The Office of the United States Trade Representative (USTR) proposed additional tariffs of 10% and 12.5% for 60 nations, including Guatemala, for imports from third countries linked to forced labor.
The proposal is based on the report “Acts, policies and practices of various economies related to the lack of imposition and effective application of a prohibition on the importation of goods produced with forced labor”, based on article 301(b)(1) of the Trade Law, with which the entity determined the non-compliance of the 60 countries investigated.
- According to the USTR, 54 economies have failed to effectively impose or enforce the ban on importing goods produced with forced labor, including Guatemala, as well as the rest of the Central American countries and others from different regions of the world.
- Meanwhile, six countries have failed to effectively enforce that ban, including Mexico, Canada, Ecuador, the European Union, Indonesia and Pakistan.
As a result, additional tariffs are proposed for products from the economies investigated. The proposed tariffs are divided into two groups:
- For economies that impose an import ban on products made with forced labor and have committed to imposing and enforcing it through an Agreement on Reciprocal Trade, or that have imposed a partial regime preventing the importation of certain products made with forced labor, the USTR proposes an additional 10% tariff.
- For all other economies it proposes an additional tariff of 12.5%.
- Additionally, a mechanism is proposed for the textile sector that would allow a certain volume of apparel and textile imports from certain economies to enter the United States at a reduced tariff rate under Section 301.
Although Mineco did not confirm what rate is being proposed for Guatemala, according to sources in the business sector the country would be in the first group, with a proposed rate of 10%, because it already has a Agreement on Reciprocal Tradewhich is pending coming into force.
What the report says about Guatemala
The report presents conclusions of the investigation and states that the USTR determined that Guatemala has not imposed or effectively applied the prohibition on importing goods produced through forced labor. Furthermore, it concludes that the failure to impose and effectively enforce said prohibition is unreasonable and harms or restricts United States commerce.
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The report adds that, however, Guatemala has made commitments under the Reciprocal Trade Agreement, also called the Reciprocal Tariff Agreement (ART), regarding the prohibition of importing products of forced labor. This agreement is pending entry into force.
The USTR indicates that the results of this investigation show that “Guatemala’s acts, policies and practices related to the failure to effectively impose and enforce a ban on the importation of forced labor are unreasonable and harm or restrict US trade.”
In the report, the USTR recognizes agreements achieved, and mentions that the USMCA was the first trade agreement to include the prohibition of importing goods produced through forced labor, as well as more recently the bilateral agreements with Argentina, Bangladesh, Cambodia, Ecuador, El Salvador, Guatemala, Indonesia, Malaysia and Taiwan.
Mineco says it does not know details, talks about actions and risks
The Minister of Economy of Guatemala, Gabriela García, explained that Section 301 of the United States Trade Law refers to that country analyzing which nations are in risk of importing products manufactured with forced labor or child labor.
That is, it refers to the imports that the analyzed country makes from third countries. He indicated that this is due, first, to the fact that when importing a product that may be the result of poor labor practices, illegal activities should not be supported and the laws should be respected. Second, it generates unfair competition, because it can create the perception of cheaper products produced under inadequate working conditions.
García explained that Guatemala is part of all the agreements that the ILO requires so that the national industry complies with the requirements to avoid forced labor. However, he pointed out that this is different, because The review carried out by the United States under Section 301 refers to imports that the economies carry out, verifying if they could come from countries with these labor practices.
The minister explained that, regarding what the United States requires of countries regarding the review of import processes, in Guatemala it is a task carried out by the Ministry of Labor, the SAT and Customs, since it may even involve smuggling and intellectual property.
“Guatemala is not sanctioned, nor is it on a black list or gray list, nor will taxes or tariffs be imposed,” the official said. What there is is an investigation and proposal from the USTR.
Asked about the report of that entity, where Guatemala is included among the 54 economies with non-compliance, García pointed out that they must analyze what the United States is using to determine in which areas the country should increase border controls.
This week a public-private mission is in Washington, which is analyzing the issue and with the Mineco authorities that are part of it they are finding out what happens now, said the official. In addition, she mentioned that she participated two weeks ago in a hearing on Section 301 and that the country is doing well in that regard.
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Regarding the possible risk of a 10% or 12.5% tariff being imposed, he stated: “There is nothing here that says there is no risk of anything. We have complied as a country, but we cannot control the decisions of the United States” and added that the country must comply with its commitments to maintain a transparent economy.
Regarding the actions to follow after the report, he indicated that “we are going to comply with what is required of us to minimize risks. That does not guarantee future decisions, but what we can control is doing things well.”
Uncertainty
Last May, Mineco reported that the USTR told them that the Reciprocal Trade Agreement — which includes tariff exemptions and commitments — would come into effect next July, after the tariffs imposed for 150 days based on Section 122 of the Trade Law of 1974 end. However, this Wednesday the minister pointed out that it is known that this measure, based on Section 122, ends around 25 July, but they still do not know when the agreement will come into effect. He added that other countries that have signed, such as El Salvador, Ecuador and Argentina, do not know it either.
What rate would Guatemala be left with and what scenarios are there?
The business and export sector evaluates how Guatemala could fare in the face of this USTR proposal.
Juan Carlos Zapata, executive director of Fundesa, pointed out that they share the objective of preventing the trade of goods produced with forced labor. He indicated that Guatemala has already assumed commitments with the United States within the framework of the Reciprocal Trade Agreement and that work is being done on its implementation.
He explained that with the missions that have traveled to Washington they have analyzed scenarios.
A likely scenario is that, upon the expiration of tariffs under Section 122 on July 24, United States President Donald Trump will use the results of this investigation to apply tariffs of 10% and 12.5%. To do this, he would have to issue a new executive order or presidential proclamation. And that there is the possibility of maintaining a list of exceptions for certain products. In that case, agricultural products, textiles and clothing that comply with the CAFTA-DR rule of origin could remain excluded, but those that currently have a tariff could keep it.
Another scenario, considered less likely, would be to apply tariffs without exceptions. But, with the entry into force of the bilateral agreement, it would allow zero tariffs for products included in said agreement, and those that are not part of that agreement would continue to be taxed.
Among the defense actions that were analyzed, Zapata mentioned the presentation of comments to the USTR during the public consultation to demonstrate progress in compliance with measures and seek exemption or differentiated tariffs.
The possibility of managing with allies the maintenance or expansion of the list of exceptions is also raised.
The effect on clothing and textiles
Alejandro Ceballos, vice president of the Apparel and Textile Industry Association (Vestex), believes that the United States’ intention is to return the tariffs to how they were before the Supreme Court of that country suspended the reciprocal tariffs issued based on the International Emergency Economic Powers Act (IEEPA), only now based on Section 301.
To comply with the ban on importing goods from suppliers in countries that practice forced labor, some measures will have to be applied, such as the approval of a law or the assignment of responsibility to importers or manufacturers who use imported inputs in their processes. This could involve a sworn declaration or another mechanism in which they certify that they do not use goods associated with these practices, Ceballos explained. However, he pointed out that if this were the case, it is not yet known what mechanism would be used.
The executive considers that these types of measures seek to avoid imports from countries like China and others. He added that El Salvador already has legislation in this regard.
He said that they hope that tariffs will not be imposed again on the country or that exemptions will be granted, although he recognizes that there is a risk that, if Guatemala does not comply, they will be applied.
He mentioned that, despite this, for the clothing and textile sector this could be favorable, since higher tariffs could be imposed on competing countries, mainly Asian, which would affect its supply chain with China.
He explained that the Guatemalan sector makes important purchases from China, such as thread, fabric and accessories. However, for the garments or clothing items that it exports to the United States, it does not import goods or raw materials from that country. If they do so, they are not exported under the CAFTA-DR origin, but rather paying tariffs outside that treaty.
He added that a large part of the fabric produced in Guatemala is exported to Central American countries, where it is made. If it includes materials from China, it must be declared outside the treaty, he mentioned as an example.
In the case of Guatemala, of the total finished clothing exported, 80% is of local origin or CAFTA, while of the fabric exported to Central America, 30% is of Chinese origin and 60% corresponds to CAFTA.
Ceballos explained that sometimes it is more convenient to purchase raw materials in China due to its lower prices, even if a higher tariff must be paid. He cited as an example lycra, whose price in China is almost a quarter of that of the United States or other countries, so people choose to pay a tariff of 33%, which may be more favorable depending on the product.
He indicated that it is not completely prohibited to buy from China, but it is necessary to comply with those conditions, and that that country continues to be the largest producer of clothing for the United States.
What is forced labor
According to the ILO, forced labor can be understood as labor that is carried out involuntarily and under the threat of any penalty. It refers to situations in which people are forced to work through the use of violence or intimidation, or by more subtle means, such as manipulated debts, withholding of identity documents or threats of reporting to immigration authorities.
According to the ILO Forced Labor Convention, 1930 (No. 29), forced or compulsory labor is defined as: “any work or service exacted from an individual under the menace of any penalty and for which the said individual does not offer himself voluntarily.”