|Free Trade Area of the Americas - FTAA
COMMITTEE OF GOVERNMENT REPRESENTATIVES ON THE PARTICIPATION OF
CONTRIBUTION IN RESPONSE TO THE OPEN AND ONGOING INVITATION
The comments below are submitted in response to the Notice of Issuance by the Free Trade Area of the Americas (FTAA) Committee of Government Representatives on the Participating of Civil Society of an Open and Ongoing Invitation for Public Comment, as published in the Federal Register, Vol. 67, No. 249, dated Friday, December 27, 2002. This paper will focus on the subject of duty drawback as it relates to the Negotiating Group on Market Access in the second draft FTAA agreement.
The USTR has indicated that, for purposes of duty drawback, the provisions of the U.S. - Chile FTA will be used as the template for the FTAA. Article 3.8 of that FTA states that duty drawback will eventually be eliminated on trade between the two FTA parties. The purpose of these comments is to propose that the U.S. economy (and that of its manufacturing and distribution companies in particular) in future FTAA transactions between member parties is better served if duty drawback is maintained in full rather than if it is eliminated.
The USTR has made available on its web site its “Summary of U.S.-Chile FTA Trade in Goods Text”. In Section D - Special Regimes, under Article 8: Drawback and Duty Deferral Programs, the USTR writes the following summary:
We appreciate the opportunity to respond to the USTR’s Open and Ongoing Invitation for public comment on all aspects of the FTAA. In this paper, we will respond to the highlighted text in the USTR summary above.
1. Assertion: Duty drawback reduces the incentive for increased trade between the FTA partner countries since inputs from third countries are duty-free under the duty-drawback program.
Comments: Statistics1 regarding trade under NAFTA between the U.S. and Mexico and between the U.S. and Canada, during the period in which full duty drawback was allowed, indicate that duty drawback does not reduce the incentive for increased trade between FTA partner countries.
Total trade between the U.S. and Mexico between 1985 and 1993 grew at an average annual rate of 13%. On January 1, 1994, NAFTA went into effect, and from 1994 through the end of 2000 full duty drawback was allowed on transactions between the U.S. and Mexico within the NAFTA agreement. During this period, total trade between the two countries increased during the first year of NAFTA compared to the previous year, and continued to grow every year through 2000. In fact, the average annual growth during this period was 17%. These facts disprove the assertion by the USTR that duty drawback reduces the incentive for increased trade between FTA partner countries.
Total trade between the U.S. and Canada in 1988, the last year before the CFTA between the U.S. and Canada took effect, was $153 billion. In 1989, the first full year of CFTA, during which duty drawback was allowed in full, the total trade increased to $166 billion, and continued to increase each year through 1993, in which year the total trade was $211 billion. On January 1, 1994, NAFTA went into effect, and from 1994 through the end of 1995 full duty drawback was allowed on transactions between the U.S. and Canada within the NAFTA agreement. In 1994, total trade grew to $242 billion, and in 1995 it increased again to $271 billion. During this entire period from 1989 through 1995, the U.S. and Canada were partners in one FTA or another and enjoyed full duty drawback. These facts further disprove the assertion by the USTR that duty drawback reduces the incentive for increased trade between FTA partner countries.
2. Assertion: Duty drawback reduces the incentive for integration between the FTA partner countries since inputs from third countries are duty-free under the duty-drawback program.
A.- The U.S. International Trade Commission (ITC) published an article by Ralph Watkins entitled “Regulatory Changes in Mexico Affecting U.S.-Affiliated Assembly Operations”.2 In this article, Mr. Watkins states that:
“In anticipation of the restrictions on duty drawback, a number of companies with Maquiladora and PITEX operations have convinced suppliers in Asia and Europe to establish parts production facilities in North America to replace imports from non-NAFTA sources. Some have found or developed alternative suppliers in North America.” [emphasis added]
“Maquiladora and PITEX operations that continued to rely on non-North American inputs expressed concern to the Ministry of the Economy that Article 303 of NAFTA would increase their costs to the point of making their goods noncompetitive in the North American market relative to finished goods imported directly into the United States and Canada from sources other than Mexico. Many also claimed that they could not find North American producers of certain parts required in their assembly operations.”
Note that this evolving disintegration between the NAFTA parties was occurring not because of the availability of full duty drawback, or even because of the anticipation of the availability of full duty drawback, but rather because of the anticipation of the restrictions on duty drawback.
B.- In a letter from The Border Trade Alliance to Mr. John Melle of the USTR, the authors state the following:
“In the majority of cases, the non-NAFTA inputs presently used by manufacturers in Mexico are not available from sources within the NAFTA region, either due to lack of production, insufficient capacity or noncompetitive pricing, quality or delivery times. The duties that companies are now being required to pay on non-NAFTA inputs, not to mention the administrative burden of complying with Article 303, are seriously threatening the competitiveness of North American-based manufacturers and hence they are being forced to look offshore to produce their products.”3
The above examples demonstrate that the elimination of duty drawback is not a consistently effective tool to use in order to increase the incentive for integration between FTA partner countries. The inability of the elimination of duty drawback to make FTA content more appealing is also evident in U.S. transactions with China. The overall cost savings for U.S. companies (and for companies in many other countries) when they source from a country like China overwhelm any incentive to trade within an FTA (even the FTAA) that paying NTR/MFN duties and eliminating duty drawback on those duties could possibly create.
C.- The proliferation of bilateral and multilateral FTAs between countries makes it increasingly unlikely that the elimination of duty drawback can provide any meaningful incentive to integrate the economies of two or more parties in an FTA without having the effect of not integrating the economies of parties in all the other FTAs to which a country is a party.
For example, Chile has FTAs with Canada, Mexico, the European Union, South Korea, and the U.S. If a company in Chile needs a component in order to manufacture an article for export, and it can purchase that component from companies in either the U.S., Mexico or South Korea, from which country will the Chilean company choose to make its purchase with the goal in mind of integrating its economy with one of its FTA partners?
In such a situation, the Chilean company will likely purchase the component from a supplier who is able to offer it the best combination of pricing, quality, delivery time and other factors, with pricing very likely being the most important factor. It will be increasingly unlikely that the elimination of duty drawback, which would have the effect of making the component more costly, could provide any meaningful incentive regarding the purchase of the needed component.
Thank you for the opportunity to offer our comments on this matter of importance to many U.S. manufacturers and distributors.
Comstock & Theakston, Inc.
William A. Hagedorn
1 All statistics in this section have been obtained or derived from the U.S. Census Bureau.
2 U.S. International Trade Commission Publication 3443, Industry Trade and Technology Review, July 2001, “Integration of Manufacturing”.
3 Letter from Messrs. A. Joe Harper, Lawrence Amrich and Carlos Angulo to Mr. John Melle, dated May 8 th, 2001.
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