1. Purpose and structure

This Chapter deals with issues affecting the trade in textiles and apparel. It
should be read in conjunction with the Chapters on National Treatment and
Market Access for Goods (Chapter 2) and Rules of Origin (Chapter 5). The
Chapter comprises a text covering emergency safeguard actions, rules of origin
and customs cooperation. An Annex to the Chapter deals with the product-specific
rules of origin (ROOs) applying to textiles and apparel.

2. Safeguard Mechanisms (Article 4.1)

The Agreement provides a mechanism to deal with a sudden growth in imports
flowing from a tariff reduction having a detrimental effect on the domestic
industry.

Under the provisions, the importing country would be required to examine
factors contributing to the market impact prior to taking any action, and
would need to give the other Party written prior notice of its intention
to take action. In critical circumstances, a country would be permitted
to take preliminary action in advance of this investigation, but would need
to complete its investigation within 200 days of taking that action.

Should the importing country find that serious damage was occurring, or
was threatened, as a result of an increase in imports from the other Party,
it would be permitted to raise tariffs back to the most favoured nation (MFN)
rate applying at the time that the action is taken.

Emergency action can only be imposed initially for a maximum period of two
years, with the provision for a one-off extension of a further two years
if considered necessary. No emergency action will be permitted to
be imposed or maintained beyond 10 years after a tariff has been eliminated
under the Agreement. An emergency action over a particular product
can only be used once.

Once the emergency action has concluded, the rate of duty will return to
the level that would have applied had no action taken place.

The country imposing an emergency action will be required to provide a level
of trade liberalising compensation to the other Party, preferably on other
textiles products and roughly equivalent to the negative trade effects caused
by the action. If no mutually acceptable form of compensation can
be found, then the exporting Party will be permitted to impose tariff penalties
on other products equivalent to those suffered under the action.

3. Rules of Origin (Article 4.2 and Annex 4-A)

The rules of origin (ROOs) applying to textiles and apparel are based on
a change in tariff classification (CTC) approach and are set out in Annex
4-A. A general description of this approach is included in Chapter
5.

The ROOs apply a stringent test referred to as "yarn forward" under
which, generally speaking and put simply:

• fabrics produced for export be made up of yarns wholly formed in one
  or other of the Parties to the Agreement; and
• apparel for export be produced from fabrics entirely formed in one or
  other of the Parties using yarns wholly formed in one or other of the Parties. The
  apparel must also be cut or knit to shape or otherwise assembled in one
  or other of the Parties.

There are, however, exceptions to these ROOs. For example:

• cotton and man-made fibre spun yarns and knitted fabrics must be produced
  from fibres grown or formed in one or other of the Parties;

The textile and apparel ROOs are product-specific and vary greatly depending
on the particular good. For example, the Chapter Rules in the Annex
allow for certain specific non-originating fabrics to be used in articles
of apparel providing the good is both cut and sewn or otherwise assembled
in the FTA territories. Examples of these special fabrics are: Harris
Tweed, velveteen and corduroy fabrics. The product-specific ROO and
Chapter and Subheading Rules in Annex 4-A should be consulted in order to
determine the test that should be applied to a particular good.

Article 4.2.3 provides a mechanism for officials to meet as required to
reconsider the ROOs applying to individual products and to amend the ROOs
as appropriate.

Article 4.2.6 is a de minimis provision, under which a product will not
forfeit its originating status if any non-originating fibres or yarns used
in the production of the component of the good that determines the tariff
classification account for less than seven per cent by weight of the textile
or apparel good. However, the de minimis provision does not apply
to elastomeric yarns for which there is zero tolerance for non-originating
yarn. In other words, elastomeric yarn must be of American or Australian
origin.

Article 4.2.8 provides that where a product for export consists of a set
of products, e.g. a skirt with a belt, any non-originating goods in the set
will not damage the status of the entire set if they account for no more
than 10 per cent of the final value of the set.

4. Customs Cooperation (Article 4.3)

The Agreement provides for Customs authorities in both countries to cooperate
to ensure compliance with the rules. Provision is made for the
Customs authorities of the importing country to request the exporting country
to verify a claim. The importing country can suspend preferential
treatment of the suspicious imports while such an investigation is taking
place.

March 6, 2004

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