Travel Goods and the Generalized System of Preferences

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1 Consulting and Government Affairs Practice th Street, NW, Suite 930 Washington, DC Telephone: Fax: July 1, 2015 Travel Goods and the Generalized System of Preferences The U.S. Generalized System of Preferences (GSP) is a powerful tool that can give your company a significant competitive advantage through duty-free sourcing from eligible countries. The process for obtaining duty-free entry under GSP is technical. Sorini, Samet & Associates (SSA) is working with companies and coalitions of companies to successfully navigate this process. We would like you to be a part of this effort. If your company currently sources travel goods from GSP eligible countries (listed below) or has considered it, GSP should be carefully considered. If your production is China-based, serious consideration should be given to moving to a GSP eligible country. Travel goods covered by this new initiative face tariffs ranging from 4.5 to 20%. The savings on duties should be factored into sourcing strategy. Why Should My Company Look at GSP? Under the Trade Preferences Extension Act of 2015, which was signed into law on June 29, 2015, certain travel goods contained in section 4202 of the Harmonized Tariff Schedule are now eligible to apply for duty-free status from GSP eligible countries. The full list of eligible items is listed at the end of this document. Inclusion in GSP is a significant development for sourcing travel goods, which include luggage, handbags, sport and travel bags, and backpacks. China currently controls over 70 percent of the market with Vietnam the second largest producer at approximately 10 percent. Neither China nor Vietnam are GSP eligible. SSA can provide you with a full list of countries that benefit from GSP, but for the purposes of travel goods, the Philippines, Cambodia, Indonesia and Thailand are currently producers that qualify for GSP. Laos and Burma are also under review for inclusion in the program. Countries eligible for the African Growth and Opportunity Act (AGOA), such as Ethiopia, are also GSP eligible. Bangladesh has been removed from GSP eligibility but may be able to return to the GSP program at a later date. How Do My Goods Qualify? Simply having or moving production to a GSP-eligible country will not automatically allow you to take advantage of this expansion. In order to qualify for GSP, a petition must be filed with the Office of the U.S. Trade Representative and the U.S. International Trade Commission. In 2015, an abbreviated timeline will be used for applications,

2 since the program will only be in effect starting July 29, Petitions must be filed at the 8 or 10 digit level by October 1, This is a condensed timetable compared to the process during a normal year. Regulations stipulate that the normal timetable for GSP petitions begin with a June 1 deadline for acceptance of petitions, with a September or October public hearing with written briefs and rebuttal materials. Decisions are announced on April 1 and are implemented on July 1. 2 However, for the newly added GSP items, we believe USTR will accept petitions on or about October 1, Petitions are not simple documents. There is a 14 point checklist of information required by law, including the names and locations of relevant firms in the beneficiary country, production and employment figures, sales figures in quantity, value and prices as well as detailed information on total exports worldwide and to the United States 3. Any company interested in the competitive edge offered by duty-free access should begin to gather this information as soon as possible. SSA will work with your company in crafting a successful petition. In addition to preparing the petition, arguments for or against the petition from other interested parties should be anticipated. Under GSP, an interested party is defined as a party who has significant economic interest in the subject matter of the request, or any other party representing a significant economic interest that would be materially affected by the action requested, such as a domestic producer of a like or directly competitive article, a commercial importer or retailer of an article which is eligible for the GSP or for which such eligibility is requested, or a foreign government. What are the Rules of Origin for GSP? In order for a good to qualify for duty-free status under the GSP, two tests must be met: 1. A good must pass the substantial transformation test in a GSP eligible country. 2. The good must meet the 35 percent value test of the GSP program. If using materials imported from a non-gsp eligible country, the materials may count toward the 35 percent value if they meet a double substantial transformation requirement. According to the U.S. International Trade Commission, substantial transformation means that the item underwent a fundamental change (normally as a result of processing or manufacturing in the country claiming origin) in form, appearance, nature, or character, which adds to its value an amount or percentage that is significant in comparison to the value which the item (or its components or materials) had when exported from the country in which it was first made or grown. Usually a new article of commerce normally one with a different name is found to result from any process that Customs decides has brought about a substantial transformation in the pre-existing elements. 4 1 H.R. 1295, The Trade Preferences Extension Act, renews GSP with an effective date of 30 days after the date of enactment, or June 29, SSA anticipates that July 29 will be the effective date, but an official Federal Register notice has not been issued at this time CFR CFR U.S. International Trade Commission,

3 As the GSP Handbook states, an item must be [t]he growth, product, or manufacture of a BDC [beneficiary designated country] and the sum of the cost or value of materials produced in the BDC plus the direct costs of processing must equal at least 35 percent of the appraised value of the article at the time of entry into the United States. Further, materials imported into the GSP eligible country may count toward the 35 percent but only if they are substantially transformed into new and different constituent materials which are then used to produce the eligible article. 5 This is referred to as double substantial transformation. In layman s terms, this requires an intermediate step between the imported material and the finished, GSP eligible, product. Unlike other U.S. programs, inputs from the United States do not count toward the 35 percent value. U.S. inputs are treated as inputs from any other country, meaning they must undergo double substantial transformation to count toward the 35 percent. The only exceptions to this requirement are that inputs sent between member countries of GSP-eligible regional associations will be treated as single-country inputs. The following regional associations qualify for this provision: the South Asian Association for Regional Cooperation (SAARC) the Andean Group (or Cartagena Agreement); the Association of Southeast Asian Nations (ASEAN); the Caribbean Common Market (CARICOM); the Southern African Development Community (SADC); and the West African Economic and Monetary Union (WAEMU). GSP eligible members of these agreements may share inputs. So in the case of ASEAN, Cambodia, Indonesia, the Philippines, and Thailand may share inputs without meeting the double substantial transformation test. 5 U.S. Generalized System of Preferences GUIDEBOOK, Office of the United State Trade Representative, Executive Office of the President, Washington, DC. July Page 15.

4 Travel Goods Now Qualifying For GSP 6 HTS Description from Harmonized Tariff Schedule Tariff Rate Category Trunks, suitcases, vanity & all other cases, occupational luggage & like containers, surface of leather, composition or patent leather Trunks, suitcases, vanity & attache cases, occupational luggage & like containers, surfaces of cotton, not of pile or tufted construction 8% Trunks, suitcases, vanity cases and similar containers with outer surface of plastics structured, rigid on all sides 20% Trunks, suitcases, vanity cases and similar containers, with outer surface of plastics materials, nesoi 20% 6.3% Other bags, outer surface of man-made fibers 17.60% 670 Other bags and cases with outer surface of sheeting of plastic, nesoi 17.60% Trunks, suitcases, vanity cases & similar containers, etc, with outer surface of textile materials, of man-made fibers 17.60% Handbags, with or without shoulder strap or without handle, with outer surface of leather, composition or patent leather, nesi, n/o $20 ea. 10% Handbags, with or without shoulder strap or without handle, with outer surface of leather, composition or patent leather, nesi, over $20 ea. 9% Handbags, with or without shoulder straps or without handle, with outer surface of sheeting of plastics 16% Handbags with or without shoulder strap or without handle, with outer surface of cotton, not of pile or tufted construction or braid 6.3% Handbags, outer surface textile material, except braid, pile or tufted cons, of man-made fiber 17.60% or handbag, with outer surface of leather, composition or patent leather, nesi 8% or handbag, with outer surface of cotton, not of pile or tufted construction 6.3% H.R. 1295, Sec. 204, engrossed as passed by the House and Senate.

5 or handbag, with outer surface of vegetable fibers, not of pile or tufted construction, nesoi 5.7% 871 Articles for pocket or handbag, with outer surface of textiles, of man-made fibers 17.60% 670 Articles for pocket or handbag, with outer surface of textiles, nesoi 17.60% Travel, sports and similar bags with outer surface of cotton, not of pile or tufted construction 6.30% 369 Travel, sports and similar bags with outer surface of vegetable fibers, excl. cotton, not of pile construction 5.70% 870 Travel, sports and similar bags with outer surface of plastic sheeting 20% Travel, sports and similar bags, outer surface of leather, composition leather, or patent leather 4.50% Travel, sports and similar bags, except backpacks, of man-made fiber 17.60% 670 Travel, sports & similar bags, outer surface of textile materials, nesoi 17.60% Backpacks, of man-made fiber 17.60% Attache cases, brief cases, school satchels, occupational luggage cases and similar containers, of man-made fibers 17.60% Cases, bags and similar containers, nesoi, with outer surface of vulcanized fiber or of paperboard 20% Containers, with outer surface of leather, composition leather, or patent leather, nesoi 4.50%