time you can plan, manufacturers can build and these countries can get the opportunity to really show you what they’re about.”

Several African countries are coming on the scene as emerging sourcing markets, Lesotho one among them.

Honorable Minister Joshua Setipa, Trade Minister of Lesotho spoke on the panel, touching on the Lesotho market and potential.

Lesotho is a landlocked nation in southern Africa with a population of 2 million and manufacturing is one of the country’s major economies. The country’s major woven apparel producer, Formosa, produces wovens with open-end and ring-spinning capabilities and a capacity to put out 1.6 million yards per month. There are 11 woven producers in Lesotho that employ 15,000 workers in the industry. There are 28 knit garment factories that employ roughly 21,000 workers. Monthly minimum wage in Lesotho is $85 a month.

There are no knit fabric producers there at present, but Minister Setipa said the country is in talks with two knit fabric knitting firms to set up production in Lesotho. Fabric is imported largely from China and some from South Africa.

The country’s major outputs are denim—it does a substantial amount of business with Levi’s—chinos, work wear, women’s trousers, jackets, shirts and blouses. Lesotho also produces a large volume of man-made fiber fabrics, namely for yoga wear. Lesotho exported more than $290 million to the U.S. last year.

Lead times there are 21 days, though to the country is constantly working to improve its infrastructure. Compliance, according to Minister Setipa, is up to par there and labor standards are high.

In turning to AGOA, the Minister said, “We are very much aware that this is probably the last extension of AGOA, so in the next 10 years what we will do is start working with the U.S. on a reciprocal trade agreement that will allow us to lock in these benefits under AGOA in a much more predictable way.”

What’s Haiti’s Competitive Advantage?

Mark D’Sa, the Special Envoy for Haiti, U.S. Department of State, opened his portion of the presentation saying, “Why Haiti? You’ve got so many other places to source from, established centers, and all that you seen when you look at Haiti is risk, but the numbers and the facts speak for themselves.”

There are 1.7 billion square meter equivalents (SMEs) available in Haiti and the current utilization is about 22 percent of the total, he said. Exports in Haiti are increasing at 15.5% a year, jobs are growing at 11.3% a year and SME utilization is growing at 6.78% a year.

“There’s a lot of opportunity and it’s not likely to get exhausted anywhere in the near future,” D’Sa said.

Target is active in Haiti, Walmart is there, Gap—D’Sa’s former emplyer—is very active in there, and earlier this month an athletic wear high performance brand was visiting Haiti to assess opportunities.

“Haiti has moved out of just basic T-shirts and jeans into high performance athletic wear as well,” D’Sa said.

The advantage in Haiti, he explained, was that there are six sailings a week, transit time from either of the country’s major ports to Miami is 3.5 days, which allows for quick reaction to demand.

Haiti’s total exports to the U.S. in 2010 were $517 million FOB and this year the numbers are reaching $904 million. “That’s more than 80 percent growth in five years,” D’Sa said.

Korean firms have so far taken the most advantage of Haiti’s growth and most of the retailers moving in are doing so through one of their existing suppliers in Haiti to minimize risk and are seeing success.

How to use the QIZ

Under the QIZ, Egypt can export goods to the United States duty free provided the products contain 10.5% Israeli inputs, which has fostered partnership in trade and peace between the two nations.

For QIZ-produced products to be eligible to enter the U.S. duty free, articles must contain 35 percent local input (24.5% Egyptian, 10.5% Israeli), and that 35 percent minimum content can include costs incurred in Israel, Egypt or the U.S.

There are now 15 zones in Egypt now, and despite sporadic turmoil in the region, Strickler noted that during the most contentious times, no order was delayed by more than 10 days.

Gabi Bar, Israeli Economic Ministry QIZ director, called the QIZ program a “win, win, win.”

For the U.S., he said, it’s an unlimited term agreement that allows for unlimited qualifying textile and apparel imports to the U.S. duty free. For Israel it opens new markets for Israeli exports and for Egypt, it improves the competitiveness of its exports to the U.S.

Egypt supplies product from yarn, fabric and interlinings to zippers, chemicals and packaging.

“We are working on it all the time and supplies done and we hope that we will be able to expand our businesses so that in the end of the day we will increase the exports of Israel to Egypt by having the 10.5% combined in and of course the Egyptian exports to United States,” Bar said.

Waleed El Zorba, Managing Director, Nile Holding, an Egyptian garment manufacturer, added his perspective and some insight on the Egyptian market.

Egypt has more than 1500 garment factories in the country, which employ 1.5 million workers of its 90 million total population. The annual garment industry output is $3.2 billion and 56 percent of that goes to the U.S. market.

Fifty percent of the country’s labor force is between 20-25 years old and 600,000-700,000 people are introduced to the labor force each year. Add to that a well-established infrastructure, multiple ports, high compliance, thirty years of garment industry experience and an abundance of human capital, El-Zorba said.

“There is fantastic opportunity and potential for growth,” he added. “We have an ambitious vision for the future. We are looking to achieve $10 billion by the year 2025.”