FTA SPURS MOROCCAN TEXTILE EXPORTS TO THE U.S.

UNCLAS SECTION 01 OF 03 RABAT 000304 SIPDIS SENSITIVE SIPDIS DEPT FOR EB/TPP/ABT DEPT FOR NEA/MAG STATE PLEASE PASS TO USTR HEYLIGER AND BELL COMMERCE FOR ITA/OTEXA M. D'ANDREA E.O. 12958: N/A TAGS: ECON ETRD KTEX PREL MO SUBJECT: FTA SPURS MOROCCAN TEXTILE EXPORTS TO THE U.S. ¶1. (U) This message is sensitive but unclassified. Please protect accordingly. ¶2. (U) Summary: A U.S. Customs and Border Protection (CBP) inspection of Moroccan textile factories highlighted the positive impact the U.S-Morocco Free Trade Agreement (FTA) has made during its first year. The Moroccan Ministry of Industry and Commerce reports textile exports to the U.S. rose 52 percent in 2006, largely due to the FTA. Nonetheless, the visit revealed an industry that is just beginning to exploit the FTA's liberal access to American markets, with the majority of Moroccan apparel still reaching the U.S. through European intermediaries and not benefiting from the FTA. Although a Tariff Preference Level (TPL) was written into the FTA for non-originating apparel made from foreign material, Moroccan officials report only 12 percent of the TPL was filled in 2006. The visit also underlined differing U.S. and Moroccan interpretations of permissible transshipment; and reinforced the need for improved cooperation and communication between U.S. and Moroccan customs officials. End Summary. -------------- First Visit By U.S. Textile Specialists -------------- ¶3. (U) The two-week visit by a three-member team of CBP textile import specialists ended on February 3. It was the first ever visit by a CBP Textile Production Verification Team (TPVT) to Morocco and occurred approximately one year following implementation of the U.S.-Morocco FTA on January 1, 2006. TPVTs conduct production verifications as part of CBP's program to verify and enforce U.S. trade agreements. The team visited 15 factories in and around Rabat, Sale, Fes, and Casablanca that had shipped textiles to the U.S. within the past year. Each visit included a comparison of U.S. import documentation with factory cutting and production records. During their out-brief to Moroccan officials, the team reported no significant problem areas and described all the factories visited as remarkably clean, modern, well-managed, and compliant with both WTO and FTA provisions. -------------- Originating Article or TPL? -------------- ¶4. (U) A key benefit of the team's visit was the opportunity for Moroccan customs and industry officials to receive FTA "Rules of Origin" and "Preference Rules" training. The training, organized by the USAID-funded New Business Opportunities program, attracted approximately 70 participants and was presented by Mr. Mark Palasek, a CBP Textile Import Specialist based at JFK. ¶5. (U) A major focus of the half-day training was determining and defining what constitutes an originating article. While the FTA rules of origin were designed to ensure only U.S. and Moroccan goods would benefit from the accord's preferential market access, the training revealed a matrix of rules that applied to various material and fabric. ¶6. (U) Palasek explained that the majority of apparel under the FTA has a yarn-forward rule, meaning that in order for the article to be categorized as an originating article, it must be made of U.S. or Moroccan yarn and all production operations forward must be either U.S. or Moroccan. However, Palasek stressed that Moroccan products that do not meet the rules of origin criteria may still be eligible under the Tariff Preference Level (TPL) quota established in the FTA for non-originating apparel. The TPL for non-originating apparel was set at 30 million square meters for the first four years of the FTA. ¶7. (SBU) Houda Marrakchi, responsible for FTA implementation at the Foreign Ministry, stressed that only Moroccan Customs had the authority to determine whether Moroccan apparel qualified under the TPL. She explained that Moroccan Customs issues "Certificates of Eligibility" that should accompany each shipment that claims FTA eligibility under the TPL. She stressed that if a shipment did not have a Certificate of Eligibility issued by Moroccan Customs, then it did not qualify under the TPL. According to the Ministry of Industry and Commerce, 12 percent of the 2006 TPL quota was filled. RABAT 00000304 002 OF 003 -------------- -------------- Many Moroccans Unaware Their Products Reach the U.S. -------------- -------------- ¶7. (U) The inspection revealed that several of the general managers of the factories visited were unaware that their products were bound for the U.S. Polex Sport Factory located in the Rabat suburb of Tamara is a prime example. ¶8. (U) Polex is a subsidiary of the French-owned Devanlay Group, which markets the Lacoste brand of apparel. Polex employs approximately 350 daily workers and produces approximately 8000 articles a day. The normal work week is 44 hours, but overtime on Saturdays is not uncommon. At any given time the factory operates approximately 4 cutters and 150 sewing stations. Polex imports 100 percent of its material and exports 100 percent of its product to its parent company in France. The general manager was unaware that whole lots of his product were shipped to the U.S. by Devanlay. ¶9. (U) Devanlay collects the shipments from Polex, along with similar shipments from its other international subsidiaries, and then distributes Lacoste brand apparel to its retailers in the U.S. The general manager of Polex did not apply for a Certificate of Eligibility under the TPL for non-originating articles, and Moroccan customs officials classified the commerce as between Morocco and France. Thus, even though the Moroccan produced apparel never entered into commerce and Devanlay did not add any value to the garments, the Moroccan produced shirts were assessed a 19 percent full duty when they arrived from Devanlay to the U.S. Both the Polex General Manager and Moroccan customs officials were surprised to learn from the CBP team that they considered this type of commerce as eligible under the non-originating TPL. When asked why he hadn't applied for a Certificate of Eligibility, the General Manager replied that he had been unaware of the regulations, but that he would contact his corporate headquarters. -------------- What is a Trans-Shipment? -------------- ¶10. (SBU) The CBP team's visit also highlighted the ongoing difference between Moroccan and U.S. views of what constitutes permissible transshipment under the FTA. The more liberal U.S. position is that as long as a product does not enter into commerce or advance in value, it remains a direct shipment and qualifies under the TPL. Moroccan customs officials have a much stricter interpretation. According to El Aid Mahsoussi, Director of Training and International Cooperation for the Moroccan Customs Service, the Polex shipment cited above involves two separate shipments, one from Morocco to France and the other from France to the U.S. Mahsoussi's position is that the Moroccan commerce is to France, and thus, outside the FTA. ¶11. (SBU) (Note: Moroccan Customs applies this same logic to U.S. products that are first shipped to European distributors. Even though the U.S. products do not enter into commerce, and are stored in customs warehouses without any value added, Moroccan Customs interprets the goods as originating from Europe when they arrive in Morocco, and thus outside the scope of the FTA. This remains a key point of disagreement that has been the subject of a DVC between U.S. and Moroccan officials. End Note.) -------------- Can't Argue With the Numbers -------------- ¶12. (U) Figures released by the Ministry of Industry and Commerce show textile exports to the U.S. increased 52 percent in 2006, with hosiery exports increasing 102 percent. Ministry officials are not shy in acknowledging the FTA's positive impact, noting that 40 companies profited from the accord in its first year with 6.5 million square meters (12 percent) of the non-originating TPL quota filled. The Ministry also acknowledged the impact of the USAID-managed New Business Opportunities (NBO) Program, and its success in assisting Moroccan textile companies in taking advantage of export opportunities to the U.S. Through the assistance of NBO, 11 Moroccan companies participated in the 2006 Magic Show in Law Vegas, where they garnered over USD 10 million in orders. NBO is again leading a Moroccan delegation to the 2007 Magic trade show (February 13-16) with hopes of surpassing last year's orders. RABAT 00000304 003 OF 003 ¶13. (SBU) Comment: The CBP inspection visit was a significant step forward in establishing a working dialogue between U.S. and Moroccan customs. Although the Moroccans were initially perturbed by the short-notice of the visit and questioned its justification under the terms of the FTA, they fully cooperated with the visit and were receptive to the training opportunity. ¶14. (SBU) Comment cont'd: While some retailers consciously choose not to apply for a TPL in order to market their apparel as European, the visit revealed that much of the Moroccan textile sector remains largely unaware of the opportunities offered by the FTA. This reinforces the continued importance of the USAID managed NBO program in both introducing U.S. buyers to Moroccan textile producers, and in assisting Moroccan firms in breaking into the American market. ¶15. (SBU) Comment cont'd: The visit also again showcased the unresolved issue surrounding the definition of transshipment, which post recommends be a major agenda item at the FTA's first annual review. Septel will assess in broader terms where we are in terms of implementation of the FTA. End comment. Bush