US apparel imports under NAFTA have declined over time, while US exports of yarns and fabrics have risen sharply

US apparel imports under NAFTA have declined over time, while US exports of yarns and fabrics have risen sharply

As the United States, Canada and Mexico embark on talks to renegotiate the 23-year-old North American Free Trade Agreement (NAFTA), we take an in-depth look at key issues for textile and apparel supply chains. In the latest developments, the three partner countries concluded the first round of talks saying they were committed to "an accelerated and comprehensive negotiation process"; but US president Donald Trump has revived threats to pull the US out of NAFTA.

As the three sides square up to renegotiate NAFTA, the Office of the US Trade Representative (USTR) on 17 July released a detailed and comprehensive summary of its renegotiating objectives.

Given Donald Trump's fiery rhetoric against the pact on the campaign trail when he repeatedly called it a "disaster," the US stance is not surprisingly aimed at reducing the trade deficit with Canada and Mexico, and bringing more manufacturing jobs back to the United States.

"Through the renegotiation of NAFTA, the Trump Administration will seek a much better agreement that reduces the US trade deficit and is fair for all Americans by improving market access in Canada and Mexico for US manufacturing, agriculture and services," the Office of the United States Trade Representative (USTR) says.

The negotiating objectives include updating existing chapters to reflect modern standards, as well as adding new chapters to cover issues that have emerged since NAFTA was first implemented at the beginning of 1994. Other issues on the agenda include digital trade, IPR protection, regulatory practices, state-owned enterprises, services, customs procedures, Sanitary and Phytosanitary Measures (SPS), small and medium-sized enterprises, and stronger labour and environmental standards.

Key objectives for textiles and apparel

The US also sets out renegotiating objectives that either address textiles and apparel directly or are highly relevant to the sector.

Here it appears to reassure the business community that it will work to preserve existing supply chains and retain existing duty-free treatment, and intends to: "Maintain existing duty-free access to NAFTA country markets for US textile and apparel products and seek to improve competitive opportunities for exports of US textile and apparel products while taking into account US import sensitivities."

The renegotiation also will also update the textile and apparel rules of origin to encourage more textile and apparel manufacturing in the NAFTA region.

US objectives relating to textiles and apparel are summarised below:

Trade in Goods:

  • Improve the US trade balance and reduce the trade deficit with the NAFTA countries.
  • Maintain existing duty-free access to NAFTA country markets for US textile and apparel products and seek to improve competitive opportunities for exports of US textile and apparel products while taking into account US import sensitivities.

Rules of Origin:

  • Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.
  • Ensure the rules of origin incentivise the sourcing of goods and materials from the United States and North America.
  • Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.

Customs and Trade Facilitation:

Provide for automation of import, export, and transit processes, including through supply chain integration; reduced import, export, and transit forms, documents, and formalities; enhanced harmonisation of customs data requirements; and advance rulings regarding the treatment that will be provided to a good at the time of importation.

Deep dive on NAFTA apparel trade issues

  • Reducing the trade deficit and bringing more manufacturing jobs back to the United States are at the core of the country's NAFTA's renegotiating objectives. These two goals are also highly consistent with Trump's rhetoric on trade policy.
  • A dilemma facing the textile and apparel sectoral negotiation is that the US currently runs a robust trade surplus with Canada and Mexico for textiles. In 2016, the value of the US trade surplus (exports minus imports) totalled $680m for yarns (up 56.7% from 1994); $4.34bn for fabrics (up 202.9% from 1994); and $1.46bn for made-up textiles (up 223.5% from 1994). 
  • Meanwhile, although the US has a trade deficit with NAFTA partners for apparel ($1.13bn in 2016), US apparel imports from Canada and Mexico often include textile inputs "Made in the USA" through the western hemisphere supply chain. So cutting the trade deficit on apparel could inadvertently and ironically have a negative impact on US textile exports to the NAFTA region. 
  • Based on the released US objectives, it seems unlikely that the NAFTA renegotiation will liberalise the yarn-forward rules of origin for textile and apparel. On the contrary, USTR could review the current exceptions to the yarn-forward rules, including the tariff preference levels (TPL) and some special regimes such as the 9802 program related to fabric sourcing to strengthen the manufacturing base and create manufacturing jobs in the US. 
  • Recognising the competing arguments between the US textile industry and the apparel industry (fashion brands and retailers) regarding the necessity and impact of these exceptions, USTR also needs more input on how companies use exceptions like the TPL in sourcing, and why.
  • Other than the rules of origin, trade facilitation and customs enforcement will be another major issue related to the textile and apparel sector in the NAFTA renegotiation. Elements from the newly enforced Trade Facilitation and Trade Enforcement Act of 2015 could be added to the updated NAFTA.
  • A positive aspect of the NAFTA textile and apparel sectoral negotiation is that all parties alongside the supply chain, including US cotton growers, textile mills, apparel retailers and brands recognise the value of agreement and no-one is calling for pulling out of the pact.
  • It is also a consensus view of the US textile and apparel industry that NAFTA renegotiation should "do no harm" – that is, strengthening rather than weakening the current supply chain partnership between NAFTA members.
  • Additionally, stakeholders in the US textile and apparel industry unanimously support keeping the renegotiation trilateral, but agree to use bilateral provisions to address some particular concerns. 
  • The NAFTA renegotiation may officially start on 18 August. However, the ambitious renegotiation agenda and the many complex and thorny issues involved mean it will be extremely challenging to agree a deal before US and Mexican elections kick in next year. 
  • There is also the risk that Trump may pull the United States out of NAFTA should he lose patience for the renegotiation. Notably, Trump's dislike of NAFTA is real.

BACKGROUND

What is NAFTA?

The North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico came into effect on 1 January 1994 with the aim of eliminating barriers to trade and investment among the three countries. 

Since then it has helped encourage a regional textile and apparel supply chain among its members. The US typically exports yarns and fabrics to Mexico, where they are cut and sewn into apparel (taking advantage of the country's lower labour costs); with the finished garments then shipped back to the US and Canada for consumption.

Qualifying textiles and apparel, travel goods and footwear originating from the NAFTA region have duty-free access to the US and Canadian markets. Its "yarn-forward" rules of origin basically require that each step of apparel production from the spinning of the yarn onwards must take place in the region must be carried out in the United States, Canada and/or Mexico.

Less demanding rules of origin also govern certain knitted underwear, bras and shirts made from fabric in short supply in North America, and textile and apparel articles made from fabric not commonly produced in the NAFTA region. These exceptions give producers flexibility to import materials not widely produced in North America. 

The value of US apparel imports from Canada in 2016 totalled US$561m, of which US$543m was under the FTA (97% utilisation rate). Meanwhile, the value of US apparel imports from Mexico in 2016 totalled US$3,570m, of which US$3,108m was under the FTA (87% FTA utilisation rate). Additionally, Canada imported US$733m and US$339m in apparel from the US and Mexico respectively. 

A recent analysis on just-style confirms US apparel imports under NAFTA have declined over time.

US imports of textiles & apparel from NAFTA countries

  2004200520062007200820092010201120122013201420152016
Yarn 107411231074940820718847862845820730603540
Fabric1525159415411554128510611217134213361330135713271306
Made-ups1346132913071332112610551137123613271331141914351542
Apparel8424757866815649488640114219452444134399450243464141

Source: OTEXA, US Dept. of Commerce

US cotton, textile and apparel ambitions

Groups representing the US textile industry, as well as fashion retailers, brands and importers, both agree on the need to modernise and update NAFTA – but their priorities are very different. The debate in the US retail and mill industries has focused on rules of origin for qualifying products under NAFTA. To qualify for NAFTA tariff benefits, companies are required to use fabrics made in the region of yarn from the region – the so-called "yarn-forward" rule. Brands and retailers feel the rule is too restrictive and limits sourcing options, while textile mills prefer rules that encourage the use of their product, particularly in yarn. 

US retailers, brands and importers have repeatedly urged a cautious approach to renegotiating NAFTA and a "seamless transition" to any new deal so that it does not harm existing supply chains. Their priorities include making customs enforcement smarter and more streamlined, facilitating regional value chains, providing for digital trade, and recognising advancements in trusted trader programmes.

For apparel maker VF Corp, owner of the Timberland, The North Face and Wrangler brands: "NAFTA supports tens of thousands of VF jobs in the United States as well as tens of thousands of jobs at our US suppliers who grow the cotton and make the materials that go into our NAFTA-made products. NAFTA has been good for our industry."

Testifying at a NAFTA hearing organised by the USTR, the company explained that a pair of Wrangler brand jeans assembled in one of VF's Mexican factories uses cotton from Texas, fabrics and zippers from Georgia, and threads from North Carolina.

The US textile industry, meanwhile, wants NAFTA to incentivise more textile and apparel jobs and production in the US, Canada and Mexico; review the rules of origin to increase NAFTA value add and remove loopholes that allow yarn and fabric from China and other non-NAFTA countries to get preferential tariff treatment; and devote more customs enforcement resources to stop illegal third-country trans-shipments.

And among US cotton farmers – for whom Mexico is one of their top export destinations – there is a desire to maintain positive and stable trading relationships. They argue stronger textile rules of origin can help expand US jobs and exports.

It is also clear that US imports from NAFTA have been clearly overwhelmed by China.

US apparel imports from NAFTA compared to US apparel imports from China

  2004200520062007200820092010201120122013201420152016
NAFTA 8424757866815649488640114219452444134399450243464141
China8928151431851822745229232350327975293922906029783297943054127922

Source: OTEXA, US Dept. of Commerce

Canada's position

Canadian apparel industry concerns are to maintain or expand access to the US market by defending NAFTA provisions that allow Canadian fashion exporters to use a wide range of non-NAFTA fabrics in their apparel while qualifying for duty-free entry into the US – provisions known as tariff preference level (TPLs).

Major changes to rules of origin and market access provisions would price many Canadian exporters out of the US market, according to the Canadian Apparel Federation (CAF), as Canadian made goods would be subject to full duties. While rates of duty vary, many apparel products are dutiable at over 20%.

It cites the example of a woman's polyester blouse (wholesale price of $20.00) made in Canada from Taiwanese fabric, which can currently be shipped to the US duty-free using TPLs. If they were eliminated, the same garment would be subject to 26.9% duty – adding over $5.00 to the wholesale cost.  

The CAF adds there are limited options for fabrics constructed in the NAFTA region. Canadian textile producers also have TPLs that allow them to use inputs from outside North America in their exports to the US.

Mexico's position

NAFTA has helped Mexico become an export powerhouse, but the country's textile and apparel industry also appears divided in its stance on NAFTA. As recently reported on just-style, Mexican apparel makers would like to see the yarn-forward rule-of-origin replaced with a less demanding single transformation to improve their competitiveness against competition from the likes of China, Vietnam and Bangladesh.

This simply requires the fabric is cut and sewn in one or more NAFTA countries, and would give producers flexibility to import materials not widely produced in North America. However, Mexico's textiles sector is lobbying the government for the yarn or fabric-forward rule to stay in the treaty.

Mexico is also backing views that NAFTA's tariff preference level provisions (which allow specified quantities of yarns and fabrics to be eligible for preferential NAFTA rates if they are subject to significant processing in one or more NAFTA countries) should be terminated or modified. 

NAFTA renegotiation timetable

On 18 May 2017, United States Trade Representative Robert Lighthizer notified Congress that President Trump intends to renegotiate the NAFTA. According to the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015), the earliest that NAFTA renegotiation can begin is 90 days after this notification – which would be anytime on or after 18 August 2017.

In fact, the US has confirmed its negotiators will meet with their Canadian and Mexican counterparts for the first round of talks on 16-20 August in Washington, DC, with seven rounds of talks planned that will rotate between Washington, Mexico City and Ottawa. The second round of talks will take place on 1-5 September in Mexico City. Discussions will then move to Canada in late September and return to the US in October, with additional rounds being planned for the remainder of the year.

However, time is the enemy of the NAFTA renegotiation. Upcoming elections among the NAFTA members means there is pressure on all parties to conclude the discussions by the end of 2017. US mid-term elections are set to take place in November 2018, and the Mexican presidential election in 2018. Canada is also scheduled to hold its federal election on or before 21 October 2019.

Once a NAFTA deal is reached, it must also be ratified by vote in all three countries' respective parliaments. In the US, in particular, there is no guarantee US Congress will approve what negotiators agree.

With thanks to Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware, for additional insight.