Short Supply: Procedures and Strategies

under the US-Colombia TPA

August 13, 2014

“Yarn Forward” Rule of Origin

Yarn Fabric Apparel

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Commercial Availability or “Short Supply”

• Benefits bilateral (FTA) trade

• Fibers, yarns or fabrics “not commercially available” in the FTA region (US and Colombia) can be sourced from outside the region and used in qualifying textile and apparel goods

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Short Supply Provisions under other FTAs:

NAFTA….1995

CAFTA…2003 (2006)

Peru/Colombia…2012

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Level of Trade under ATPDEA and Colombia TPA ($US millions)

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Imports 2010 2011 2012 2013

2014 (Jan-June)

All Textiles & Apparel

$292 $264 $259 $281 $131

Textiles & Apparel: TPA/ATPDEA

$242 $50 $198 $246 $114

Apparel using Short Supply

$0.2 $0.01 $5.5 $7.7 $1.7

Percent of imports

0.1% 0.01% 2.8% 3.1% 1.49%

Hallmarks of the Colombia TPA Short Supply Process

• You can use a fiber, yarn or fabric from a third county and still get duty-free treatment on the apparel.

• Once a request has been accepted, CITA can make a decision within 30 business days.

• Requestors and Suppliers have to provide evidence. CITA does not collect information – it only reviews information submitted on the record.

• Any textile producer, apparel producer and importer/brand or retailer can use short supply to their advantage.

• It can be a powerful tool, if used strategically!

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CAFTA Short Supply: What Doesn’t Matter!

• PRICE: CITA does NOT consider whether the product is available outside the region at a lower price. As long as a potential supplier can demonstrate that it can produce the subject product or one substitutable, price is irrelevant.

• NON-MEASUREABLE CRITERIA: As long as a supplier can meet all physical specifications included in a description, CITA does not consider a customer’s preference or other non-measureable criteria (eg hand and feel) as reasonable requirements.

• TERMS OF SALE: Issues regarding samples, financing and means of delivery are considered terms of sale, and are not relevant.

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Short Supply Strategies: Factors to Consider

Whether you want to Add a product, or object to a Request to

Add a product, think carefully!

• How critical is this product for you and your customer?

• What are the opportunities/threats for US and Colombian suppliers and existing/potential customers?

• How much flexibility is there in product specifications?

• What are the critical price points and extent of foreign competition?

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• A carefully crafted product description is often the key to having a request approved.

• Reasonable due diligence with US and Colombian suppliers is also a must.

• But how well you know your suppliers and how flexible you can be in terms of product specifications can make or break a request.

• ITS ALL ABOUT RELATIONSHIPS – with your customers and your suppliers.

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Adding a Product: Product Description and Due Diligence are CRITICAL!

Adding a Product: How do you start?

If you think that a product isn’t available, you

must compile evidence to support your claim.

• Describe the product:

– Reasonable specifications (industry standards)

– Reasonable deadline and quantities

– Is there a substitutable product?

• Identify potential suppliers, and contact them to confirm whether they can or cannot supply the product.

• Collect documents to support your claim.

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Product Descriptions:

• You don’t have to include all the specifications that you would for a mill. Only use the specifications that are relevant, but include ranges.

• You can start due diligence with a broader description, but if you learn that a supplier can make some part of the range, you can narrow the description in your Request.

• You can’t include non-measurable criteria (for example, hand and feel), but you may be able to get the same effect using performance criteria.

• If you add performance criteria, you must cite the industry standard test used to measure performance (ASTM, AATCC)

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Don’t forget TOLERANCES!

• Some physical parameters can change after construction. Dyes and other finishing processes can affect yarn size, thread count, colorization, and weight.

• Even though you provide specifications based on construction parameters, take into account how post-construction processes can affect physical characteristics.

• Customs tests the entered apparel, NOT the fiber, yarn or fabric. If test results fall outside specifications, they will deny duty-free treatment.

• CITA CANNOT MAKE ANY CHANGES to a product description once its been submitted by a requestor. Expansion of specifications must be made in a new Request.

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Example of Product Description:

Certain Cotton/Polyester three thread circular knit fleece fabric: HTS: 6001.21 Fiber content: 70—90% cotton and 10-30% polyester Yarn description: Face yarn - 100% ring spun combed cotton yarn Tie yarn - 100% multifilament polyester yarn Fleece yarn - cotton and staple polyester yarn of no less than cotton Machine gauge: 21 Weight: 232-271 grams/meter squared (6.85 - 8.0 ounces per square yard) Finish: napped on one side.

Performance Criteria:

1. Torque must not exceed 4% (must meet AATCC 179)

2. Vertical and horizontal shrinkage must be under 5%

3. Must meet a class-1 flammability rating

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Downstream Products and Finishing

• CITA will not accept a Request if it finds that it is only an “upstream input” and not the “downstream” product that is unavailable.

• For example, if the inquiry is for a fabric that calls for a specific yarn, if a supplier can make the fabric but the yarn isn’t available in the CAFTA region, a supplier will say so in its response to the requestor.

• Confirm with the supplier, but be prepared to modify your Request to ask for the upstream input.

• In the same way, CITA also does not accept Requests where the only aspect of the product that’s “unavailable” is a finishing process.

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Tips for Product Descriptions

• Choose your Description Carefully: Craft a product description that gets you what you need, but is likely to get approved.

• Be flexible: Consider flexibilities of both your suppliers and your customers.

• Tolerances: Consider obtaining independent lab tests on garment samples to determine reasonable tolerances.

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Due Diligence: Contacting Potential Suppliers

• Do your homework – find out as much about potential suppliers as you can, before you contact them.

• US and Colombian suppliers have a stake in whether you can use third-country (cheaper) inputs and still get duty-free treatment. Understand suppliers’ concerns, and be willing to address them.

• Remember: suppliers don’t have to currently make the product – all they have to show is that they’re capable of making the product.

• They don’t have to make the entire range of specifications, or the entire quantity, as long as they can demonstrate what they can do.

• Be flexible when working with suppliers – they can be a partner or a roadblock to your success.

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Due Diligence: What must the Potential Supplier provide?

• An offer to supply the specified product or one substitutable.

• Detailed information on its production capacity and capability, and, if applicable, information about the substitutable product.

• Must identify all sub-contractors, with information about the contractor’s capability.

• While a requestor may ask for certain information and/or a sample (free or otherwise), suppliers are NOT required to provide business proprietary information, or provide samples.

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Due Diligence: Substitutable Products

• Suppliers may propose another product as a substitute for the purposes of the end use, and explain why it’s substitutable.

• If you don’t think it’s a good substitute, you must tell the supplier why it is not substitutable, using measurable criteria.

• “Customer Preference” or other non-measureable criteria (e.g. hand and feel) are not acceptable arguments.

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Due Diligence: What if I don’t think the Supplier is capable?

If you don’t think a supplier has demonstrated its ability to

supply the product as specified, be sure to:

• Tell the supplier why you don’t think they’re capable.

• Give the supplier an opportunity to respond, and to provide information that supports their claim.

• Address the supplier’s arguments, and answer all questions.

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Tips on Due Diligence with Suppliers:

• Know your supply chain – Get a feel for what suppliers are capable of. Don’t assume they’re not capable just because its not currently being produced.

• Work With Potential Suppliers – Most existing suppliers will work with good customers. Many potential suppliers are eager to build new business relationships. Be sensitive to their concerns and find ways to address them.

• Act In Good Faith – Play it straight with suppliers and they’ll (usually) play it straight with you.

• DON’T LEAVE QUESTIONS UNANSWERED.

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Responding to Due Diligence Inquiries: What must a Supplier provide?

REMEMBER: A requestor may ask anything they like, but….

• No business confidential information (i.e. details about equipment names, current customers, current production schedule).

• You don’t have to supply a sample, but if you do, make sure you clearly state if its to spec – it can be tested!

• Don’t forget about using sub-contractors!

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Responding to Due Diligence Inquiries: Tips for Suppliers

• Think about whether you want to make an Offer – is it strategically important?

• Make sure you respond to the initial inquiry.

• Clarify any questions about the product’s specifications and criteria, its substitutability, and requirements for quantity and deadlines.

• Answer ALL outstanding questions from the requestor regarding production capability and normal business practice.

• You may consult with other suppliers about the inquiry.

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Filing a Request: What do I need?

• Complete product description, no broader than was presented during due diligence.

• Explanation of how you identified potential suppliers.

• Summary of your due diligence communications with suppliers.

• Explanation whether the product may or may not be substituted with another product.

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How to File a Request under CAFTA:

• Submit electronic and original signed hard copy versions.

• If you want to hold certain information as “Confidential” you must also prepare a “Public” version.

• You must submit an electronic copy of the “Public” version, but are not required to submit an electronic copy of the “Confidential” version.

• Official Receipt date is the date all required versions have been received.

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So I submitted a Request…..

• Once you submit a Request, CITA has two business days to review the Request to see if it meets requirements.

• CITA will “Reject” a submission if its deficient in terms of

– Inadequate Due Diligence

– Improper Product Description

• If rejected, CITA will send requestor an explanation of each deficiency.

• If accepted, CITA issues email notice to all interested parties.

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The Request was Accepted. Now what?

• If a Request is accepted, CITA allows potential suppliers 8 business days to submit a Response with an Offer to Supply.

• The supplier must provide information demonstrating their capability to supply the product.

• If a requestor doesn’t think the supplier has met their burden, they can file a Rebuttal.

• Usually, if Responses and Rebuttals are filed, CITA will extend the deadline by 14 business days, and will call a public meeting for the parties to present their case.

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http://otexa.ita.doc.gov/

For More Information:

Maria Dybczak

Direct Phone: (202) 482-3651

Email: Maria.Dybczak@trade.gov

www.OTEXA.trade.gov

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