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Administration Plans Afghanistan-Pakistan Production Zones
Inside U.S. Trade

02.23.2007

The Bush Administration plans to submit legislation to Congress as soon as possible that would establish "reconstruction opportunity zones" (ROZs) on both sides of the Afghanistan-Pakistan border that would produce items to enter the U.S. duty free, according to a spokeswoman for the Office of the U.S. Trade Representative.

"There is no specific timeline, but we hope to submit legislation as soon as possible in order to ensure that the ROZs can be put into effect," she said. But a private-sector source said U.S. officials briefing business representatives conveyed the impression that the administration hopes to complete its formal proposal by late spring.

U.S. private-sector sources said a goal of the ROZ concept seemed to be to facilitate textile and apparel trade, because the region is unable to produce many other products. In the business briefing on Feb. 20, administration officials showed a map indicating they were considering establishing the ROZs in the mountainous region along the border Pakistan shares with Afghanistan, sources said. But officials emphasized there has been no final decision on where to place the ROZs, according to these sources.

Private sector sources this week expressed doubts on the extent to which the ROZs could actually thrive on textile trade given the infrastructure and security issues in the area. U.S. business wants assurances that there will be infrastructure improvements and adequate security arrangements to ensure that textile buyers could safely visit the region, private-sector sources said.

They said the region's current lack of textile industry presence is related to security issues, and that it remains unclear how the ROZ program will address these issues.

One private-sector source also pointed out that U.S. textile interests are likely to fight additional imports from these ROZs. A U.S. textile industry source this week expressed opposition to the idea with the argument that the ROZs could lead to transshipment from China, particularly since customs officials would be unable to effectively monitor the trade from that region.

Alternatively, the ROZs could be used as a place to warehouse, label or package textile goods made in the industrialized Pakistani cities of Islamabad or Karachi, he said. This could add enough value to satisfy a lenient value-added rule of origin, and would be sufficient to make it worthwhile to avoid the tariffs that are currently imposed on Pakistani textile products, he said.

However, the USTR spokeswoman insisted that the administration has not yet decided what products or regions would be eligible for production in the ROZs or what type of rule of origin would be used to determine eligibility. She said these factors "are all under continued review based on the ongoing consultations" with congressional staff and industry representatives that have taken place over the past few weeks.

A Democratic Finance Committee aide said administration officials briefed Finance staff members earlier this month on the ROZ proposal, but staffers seek more information to review the proposal more thoroughly. "It's our understanding that there is a possibility of including textiles, and it's reasonable to expect that that would cause concern," she said. The administration has also briefed the Senate Foreign Relations, House Ways and Means and House Foreign Affairs committees, sources said.

The Feb. 20 briefing to members of the U.S.-Pakistan Business Council was given by Assistant USTR for South Asia Doug Hartwick, Deputy Assistant Secretary of Commerce for Textiles and Apparel Matt Priest and Deputy Assistant Secretary of State for Trade Promotion and Policy Chris Moore.

Business council members want the administration to ensure broad product coverage and a simple rule of origin like that used in the Generalized System of Preferences, which bestows origin to a country where 35 percent of the value of a product is added.

In the briefing, officials conveyed the message that the administration is considering using the GSP as a model, though they said they had not decided whether textile and apparel items would be eligible, according to private-sector sources. The officials also floated the possibility of using the same rule of origin as GSP for items that are also covered under GSP, they said.

Afghanistan and Pakistan are eligible for GSP benefits, which does not cover textiles and apparel and some other import-sensitive products. The GSP needs to be periodically renewed which is not the case for the ROZs, which private sector sources said is meant to encourage long-term investment.

U.S. officials in this week's briefing said they had a feasibility report by the U.S. Agency for International Development (USAID) on the ROZs, but did not reveal the report's contents, sources said. This report was a necessary precursor to the consultations (Inside U.S. Trade, Aug. 11, 2006).

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