Opportunities in the Upcoming U.S.-Colombia Free Trade Agreement

by Sheppard Mullin Richter & Hampton LLP

[authors: Curt Dombek and Mark Jensen]

President Obama’s visit to the Summit of the Americas produced an important development for business in the United States and Colombia. During an April 15 press conference, President Obama and Colombian President Juan Manuel Santos jointly announced that the U.S.-Colombia Free Trade Agreement (CFTA) will enter into force on May 15, 2012. The enactment of the CFTA creates significant opportunities for both U.S. and Colombian businesses involved in international transactions. In order to take advantage of these opportunities, it will be important for parties to understand key parameters of the agreement, including what qualifies goods as originating in the United States or Colombia.

Economic Background. The United States is currently Colombia’s leading trade partner for both imports and exports, while Colombia is the 20th largest export market for products from the United States and the 25th largest foreign exporter of goods to the United States. See Congressional Research Service, the U.S.-Colombia Free Trade Agreement: Background and Issues (Dec. 20, 2011). U.S. Exports to Colombia in 2011 were $14.3 billion, which the U.S. International Trade Commission estimates will grow by more than $1.1 billion under the CFTA. Colombia exported $15.6 billion worth of goods to the United States in 2010. Office of the U.S. Trade Representative (USTR), Colombia, http://www.ustr.gov/countries-regions/americas/colombia.

The CFTA will make over 80 percent of U.S. exports of consumer and industrial products to Colombia duty free immediately, while most other tariffs will be phased out over a 10-year period. USTR, Benefits of the U.S.-Colombia Trade Promotion Agreement: More American Exports, More American Jobs, http://www.ustr.gov/about-us/press-office/fact-sheets/2012/april/benefits-us-colombia-trade-promotion-agreement-more-ame. For agricultural products, more than half of current U.S. farm exports to Colombia will become duty free immediately; virtually all other tariffs will be eliminated in 15 years. Id. Colombia will provide substantial market access across its services sector by eliminating measures preventing firms from hiring U.S. professionals, and phasing out restrictions in cable television. Id. Colombia will also join the World Trade Organization’s Information Technology Agreement, thereby removing barriers on Information Technology products. Id.

Origination under the CFTA. As with other free trade agreements involving the United States, the origin of items under the agreement will be determined by rules related to tariff-shifts and regional value content. Specific tariff-shift or regional content requirements apply based on the item’s Harmonized Tariff Schedule (HTS) number, and requirements may differ from item to item; some items may require regional value content calculations, for example, while others will not. Under the tariff shift rules, a product that is processed to become a different product in either the United States or Colombia will be considered of U.S. or Colombian origin, respectively, so long as it meets the tariff-shift requirements for its HTS number. See generally CFTA, Ch. 4, U.S.-Colom., Nov. 22, 2006. Under the regional value calculations, a product must be manufactured or processed using a certain amount of underlying materials originating in the country, according to specific formulas provided in the CFTA. See id. Special categories of goods such as textiles and autos are subject to specific origination requirements, such as an exception where underlying materials are not available in the territory (e.g. textiles) or a unique regional value content formula (e.g. autos).

The CFTA also provides for verification procedures related to origination claims, which may be made by written requests for information or questionnaires, visits to the premises to observe production of goods, and other mutually-agreed upon procedures. The CFTA allows parties to deny preferential treatment to an imported good where the verification request is not responded to within a reasonable period of time under the importing Party’s law, where a request for a visit is not granted within a reasonable period, or where the Party finds a pattern of conduct indicating that an importer, exporter, or producer has provided false or unsupported declarations that a good imported into a territory is originating.

Conclusions. The CFTA provides significant opportunities for the development or expansion of cross-border markets in the United States and Colombia. In order to take full advantage of these opportunities, it will be important for businesses to understand laws regarding origination, obligations related to verification procedures, and other aspects of the law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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