First Zolitur, Now CAFTA
Honduran Customs Negates Trade Treaty with Bureaucracy

October 8th, 2014
by Robert Armstrong

On January 1, import duties on all but a handful of goods traded between Honduras and the United States, other Central American countries and the Dominican Republic will officially go to zero under terms of the free trade agreement among those countries – CAFTA-DR – which entered into force in 2006. However, because of bureaucratic obstacles, some of which violate the text of the agreement, most Bay Islands importers will continue to pay 15 percent duties on those goods.

 

That reality hit us in the face like a bucket of ice water this month as the Voice sought to branch out into the postcard business. We found we could print the cards in the US for a third of what it would cost us to print them in Honduras. According to the tariff-elimination schedule of CAFTA, the Honduran import duty on postcards printed in the US was supposed to have been reduced to 1.5 percent by 2014 and eliminated entirely on January 1, 2015. However, shippers we consulted, if they were aware of the existence of CAFTA at all, told us we would have to pay the full 15 percent duty on the shipment unless we wanted to retain customs brokers and obtain special documentation at a cost that would exceed the value of our shipment.

 

That’s not the way it was supposed to work.

 

In my previous career I helped negotiate US free-trade agreements with South Korea and Australia. I also spent two years at the US Embassy in Tegucigalpa working to assure compliance with CAFTA and preaching its potential benefits to Honduran audiences.

 

Free-trade agreements that are worthy of the name are supposed to be about eliminating bureaucratic obstacles to trade, not creating new ones. CAFTA was supposed to establish clear and transparent rules that would be applied in a straight-forward manner. It was supposed to be accessible to and benefit small businesses and individuals as well as big corporations with armies of lawyers and lobbyists. The tariff was supposed to be the tariff, and that was supposed to be that.

 

Imagine my shock and disappointment, then, when I tried to claim CAFTA benefits for my measly $200 box of postcards. Most shippers I contacted had never heard of CAFTA. It took me all of five minutes to find the applicable rate for the cards under the agreement on the internet – 1.5 percent. But when I told one shipping agent my goods should be dutied at that rate, he scoffed and said, “That would be nice.” Another said, “If you want to apply this CAFTA law then you have to make your own poliza at customs.” Another said, “Exemptions are done through Zolitur.”

 

We have written extensively in these pages about the on-again/off-again saga of Zolitur (Zona Libre Turística) – a tax-exemption scheme enacted by the Honduran Congress for Bay Islands businesses. However, Zolitur has nothing to do with CAFTA. Zolitur was a unilateral extension of tax benefits by the Honduran Congress to Honduran businesses. What the Honduran Congress giveth, the Honduran Congress may taketh away. In contrast, CAFTA is an international treaty. The Honduran Constitution states that treaties take precedence over domestic laws. They must be respected.

 

Another key distinction between Zolitur and CAFTA is that, whereas Zolitur benefits are granted to licensed beneficiaries according to specific criteria and procedures, CAFTA benefits are supposed to accrue to the goods of the signatory countries, automatically and regardless of who is importing them. The only criterion is whether a specific good in fact originated or was produced in one of the member countries. In some cases, such as textiles and autos, there are complicated rules for determining origin. But for the vast majority of products, including our postcards, the rule is straight-forward. The cards were printed in the US, and that should be the end of the story.

 

The one shipping representative we contacted who seemed to know something about CAFTA told us, “Every single time anyone wants to make use of CAFTA benefits a certificate of origin that certifies the production/origin of the imported item is from the USA, is needed.  Then, a separate export BL (bill of lading) from the USA and a separate import document in Honduras (poliza) in the name of that same importer … is required.  … These three separate documents have a stand-alone cost of approximately $250.”

 

Sounds legit. Except that’s not what the agreement says.

 

The Rules of Origin chapter of CAFTA states that customs authorities may indeed require a certificate of origin from an importer to demonstrate that the good being imported qualifies for CAFTA treatment. But it says such a certificate may be either written or electronic and “need not be made in a prescribed format.” The obvious intent here is to minimize bureaucratic requirements for claiming benefits. Furthermore, the agreement states clearly that “no party may require a certification or information demonstrating that the good is originating where the customs value of the importation does not exceed US$ 1,500.” (Article 4.17) The customs value of our postcards was less than $200.

 

We contacted an official at the US Commerce Department who monitors CAFTA compliance. He confirmed that in our case, all we should be required to do is present a commercial invoice showing the cards were printed in the US.

 

A contact at the US Embassy in Tegucigalpa told us that complaints about Honduran Customs not adhering to CAFTA rules had become so common in recent months that the Ambassador had written a letter of protest to the Honduran revenue authority (DEI). The same contact said Mexico was having similar problems getting Honduran Customs to follow the rules of Mexico’s trade agreement with Honduras.

 

CAFTA was greeted with much fanfare and controversy a decade ago, when it was undergoing ratification. Supporters touted it as a godsend that would lead to a more prosperous future for Central America. Detractors said it would be the end of the world as we know it, embodying everything that is evil, capitalist and “neoliberal.” Neither side was right.

 

Trade chart-webThe most remarkable thing about CAFTA as it enters its 10th year is how unremarkable it has been. Total trade between the US and Honduras between 2005 – the last full year before CAFTA entered into force – and 2013 grew just 32 percent, from just over US$ 9 billion to US$ 11.9 billion, according to US Commerce Department data. That’s a growth rate of just 3.5 percent a year. Granted, the agreement took effect just before the global economy hit the skids and Honduras experienced some political turmoil. Two-way trade dropped 20 percent in 2009 and took two years to recover. But in the eight years before the agreement took effect, two-way trade grew more than 9 percent a year on average, and that period bracketed the devastation of Hurricane Mitch.

 

So why has CAFTA been such a nothing burger? There could be any number of explanations. But could one of them be that for all intents and purposes, for small businesses and individual importers, it may as well not exist? Could it be that we should be arguing not about whether free trade has been good or bad for Honduras but about whether it has even been tried?

 

CAFTA was supposed to be a game-changer for Honduras. It was supposed to lead from a system in which economic actors must continually ask the government for permission to one based on rules that are transparently and evenly applied with minimal bureaucratic formalities. When I used to travel Honduras trying to sell sometimes skeptical crowds on CAFTA, critics would allege that the agreement would benefit only large corporations. There would be nothing in it for the little guy. I told them they were wrong. I now have reason to believe they may have been right. But it didn’t have to be that way.

 

 

 

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