On October 1, 2005, Tennessee-based Liberty Fibers Corporation (formerly Lenzing AG) announced that after more than 50 years of business, the company had lost its struggle to stay afloat and was declaring Chapter 11 bankruptcy. This move, taken in response to foreign competition according to company officials, resulted in layoffs for approximately 350 employees and the shuttering of Liberty’s production facilities.

But on top of this, Liberty’s position as the lone surviving manufacturer of rayon staple fibers in North America means that the impact of this company’s failure will be felt throughout the domestic textile and apparel sectors. This is especially true for those in the nonwovens industry who use rayon in feminine hygiene products, disposable wipes, medical products and more.

Indeed, not long after the Oct. 1 disclosure, INDA, Association of the Nonwoven Fabrics Industry, learned from several of its members that Liberty’s bankruptcy had created a significant predicament. With Liberty out of the picture, these companies were forced to get their rayon from suppliers located on other continents which, in turn, meant that their products no longer qualified for duty-free access under rules of origin specified in the North American Free Trade Agreement (NAFTA). This is basically due to the fact that the NAFTA text requires virtually all of the raw material in a finished good to be produced in the U.S., Mexico, or Canada if the finished product is to enjoy duty-free treatment when traded between any of the three countries in the accord.        With the sudden exit of the sole remaining producer of rayon in North America, the bottom line is that many industry members unexpectedly discovered that they may have to pay duties when shipping products between the U.S., Canada and Mexico.  And, with such tight profit margins on many of these goods, there could be significant impacts on the profitability of impacted companies.  

In an effort to assist members with this predicament, INDA staff researched the original NAFTA text for provisions related to “short supply” issues and the means to invoke such provisions. The short supply process was included in NAFTA so that textile and apparel manufacturers could petition the government so fabrics manufactured from source materials that come from outside North America can still qualify for free trade benefits as long as clear evidence shows that the source materials “cannot be supplied by the domestic industry in commercial quantities in a timely manner.”

To date, in fact, the Polymer Group, Inc. (PGI) and Johnson and Johnson Consumer Products (J&J) have both filed short supply petitions with the U.S. government requesting the use of this remedy.

Based on growing interest in the short supply process, this column will endeavor to serve as a “how-to” guide for those interested in utilizing the process. And while the information contained in this article is not exhaustive, our intent is to provide readers with enough information to consider if this could be a remedy for them. 

Short Supply Requests: What You Should Know

Like all free trade agreements negotiated by the U.S., the 1994 NAFTA contains very specific rules for determining if a particular good has originated from the beneficiary region, which in turn determines whether it qualifies for duty-free benefits under the pact. In the case of textiles and apparel, in NAFTA and every subsequent agreement onward, the U.S. has relied upon a “yarn-forward” tariff-shift rule. This means that the yarn or fibers used to form the fabric must originate in the region party to the agreement in order for the finished good to qualify for free trade benefits.  

There are some exceptions to this origin rule and NAFTA allows for up to 7% of the weight of a textile or apparel item to be composed of non-originating inputs, but generally speaking, virtually all of the raw material must come from the U.S., Canada or Mexico for the finished good to qualify for duty-free treatment.  

To counter incidents in which raw materials are not commercially available in sufficient quantities, Section 7.2 of Annex 300-B to NAFTA provides the foundation for the short supply mechanism (these provisions are codified under Title 19 of the U.S. Code at Section 3332(q)(3)(a)). Under these provisions, NAFTA parties are granted the right to request consultations addressing possible modifications to the rules of origin for textile and apparel products when there are concerns about the, “availability of supply of fibers, yarns or fabrics in the free trade area and whether domestic producers are capable of supplying commercial quantities of the good in a timely manner.” The law further states that parties should endeavor to conclude these consultations within 60 days of the request, and that the resulting agreement from these talks between two or more parties will supersede any previously agreed upon rules of origin.  

For those interested in using the short supply process in the U.S., the Statement of Administrative Action (SAA) that accompanies the NAFTA Implementation Act provides some additional detail. Specifically, the SAA states that any interested person may submit a petition to the Department of Commerce’s interagency Committee for the Implementation of Textile Agreements (CITA) requesting an amendment to a particular rule of origin based on a change in the availability in North America of a particular fiber, yarn or fabric. CITA will review the request and if it finds need for a change, it will then make a recommendation to the President that the origin rules be amended. The NAFTA Implementation Act gives the President the authority to proclaim modifications to the NAFTA rules of origin provided there is agreement with one or more of NAFTA countries on such a modification.

The SAA stipulates that the burden for demonstrating that rules of origin need to be modified falls on the party that files a short supply request. Yet, according to officials at Office of Textile and Apparels (OTEXA) within the U.S. Department of Commerce, there is no official document that spells out the elements needed for a successful filing. Instead, in has become common practice to use previous petitions as models for new ones. Petition samples can be found at www.otexa.ita.doc.gov.  

While this might suggest there is a good deal of flexibility in what must be included in these submissions, a survey of the petitions filed over recent years suggests the petitions should contain several key elements.  

Submissions should, for instance, clearly identify the fiber, yarn or fabric that is the subject of a request using the description and corresponding code found in the U.S. Harmonized Tariff Schedule, and detail how the rule of origin should be modified. Petitioners should also detail their basis for asserting that the product cannot be supplied by the domestic industry in commercial quantities in a timely manner, supported by whatever documentation they have available to substantiate these claims. Media reports or correspondence from the defunct manufacturer can serve as evidence.  

In many cases, companies filing these petitions choose to enlist a law firm to help them prepare their submissions. OTEXA officials, however, insist that using legal counsel is not a requirement for preparing a strong submission and said that their office is willing to provide any petitioner extensive assistance during the preparation process and will even review and comment on draft versions before they are formally filed.

A word of caution that needs to be sounded is that there are numerous administrative steps that must be taken by the U.S. government in response to a petition that can make the response tremendously time consuming. According to OTEXA officials, the investigation/consultation process involves: 1) publishing a notice of the petition in the Federal Register; 2) reviewing public comments and 3) consulting with the other NAFTA governments, the U.S. International Trade Commission and sometimes industry interests and the U.S. Congress.  

In all, the process can take six to nine months to complete, and there are no specific provisions in place allowing for retroactive compensation of the duties paid while the investigation/consultation period is underway.  Nevertheless, there is nothing explicit included in the NAFTA Implementation Act that bars retroactivity and PGI and J&J have both requested that retroactivity be applied to their requests.

So while it is currently uncertain whether their request for retroactivity will be granted, it appears there is a strong case for modifying NAFTA rules of origin related to rayon. And, as OTEXA officials point out, if modifications are implemented, the changes are considered to be permanent unless availability of the product changes and someone files a new petition that is acted upon.

Peter Mayberry’s column appears monthly in Nonwovens Industry.