The U.S. last week agreed to offer significant new market access benefits to the Costa Rican wool apparel industry in exchange for that country accepting a rules of origin change for pocketing fabric under the Central American Free Trade Agreement, according to a Dec. 1 letter exchange reprinted below.

The U.S. concessions seem designed to accrue exclusively to the Costa Rican wool apparel industry, in contrast to the earlier compensation deals the U.S. has struck with other CAFTA countries to get them to accept the pocketing fabric change, private-sector sources said. Those deals bestowed benefits on the individual countries but also other CAFTA signatories, they said.

The Costa Rica compensation deal is the last one that the U.S. is negotiating to achieve a rule of origin change requiring that pocket fabric used in CAFTA apparel must be formed and finished in the region. In contrast, the original CAFTA text allowed the fabric to be from third countries.

The change was demanded by House Republicans with textile constituencies for their vote in support of the CAFTA in July 2005, but it is not likely to go into effect soon. The U.S. has taken the position that all signatories must have implemented the CAFTA before the pocket change can go into effect. Costa Rica is unlikely to pass all its implementing legislation before early 2008.

Under the deal, the CAFTA will be changed so that certain wool apparel from Costa Rica will be exempted from a 1 million Square Meter Equivalent (SME) limit set for wool apparel that can be shipped to the U.S. if made from fabric provided by Mexico, according to paragraph 6 of the letter.

That sublimit, which can grow over time, is part of the cumulation provision that allows Mexico to ship 100 million SMEs to CAFTA countries for apparel production provided Mexico offers reciprocal access. The resulting apparel enters the U.S. with CAFTA benefits.

The apparel qualifying for the Costa Rican exemption is men's and boys' and womens' and girls' suits, trousers, suit-type jackets and blazers, vests, and women's and girls' skirts, according to the letter exchange.

The exemption does not apply to apparel made from carded wool which industry sources said is typically used in the manufacture of sports coats, blazers and overcoats. Also ineligible for the exemption is apparel made from fine wool yarn, which industry sources said is used for high-end men's suits.

The U.S. also agreed to change the tariff benefits and duration of an existing tariff preference level (TPL) of 500,000 SMEs for certain wool apparel assembled in Costa Rica from foreign fabric, according to paragraph 7 of the letter. TPLs are used as limited exemptions from the prevailing rule of origin, and this particular TPL applies to suit-type jackets, skirts, suits, shorts and trousers.

The CAFTA as originally negotiated with Costa Rica would have reduced by 50 percent the most favored nation duty applicable to the apparel entering under the TPL for two years. Under the compensation deal, the U.S. agreed to extend duty free treatment for the TPL apparel and to extend its duration for 10 years, according to paragraphs 7a and 7b.

In paragraph 7c, the U.S. agreed to set up an additional TPL of 500,000 SMEs annually allowing duty free entry of wool apparel provided it is not made from carded wool and fine wool fabric, industry sources said. This means the apparel coming in will be made from combed wool and wool coarser than 18.5 microns, industry sources said.

This TPL will cover men's and boys' and women's and girls' suits, trousers, suit-type jackets and blazers, vests, and women's and girls' skirts.

The letter specifies exactly how the apparel coming in under these TPLs will be counted against what limit in paragraph 7d. Apparel eligible for duty-free entry under both allocations will first be counted towards the newly created TPL, and then towards the TPL that existed under CAFTA but was expanded.

In a concession not focused on wool apparel, the U.S. will bestow CAFTA benefits to certain apparel that is assembled in Costa Rica from foreign fabric. Women's and girls' suits, ensembles, suit-type jackets, blazers, dresses, skirts, trousers, and shorts will be considered originating in CAFTA regardless of the origin of the fibers, yarns or fabrics used for the production of the good.

Finally, the U.S. agreed to allow duty-free entry into the U.S. market, subject to certain quantity restrictions, for certain women's knit swimwear products even if the material used to make the products is not originating in the CAFTA region. But the eligible products must both be cut or knit to shape, and sewn or otherwise assembled, in Costa Rica.

In the last twelve months, the U.S. has imported 865,000 SMEs of wool apparel products from Costa Rica, and 258 million SMEs from the world. Over the same time, the U.S. imported from the world over 13 billion SMEs of cotton apparel products.

Separately, Costa Rican President Oscar Arias this week said that it will be a challenge to pass the implementing legislation for CAFTA, especially a bill that will open the telecommunications market in Costa Rica to foreign competition, before the March 2008 deadline. However, he pointed out that passing the telecommunications bill, and other CAFTA implementing legislation that would open the energy and insurance sectors in Costa Rica, would offer new opportunities for U.S. investors.

In a speech at the U.S. Chamber of Commerce on Dec. 5, Arias promised that the executive branch is trying to persuade members of Costa Rica's Congress to vote in favor of the telecommunications bill before the March 2008 deadline. "We'll do our best, that is a promise," he said.

In addition, he said he hoped that Congress would ratify the CAFTA agreement itself in February or March 2007, which other sources have said is likely (Inside U.S. Trade, Dec. 1, p.1).

Arias also promised that tax rates for foreign firms who wish to do business in Costa Rica will continue to be low, and that a special set of incentives will be offered for high-tech firms.

An informed source explained that there are several proposals on the table for such tax incentives, and that the president is currently negotiating with Congress to reach a deal. However, there is no desire to advance the tax issue with CAFTA still pending, as doing so could jeopardize CAFTA's passage, he said.

This is because the Libertarian Movement in Costa Rica, whose congressional members are perhaps the strongest voice in favor of CAFTA, are likely to oppose lower tax rates for foreign firms, according to this source.

Overall, Arias stressed in his speech that companies that move to Costa Rica would be rewarded by its economic and political stability, rule of law, and its democratic political system.

Arias also said he hopes to start negotiations on an FTA with the European Union by March of next year.