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Which products would be hardest hit if NAFTA nixed?

By Dr Sheng Lu 08 Nov 2017 (Last Updated June 3rd, 2021 15:55)

As talks to renegotiate the North American Free Trade Agreement (NAFTA) head into their fifth round later this month, concerns remain that US President Donald Trump may end the agreement should the United States, Canada and Mexico be unable to strike a deal. Here Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware, identifies the textile and apparel products that would be most affected by NAFTA's termination. 

Which products would be hardest hit if NAFTA nixed?

As talks to renegotiate the North American Free Trade Agreement (NAFTA) head into their fifth round later this month, concerns remain that US President Donald Trump may end the agreement should the United States, Canada and Mexico be unable to strike a deal. Here Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware, identifies the textile and apparel products that would be most affected by NAFTA’s termination. 

The pattern of textile and apparel trade flows under NAFTA reflects a regional supply chain between the United States, Canada and Mexico.

One key collaboration is between the US and Mexico. The US typically provides textile intermediaries such as yarns and fabrics to apparel factories in Mexico, which then turn the imported textiles into clothing using Mexico’s relatively cheap labour. The finished garments are mostly exported back to the US for consumption. Trade statistics from the World Trade Organization (WTO) also confirm the existence of this unique supply chain: of Mexico’s total textile imports in 2016, over 55% came from the US. During the same period, close to 94% of Mexico’s total apparel exports went to the US, of which around 83% contained US yarns or fabrics.

On the other hand, the tariff preference level (TPL) provisions under NAFTA provide a certain amount of textile and apparel exports from the US and Canada with duty-free access to each other’s market each year without having to comply with the restrictive “yarn-forward” rules of origin.

Top categories of Mexico’s apparel exports to the US in 2016 (by value) and market competition

OTEXA code and product descriptionShare in Mexico’s apparel exports to the USMexico’s rank (in US import market share)Mexico’s #1 competitor (US import market share)Mexico’s #2 competitor (US import market share)
1347 (men’s trousers-cotton)30.8%#3 (18.0%)Bangladesh (23.7%)China (18.6%)
2338 (men’s knit shirts-cotton)8.1%#10 (4.6%)China (35.4%)Vietnam (14.9%)
3639 (women’s knit shirts-MMF)7.7%#4 (5.3%)China (29.7%)Vietnam (19.6%)
4638 (men’s knit shirts-MMF)7.2%#6 (6.5%)Honduras (14.3%)Vietnam (13.2%)
5659 (other MMF apparel)6.0%#3 (4.6%)China (56.8%)Vietnam (10.4%)
6348 (women’s trousers-cotton)5.5%#8 (3.1%)China (35.4%)Vietnam (14.9%)
7647 (men’s trousers-MMF)5.1%#2 (7.1%)Vietnam (21.9%)China (19.4%)
8359 (other cotton apparel)3.2%#2 (10.7%)China (48.9%)Bangladesh (8.0%)

Source:OTEXA (2017)

The TPL mechanism has played a critical role in facilitating trade and production collaboration between the two countries – in particular, the export of Canada’s wool suits to the US and US cotton or man-made fibre apparel to Canada. Statistics from the Office of Textiles and Apparel (OTEXA) under the US Department of Commerce show that in 2016, more than 70% of the value of Canada’s apparel exports to the US under NAFTA utilised the TPL provision, including almost all wool apparel products. Over the same period, the TPL fulfilment rate for US cotton or man-made fibre apparel exports to Canada reached 100%, suggesting a high utilisation of the TPL mechanism by US apparel firms too.

In comparison, there is minimal textile and apparel production and trade between Mexico and Canada. WTO data shows that in both imports and exports, Mexico and Canada accounted for less than 3% of each other’s market share in 2016.

Textile and apparel supply chains involving NAFTA members, particularly the US and Mexico, face intense competition from Asia. According to the 2017 US Fashion Industry Benchmarking Study released by the US Fashion Industry Association (USFIA), Asia as a whole is the dominant sourcing base for US fashion brands and retailers – and eight of the top ten most utilised sourcing destinations by respondents are Asian countries.

Data from OTEXA further shows that in the US import market, apparel from Mexico directly competes with similar products from Asia. Almost all top categories of Mexico’s apparel exports to the US are non-fashion-sensitive basic items, such as cotton men’s trousers, knit shirts and knit skirts. These not only have a high price elasticity of substitution but are also supplied in larger quantities to the US by price-competitive Asian countries such as China, Vietnam and Bangladesh.

Note: MMF refers to “man-made fibre”; Mexico’s competitors were the top suppliers (by value) to the US market in 2016 for respective product categories.

Categories hardest hit by NAFTA’s termination

If President Trump terminates NAFTA, the immediate impact would be an increase in tariff rate for textile and apparel products traded between the three NAFTA members, rising from zero to the most-favoured-nation (MFN) rates applied for regular trading partners. According to the WTO, in 2017  the average applied MFN tariff rates for textile and apparel are 7.9% and 11.6% respectively in the US, 2.3% and 16.5% in Canada, and 9.8% and 21.2% in Mexico.

My previous study, conducted at the macro industry level, shows the tariff escalation effect of ending NAFTA would significantly hurt US textile exports and do little to curb total US apparel imports.

How would end of NAFTA affect US apparel industry?

An examination of tariff data and trade volume at the detailed 6-digit HS code level suggests similar findings – but with some new insights:

First, the termination of NAFTA could significantly impact US textile exports to Mexico and Canada. Notably, the lion’s share (on average over 60%) of many US textile exports at the 6-digit HS code level currently goes to Mexico and Canada. Meanwhile, these exports would face a relatively high applied MFN tariff rate (10%-15%) in the Mexican and Canadian markets without NAFTA. Moreover, because of the nature and distance of regional textile and apparel supply chains, it would be very difficult for the US textile industry to find alternative export markets.

Considering both the current trade volume and the potential escalation in tariff rate, the following US textile exports could be hardest hit:

  • 590320 (Textile fabrics of cotton, impregnated, coated, covered or laminated with polyurethane)
  • 590390 (Textile fabrics of cotton, impregnated, coated, covered or laminated with plastics nesoi, other than those of heading 5902)
  • 520942 (Denim containing 85% or more cotton by weight, weighing more than 200 g/m2, of yarns of different colours)
  • 540710 (Woven fabrics obtained from high tenacity yarn of nylon or other polyamides or of polyesters)
  • 580632 (Woven ribbons of man-made fibres, not pile, not cont by wt 5% or more of elastomeric yarn or rubber)
  • 540110 (Sewing thread of synthetic filaments, whether or not put up for retail sale)
  • 600192 (Knitted or crocheted pile fabrics of man-made fibres)
  • 570320 (Carpets and other textile floor coverings, tufted, whether or not made up, of nylon or other polyamides, hand-hooked)
  • 570330 (Hand-hooked carpets & other textile floor coverings, tufted, whether or not made up, of man-made materials)

Top US textile and apparel exports to Mexico

Top US textile and apparel exports to Canada

Second, similar to the case in textiles, NAFTA’s termination could also hurt US apparel exports to Canada, with the top four US apparel exports most affected:

  • 611030 (Sweaters, pullovers, sweatshirts and similar articles, knitted or crocheted, of man-made fibres, containing 25% or more by weight of leather)
  • 611020 (Sweaters, pullovers, and similar articles, knitted or crocheted, of cotton, containing 36% or more of flax fibres)
  • 620462 (Recreational performance? outwear, women’s/girls’ trousers, bib/brace overalls, breeches & shorts, not knit/crochet, cotton, containing 15% or more by wt of down)
  • 610910 (T-shirts, singlets, tank tops and similar garments, knitted or crocheted, of cotton)

For these products, Canada currently serves as a leading export market for the US, largely thanks to the NAFTA’s TPL program (note: in 2016 the TPL utilisation rate for US cotton or man-made fibre apparel exports to Canada reached 100%). However, without NAFTA, the US exports would face a tariff rate as high as 17%-18% in Canada, which could significantly cut trade flows given the high price elasticity of demand for apparel products.

Third, NAFTA’s termination could further affect US fashion brands and retailers who import apparel from Mexico and Canada, but in a limited way. Considering both the current trade volume and the potential escalation in tariff rate, at the 6-digit HS code level, the apparel categories most affected may include:

  • 620342 (Recreational performance outwear, men’s/boys’ trousers, overalls & shorts, not knit/crochet, of cotton, containing 10 to 15% or more by weight of down)
  • 610990 (T-shirts, singlets, tank tops and similar garments, knitted or crocheted, of man-made fibres)
  • 620343 (Recreational performance outwear, men’s/boys’ trousers, bib & brace overalls, breeches & shorts, not knit/crochet, synthetic fibres, containing 15% or more of down, etc)
  • 620530 (Men’s or boys’ shirts, not knitted or crocheted, of manmade fibres, certified hand-loomed and folklore products)
  • 621132 (Recreational performance outwear, men’s or boys’ track suits or other garments nesoi, not knitted or crocheted, of cotton)
  • 621133 (Recreational performance outwear, men’s or boys’ track suits or other garments nesoi, not knitted or crocheted, of man-made fibres)
  • 620331 (Men’s or boys’ suit-type jackets and blazers, of worsted wool fabric of wool yarn fibre avg diameter 18.5 micron or <, not knitted/crocheted)

For these apparel categories, the applied MFN tariff rate in the US ranges from 8% to 16% in 2017. However, unlike the case of US textile and apparel exports, Mexico and Canada are currently two of the many sourcing bases used by US fashion brands and retailers, which makes the potential negative impact of the termination of NAFTA much more modest. Except for HS 621132 and HS 621133, US fashion bands and retailers can probably quickly find alternative sourcing destinations from Asia or members of the Central American Free Trade Agreement (DR-CAFTA), which also supply the US market with identical products.

In conclusion, analysis at the detailed 6-digit HS code level once again suggests there would be an ironic impact in ending NAFTA. Rather than cutting the US trade deficit and promoting ‘Made in the USA’ textiles and apparel, the termination of NAFTA would most likely lead to the loss of two extremely critical export markets for US textile and apparel makers, and make importers switch their sourcing elsewhere.

Top US textile and apparel imports from Mexico

Top US textile and apparel imports from Canada

NAFTA renegotiation – Key issues for textiles and apparel