The sixth round of NAFTA talks between the US, Canada and Mexico takes place next week

The sixth round of NAFTA talks between the US, Canada and Mexico takes place next week

The future of the North American Free Trade Agreement (NAFTA) may be under threat, but Mexican textile and apparel makers continue to take a "no pasa nada" [nothing's the matter] approach to the looming risk that the treaty will end.

Their stance comes after the fifth-round of negotiations in December pressured Mexican producers to agree with US President Trump's demands that the 23-year accord be reviewed every five years – all in hopes that Washington will keep the Tariff Preference Level (TPL) benefit intact.

The next few days, however, will be tense as talks to tear up the accord comprising the US, Canada and Mexico enter their sixth round in Montreal on 23 January. Trump has signalled he could suddenly cancel the deal – something Canadian officials have said is increasingly likely as Mexicans continue to skirt his "America First" agenda.

Despite potentially causing a huge dent on Latin America's second economy, "the NAFTA thing has not affected us," charges José González, president of the Puebla-Tlaxcala state chapter of textile industry association Canaintex. He adds that Mexico shipped "a little more" clothing north of the border last year than in 2016.

Trends in US garment imports from Mexico and DR-CAFTA

"I think the treaty will be renewed with some minor changes, except for the automotive chapter."

Mirroring that optimism, Gustavo Bojalil, Puebla State president of apparel industry association Canaive, predicts exports will rise 2% this year to $6.63bn – fractionally higher than $6.5bn in 2017 and matching last year's gains.

"I don't think exports will come down this year unless Trump imposes taxes [ends NAFTA]," Bojalil continues. "Last year, we were in an ascendant trend and Trump had little effect."

Falling peso woos buyers

That said, he concedes the falling peso has boosted US brands' interest in Mexico's near-shoring advantage and that, coupled with maquila efforts to restructure and modernise their machinery, helped boost trade.

The local market, meanwhile, should grow 5% in 2017 on the back of rising local demand for clothing (helped by a government crackdown on sub-valued Asian imports) and a spate of new domestic apparel trademarks, Bojalil says.

He adds his firm TK should grow 10% this year, matching or exceeding a similar 2017 gain, as US clients supplying Target and Reebok lift orders for his soft knits, including round-neck T-shirts and button-down polos. "We also have new clients in Mexico that have started to grow sales like Cuidado con el Perro [beware of the dog], Oggi Jeans and Prima Mexico.

"When Trump threatens us, we turn to the international market and to South and Central America," Bojalil adds, echoing views that Mexico can offset US losses by expanding manufacturing and retail businesses to nearby nations.

That, of course, may be wishful thinking as the country trades some $11bn of textiles and apparel with the US – a market set to be imperilled if NAFTA ends, resurrecting pre-agreement tariffs of 16% to 32% for Mexico's crucial denim and cotton exports.

Fifth-round compromise

To avoid big losses, Mexican makers and officials acquiesced to Trump's demand for a five-year NAFTA review but rejected the so-called Sunset Clause to automatically terminate it if talks end up in stalemate, Gonzalez says.

This was all in the hope that the TPL to source scarce raw materials for export apparel remain in place, he adds. The tariff preference level (TPL) provisions under NAFTA allow key yarn and fabric to come from outside the region without having to comply with the restrictive "yarn-forward" rules of origin.

The US has recently softened its stance on the TPL chapter, which it wants to shelve to protect American textile makers.

"We agreed to review the treaty every five years hoping that there will be a compromise on TPL," González explains. "A revision could be good for the treaty, to look at what works well, what can be corrected, refined, etc. It has to be a win-win treaty."  

But another source close to the talks concludes: "We will revise and update every five years, but we are not going to accept an automatic termination because that is not good for investments and would hurt the industry."

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