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Thursday, March 25, 2010

The Haitian Economy and the HOPE Act

J. F. Hornbeck
Specialist in International Trade and Finance

In December 2006, the 109th Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE I), which included special trade rules that give preferential access to U.S. imports of Haitian apparel. These rules were intended to promote investment in the apparel industry as one element of a broader economic growth and development plan. HOPE I allowed for the duty-free treatment of select apparel imports from Haiti made from less expensive third-country inputs (e.g., non-regional yarns, fabrics, and components), provided Haiti met rules of origin and eligibility criteria that required making progress on worker rights, poverty reduction, and anti-corruption measures. Early assessments of the effectiveness of HOPE I, however, were disappointing. The 110th Congress responded by amending HOPE I in the Hemispheric Opportunity through Partnership Encouragement Act of 2008 (HOPE II). HOPE II extends the preferences for 10 years, expands coverage of duty-free treatment to more apparel products, particularly knit articles, and simplifies the rules, making them easier to use. Early evidence suggests that apparel production and exports are responding to these changes. 

HOPE II also amended the eligibility requirements by requiring Haiti to create a new independent Labor Ombudsman's Office and establish the Technical Assistance Improvement and Compliance Needs Assessment and Remediation (TAICNAR) Program. The TAICNAR program provides for the United Nations International Labor Organization (ILO) to operate a firm-level inspection and monitoring program to help Haitian apparel factories comply with meeting core labor standards, Haitian labor laws, and occupational health and safety rules. It would apply to those firms that agree to register for the program as a prerequisite for utilizing the tariff preferences. The TAICNAR program is also designed to help Haiti develop its own capacity to monitor compliance of apparel producers in meeting core labor standards. 

The earthquake that rocked Haiti on January 12, 2010, caused considerable damage to the apparel sector, although much has been done to get capacity back to at least 80% of pre-earthquake levels. Early estimates of rebuilding costs for the industry begin at $25 million to refurbish damaged buildings, replace machinery, and train new employees. The apparel world moves quickly, and the greatest fear is that U.S. buyers will abandon Haiti for other production sites just as the apparel industry was making strides in redevelopment. Although buyers are reportedly willing to stay with Haiti factories, the sentiment could shift quickly if production is unable to return to levels adequate to meet orders. The U.S. Congress could respond by amending the tariff preferences and rules of origin in HOPE II to provide additional incentives for investors to operate in Haiti. First, the 55% value-added rule could be lowered, presumably allowing more firms to take advantage of the preference. Second, there is a capped (70 million square meter equivalents—SMEs) provision for both knit and woven articles that allows duty-free treatment for apparel made from third-country inputs with no value-added requirement. The rule is attractive for many apparel producers of varying size and capabilities in Haiti and the caps could be increased, exclusions reduced, or either eliminated. Third, Congress could reduce the 3-for-1 earned import allowance rule to a 2-for-1 or 1-for-1 rule. Other options might include a more comprehensive extension of tariff preferences to other manufactured goods or a broader elimination of tariffs across the board. The tradeoff would be the possible reduction in the use of U.S.-made yarns and fabrics in Haiti apparel production. Although Haiti is not a large producer by worldwide standards, U.S. firms may wish to minimize any possible negative effects on their industry.

Date of Report: March 16, 2010
Number of Pages: 28
Order Number: RL34687
Price: $29.95

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