7.4 Other Free Trade Agreements and Preference Programs

7.4 Other Free Trade Agreements and Preference Programs

Core Regulatory Tenet: GSP authorization has been lapsed since December 31, 2020 and is not currently reauthorized; when authorized, GSP under General Note 4 and 19 U.S.C. § 2461 requires 35% direct cost of processing plus BDC materials | Direct importation is mandatory across all FTAs (goods transshipped must remain under customs supervision without entering commerce) | Special Program Indicators (SPIs) in Column 1 Special designate treaty claims | Competitive Need Limitations (CNLs) revoke GSP on specific commodities (SPI 'A*') | Retroactive duty recovery during GSP lapses requires entering goods with SPI 'A'.

The Architecture of U.S. Trade Preferences

Beyond the USMCA, the United States participates in a comprehensive network of reciprocal Free Trade Agreements (FTAs) and non-reciprocal Unilateral Trade Preference Programs. In the Harmonized Tariff Schedule of the United States (HTSUS), these programs are codified across the General Notes and reflected on tariff lines in the Column 1 'Special' sub-column via two-letter or symbol Special Program Indicators (SPIs).

Customs compliance professionals must distinguish between two fundamental treaty architectures:

1. Unilateral Trade Preference Programs: Authorized by Congress to promote economic development in developing regions. These programs are non-reciprocal (the foreign country does not grant duty-free access to U.S. exports). Major programs include:
   • Generalized System of Preferences (GSP): Authorized under Title V of the Trade Act of 1974 (19 U.S.C. § 2461 et seq., HTSUS General Note 4);
   • African Growth and Opportunity Act (AGOA): HTSUS General Note 16, SPI "D";
   • Caribbean Basin Economic Recovery Act (CBERA / CBTPA): HTSUS General Note 7, SPI "E" or "E*".
2. Reciprocal Bilateral and Regional Free Trade Agreements: Binding international treaties where the United States and partner nations grant mutual preferential tariff concessions based upon negotiated rules of origin, including CAFTA-DR, KORUS, Colombia, Chile, Australia, Singapore, and Israel.

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Generalized System of Preferences (GSP): General Note 4

CURRENT STATUS — GSP IS LAPSED. GSP authorization expired on December 31, 2020 and, as of September 2026, Congress has not reauthorized it. Renewal bills have advanced in successive Congresses — H.R. 4276, the Generalized System of Preferences Reauthorization Act of the 119th Congress, cleared the House Ways and Means Committee in late 2025 and would reauthorize the program through December 31, 2030 with a retroactive refund of duties paid on GSP-eligible entries from January 1, 2021 — but none has been enacted. Goods that would otherwise be GSP-eligible are currently dutiable at Column 1 General rates.

This matters in two directions on the exam. The substantive GSP rules remain printed in General Note 4 and in 19 CFR 10.171–10.178 of the designated CFR edition, so a question asking whether an article satisfies the 35% rule is answerable exactly as written. But a question asking what duty is owed today on a qualifying article from a beneficiary country has a different answer than the same question asked in 2019: full Column 1 General duty, with the SPI still transmitted to preserve a future refund.

Congress has historically renewed GSP retroactively to the expiration date and refunded duties paid during the lapse without interest. CBP accordingly instructs filers to keep flagging eligible entries with the GSP SPI so refunds can be automated if reauthorization occurs.

The Generalized System of Preferences (GSP) is the oldest and largest U.S. trade preference program. Enacted under Title V of the Trade Act of 1974, GSP grants duty-free entry to thousands of products from designated Beneficiary Developing Countries (BDCs) and Least-Developed Beneficiary Developing Countries (LBDCs).

Special Program Indicators for GSP

In the HTSUS Column 1 Special sub-column, GSP eligibility is indicated by three distinct SPI codes:

• "A": Eligible for all designated Beneficiary Developing Countries (BDCs).
• "A*": One or more specific BDCs are excluded from duty-free eligibility for that specific 8-digit tariff line. General Note 4(d) lists the excluded countries for each tariff line.
• "A+": Eligible only for designated Least-Developed Beneficiary Developing Countries (LBDCs) listed in General Note 4(b)(i).

The 35% Value-Added Requirement (19 CFR 10.176 & 10.178)

Under General Note 4(c) and 19 CFR 10.176, an article qualifies for GSP duty-free treatment only if:

1. It is wholly the growth, product, or manufacture of a BDC; or
2. It has been substantially transformed into a new and different article of commerce in the BDC; AND
3. The sum of the following costs equals or exceeds at least 35% of the appraised customs value of the merchandise upon entry into the United States:

$\text{GSP 35\% Formula} = \left( \frac{\text{Cost of BDC Materials} + \text{Direct Costs of Processing}}{\text{Appraised Customs Value}} \right) \times 100 \ge 35 \text{ percent}$

Includible vs. Excludible Costs under 19 CFR 10.178

The CBLE frequently tests whether candidates can distinguish between costs that count toward the 35% threshold and costs that are legally excluded:

Competitive Need Limitations (CNLs) and Statutory Lapses

• Competitive Need Limitations (CNLs): Under 19 U.S.C. § 2464(c), GSP duty-free treatment for a specific article from a specific beneficiary country terminates if U.S. imports of that article exceed either (1) an annually adjusted dollar value ceiling, or (2) 50 percent or more of total U.S. imports of that article from all sources during a calendar year. A country that breaches a CNL is placed on the General Note 4(d) exclusion list and the tariff line carries the SPI "A*". Because the program has been lapsed since the end of 2020, the CNL determinations and the General Note 4(d) list have not been refreshed through the annual review cycle.
• Lapse Filing Practice: During the lapse, goods are entered at Column 1 General rates with estimated duties deposited, while the filer still transmits the GSP SPI in ACE. That flag allows CBP to automate refunds if Congress reauthorizes retroactively, without requiring each importer to file a protest or a post-entry claim.

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Major Bilateral and Regional Free Trade Agreements

The United States maintains reciprocal Free Trade Agreements across the globe, each governed by its own General Note in the HTSUS:

1. CAFTA-DR (General Note 29 / SPI "P" or "P+")

The Dominican Republic-Central America-United States Free Trade Agreement encompasses the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. Origin is based upon product-specific tariff shift and RVC rules. In the textile and apparel sector, CAFTA-DR enforces the strict Yarn-Forward Rule, which requires that all yarn spinning, fabric weaving/knitting, and final garment assembly occur within the CAFTA-DR territory for the article to qualify as originating. General Note 29(e) includes a 10% de minimis rule by weight for non-originating fibers.

2. KORUS: U.S.-Korea Free Trade Agreement (General Note 33 / SPI "KR")

KORUS eliminated tariffs on the vast majority of industrial and consumer merchandise between the U.S. and South Korea. Origin rules rely on tariff shift requirements and RVC calculations utilizing the Build-Down Method (analogous to the Transaction Value method) or the Build-Up Method (where RVC is calculated based solely on originating materials as a percentage of value):

$\text{Build-Up RVC} = \left( \frac{\text{VOM}}{\text{AV}} \right) \times 100$

Where VOM is the value of originating materials and AV is the adjusted value. KORUS certifications may be issued by importer, exporter, or producer, and CBP conducts rigorous verification reviews through electronic communications under 19 CFR Part 10 Subpart R.

3. Colombia, Peru, and Chile FTAs

• Colombia Trade Promotion Agreement (General Note 34 / SPI "CO"): Comprehensive duty-free access for industrial products, coupled with strict agricultural safeguards and environmental verification mechanisms.
• Peru Trade Promotion Agreement (General Note 32 / SPI "PE"): Reciprocal duty elimination modeled on the Colombia agreement.
• U.S.-Chile Free Trade Agreement (General Note 26 / SPI "CL"): Phased tariff elimination that established 100% duty-free trade across all bilateral tariff lines.

4. Australia and Singapore FTAs

• Australia FTA (General Note 28 / SPI "AU"): Duty-free trade in manufactured goods, with unique agricultural Tariff-Rate Quotas (TRQs) for beef and dairy.
• Singapore FTA (General Note 25 / SPI "SG"): Pioneer agreement featuring the Integrated Sourcing Initiative (ISI) under General Note 25(m), allowing designated medical and high-tech electronic components manufactured in non-party countries (such as Indonesia or Malaysia) to be treated as originating materials when shipped through Singapore.

5. U.S.-Israel Free Trade Agreement (General Note 8 / SPI "IL")

Signed in 1985 as the first U.S. free trade agreement, the Israel FTA requires goods to be wholly obtained or substantially transformed in Israel, with a 35% value-added requirement. Notably, under General Note 8(b), up to 15% of the 35% requirement (equal to 15% of the appraised value) may consist of materials produced in the United States, effectively reducing the Israeli local content requirement to 20%.

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Special Program Indicators (SPI) Decryption Table

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Direct Importation and Non-Party Transshipment Rules

A critical, universal requirement across every U.S. free trade agreement and preference program is the Direct Importation Rule (codified for GSP under 19 CFR 10.175 and across FTA uniform regulations):

STATUTORY DIRECT IMPORTATION MANDATE: Merchandise must be imported directly from the preference country into the customs territory of the United States. If cargo passes through the territory of any intermediate non-party country, it must satisfy strict customs custody and non-manipulation conditions.

Permitted vs. Prohibited Operations in Non-Party Countries

When goods transit through an intermediate third country (e.g., Colombian goods transshipped through Panama, or Korean electronics transshipped through Hong Kong), preferential tariff treatment is preserved only if:

1. Customs Custody Maintained: The merchandise remained under continuous customs control and supervision in the intermediate country;
2. No Entry into Commerce: The merchandise did not enter into the domestic commerce of the intermediate transit country (e.g., entered only under in-bond transit or bonded warehousing);
3. Permitted Operations Only: The goods underwent no operations other than:
   • Unloading and reloading;
   • Splitting of bulk shipments for logistics;
   • Any operation necessary to preserve the merchandise in good condition (e.g., refrigeration, freezing, ventilation, addition of preservatives, or re-crating damaged outer packaging).

Loss of Origin Through Foreign Manipulation

If merchandise transshipped through a non-party country is subjected to any manufacturing, sorting, repackaging for retail sale, chemical blending, or commercial manipulation outside customs bonded custody, the direct importation chain is broken. The goods permanently lose their originating status and are assessed Column 1 General duty rates upon arrival in the United States. When requested by CBP, the importer must substantiate direct importation by presenting Through Bills of Lading, commercial transportation invoices, and Certificates of Non-Manipulation issued by the customs authorities of the intermediate country.