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May 28, 2020

US-Kenya trade deal – Here’s what the apparel industry wants

As more details emerge on the proposed US-Kenya Free Trade Agreement, Kendall Keough and Sheng Lu from the University of Delaware look at various industry views on the pact – and why apparel-specific provisions are the focal point of the debate.

As more details emerge on the proposed US-Kenya Free Trade Agreement, Kendall Keough and Sheng Lu from the University of Delaware look at various industry views on the pact – and why apparel-specific provisions are the focal point of the debate.

In March this year, the Trump administration notified Congress of its plans to negotiate a free trade agreement (FTA) with Kenya, aiming to both deepen the economic ties between the two countries and complement Africa’s regional economic integration efforts. Further details around the specific negotiating objectives of the proposed US-Kenya Free Trade Agreement were released by the Office of the US Trade Representative (USTR) on 22 May.

Overall, the pact intends to “build on the objectives of the African Growth and Opportunity Act (AGOA) and serve as an enduring foundation to expand US-Africa trade and investment across the continent.” It could also become a model trade agreement between the United States and sub-Saharan Africa countries and eventually replace the AGOA a trade preference programme currently set to expire in 2025.

With regards to the textiles and apparel sector, USTR says it will: “Secure duty-free access 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 proposed agreement will also: “Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect to textiles.” The same or very similar language is used in the proposed US-Japan Free Trade Agreement and US-EU trade negotiations.

Of the total US$667m in US merchandise imports from Kenya in 2019, nearly 70% (US$453m) were apparel items – making the sector the single largest stakeholder in the proposed FTA. However, designing the textile and apparel chapter in the agreement is far from easy. In fact, various stakeholders have proposed competing views on the apparel-specific provisions, ranging from the rules of origin to the tariff elimination schedule – as shown by this analysis of the 133 public comments submitted to the US International Trade Commission (USITC) as of May 2020.

#1: The fashion apparel industry has expressed strong unanimous support for the proposed US-Kenya FTA. Kenya is widely regarded as a growing sourcing destination for US fashion brands and retailers. While still being a relatively minor supplier, the East African country’s apparel exports to the US reached a record high of US$453m in 2019 – an increase of 132% from ten years ago. For many US companies, Kenya is the single largest apparel-sourcing base in sub-Saharan Africa, accounting for one-third of the region’s total apparel exports to the US in 2019. As noted by the US Fashion Industry Association (USFIA): “There is a tremendous opportunity to expand trade between the United States and Kenya” through the elimination of both tariff and non-tariff barriers under the FTA.

#2: The apparel industry urges the proposed US-Kenya FTA should “do no harm” to the existing supply chain established around AGOA and ensure a seamless transition between the two trade programmes. Data from the US Department of Commerce shows that between 2015 and 2019, 99.7% of US apparel imports from Kenya claimed the AGOA benefits. Of these imports, almost 100% took advantage of the so-called “third-country” fabric provision, which allows lesser-developed sub-Saharan Africa countries like Kenya to enjoy duty-free access to the US market for apparel made from yarns and fabrics originating from anywhere in the world – also known as the “cut and sew” or “single transformation” rules of origin.

Understandably, US fashion brands and retailers hope to continue to enjoy these AGOA benefits through the new FTA. For example, PVH, one of the largest US fashion corporations, says in its comment: “No change should be made with respect to market access and dutyfree treatment for apparel made in Kenya effective from the date of entry into force of the agreement.” Likewise, USFIA calls for the new FTA to: “Preserve the commercial opportunities developed through AGOA benefits.” The American Apparel and Footwear Association (AAFA) would like to see AGOA extended for another ten years after 2025, regardless of the status of the US-Kenya FTA.

#3: Despite overall support for the agreement, industry stakeholders hold different views on how liberal the apparel-specific rules of origin should be in the US-Kenya FTA and how long to keep it. On the one hand, some argue that without AGOA-like liberal rules of origin, Kenya won’t survive as an apparel sourcing destination for US fashion companies because of the lack of local textile manufacturing capacity. For example, according to the African Coalition for Trade, which represents businesses in several sub-Saharan Africa countries: “Africa does not currently have the capacity to produce the volume and variety of yarn and fabric necessary to support its apparel industry. Any tightening of the third-country fabric rule of origin in the post-AOGA model FTA would decimate the African apparel industry and lead to the loss of hundreds of thousands of jobs.” Likewise, USFIA and the Mauritius embassy argue that for a successful US-Kenya FTA, it is essential to maintain the liberal AGOA rules of origin and tariff preference level, which are the basis for US-Kenya trade in textiles and apparel.

However, some other industry stakeholders suggest the FTA should gradually adopt more restrictive “yarn-forward” rules of origin. They believe this would encourage the development of the local textile industry in Kenya and the broader sub-Saharan Africa region. The “yarn-forward” rules typically require that to qualify for preferential duty treatment, each component starting with the yarn used to make the garments must be formed within the free trade area. In other words, should the US-Kenya FTA adopt “yarn-forward” rules of origin, garment factories in Kenya would have to either import yarns and fabrics from the United States – an option that is commercially infeasible given the long-distance – or use locally-made textile inputs.

PVH, in its comment, explains the rationale behind the proposal: “We should move to a yarn forward rule of origin in phases…to allow the orderly verticalisation of the apparel industry [in Kenya].” AAFA further adds: “A strong, vertical supply chain for the apparel and footwear industry in Kenya will reduce costs, minimise disruption and improve efficiency.”

Notably, the National Council of Textile Organizations (NCTO), which represents the US textile industry, has not yet commented on the US-Kenya FTA, but may potentially join the debate. For years, NCTO has insisted that all US free trade agreements should adopt strict “yarn-forward” rules of origin. NCTO is most likely to hold the same position for the proposed US-Kenya FTA for two reasons. Firstly, to avoid setting a “bad precedent” that may have implications for future US FTA negotiations; and secondly, to prevent the case where US apparel imports from Kenya substantially increase and negatively affect apparel suppliers in the western hemisphere (such as Mexico and countries in Central America). It is important to note that because of the “yarn-forward” rules of origin in NAFTA and DR-CAFTA, as well as geographic factors, most apparel exports from Mexico and Central American countries contain US-made yarns and fabrics – making the region the single largest export market for the US textile industry.

So, understandably, protecting exports to the western hemisphere is always among the top priorities for NCTO members in trade agreement negotiations.

Furthermore, the debate on rules of origin is connected with the discussion on how to promote a regional textile and apparel supply chain in sub-Saharan Africa? and enhance regional economic integration. Several stakeholders, including AAFA and USFIA, urge that the US-Kenya FTA should support regional supply chain collaboration rather than intensify the competition between Kenya and other AGOA members in the US apparel market. The Atlantic Council, a well-known think-tank, also argues: “The bilateral (FTA) approach should not undercut the US’s longstanding support for regional integration in African markets and the progress that has been made in the East African Community (EAC) and the African continental free trade agreement area (AfCFTA).” The Mauritius embassy echoes this view, and suggests the US-Kenya FTA “could be made conductive to regional integration in Africa by allowing cumulation provisions in the agreement that would allow the use of materials sourced from other African partners to achieve the rules of origin requirements.”

#4: Industry stakeholders also suggest the US-Kenya FTA could include modern trade agendas to make the agreement more relevant to the needs of the fashion industry in the 21st Century world economy. The most commonly mentioned issues include:

  • Sustainability, labour, and environmental standard: As noted by AAFA: “The US-Kenya FTA is a unique opportunity to include state-of-the-art sustainability provisions for the apparel and footwear industry…If similar concepts are incorporated into this agreement, it will set the precedent for future trade deals and allow the US to set the gold standard on sustainability.”
  • E-commerce, digital trade, and data protection: As commented by USFIA: “Since AGOA went into effect, there have been major changes in business, most notably, the widespread reliance on e-commerce. This chapter should maintain that FTA parties will not assess customs duties on electronic transmissions, including content transmitted electronically, and will agree to protect the personal information included in e-commerce.
  • Strengthened intellectual property rights (IP) protection: As recommended by AAFA, the US-Kenya FTA could “clearly articulate requirements to easily record and register IP; commitments to enforce against counterfeiting, including through third-party marketplaces; and efforts to cooperate on international efforts to thwart IP rights theft.”
  • Transparency and trade facilitation: Several stakeholders call for the inclusion of a Trade Facilitation Agreement (TFA)-like provision to achieve greater predictability and transparency in government regulations, rulings, and border operations. This could help businesses shorten lead time and expedite trade flows. Meanwhile, some stakeholders such as AAFA want to see: “Customs provisions apply to the whole agreement and not single out any one industry.”

How to deal with Kenya’s import restrictions on second-hand clothing could be another thorny issue relevant to apparel in the FTA talks. Back in 2018, member countries of the East African Community (EAC), including Kenya, attempted to ban used clothing imports to protect the local apparel industry. As of 2019, Kenya’s applied tariff rate for used clothing (HS code 630900) remained as high as 44.9%. In early 2020, Kenya said it would suspend imports of secondhand clothing and shoes due to concerns they could transmit the coronavirus. In its submitted comment, the Secondary Materials and Recycled Textiles Association (SMART), whose members export 8-10 million kilograms of used clothing each year, urge the proposed US-Kenya FTA to “prohibit the imposition of any import ban on secondhand clothing” and “phase-in duty eliminations on secondhand clothing.” However, SMART’s position could be at odds with apparel manufacturers in Kenya, along with US fashion brands and retailers interested in expanding sourcing from the country.

In conclusion, while the proposed US-Kenya FTA presents an opportunity for the fashion apparel industry overall, policymakers are likely to find it challenging to strike a balance among different stakeholders with competing arguments and interests on several complicated issues. In particular, the apparel-specific rules of origin could become the focal point of the debate, either making or breaking the trade deal. Covid-19 and the US presidential election later this year also add to uncertainties around the talks. That being said, discussions on the US-Kenya FTA are likely to intensify as the expiration date for AGOA is fast-approaching.

About the authors: Kendall Keough is a graduate research assistant in the Department of Fashion and Apparel Studies at the University of Delaware; and Dr Sheng Lu is an Associate Professor in Fashion and Apparel Studies at the University of Delaware.

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