Examplifying NAFTAs western hemisphere supply chain, this T-shirt was designed in Canada and made in Mexico of USA fabric

Examplifying NAFTA's western hemisphere supply chain, this T-shirt was designed in Canada and made in Mexico of USA fabric

President-elect Donald Trump has made no secret of his dislike of the North American Free Trade Agreement (NAFTA) between the US, Mexico and Canada. But far from bringing back 'Made in USA' manufacturing, withdrawing from the pact would hurt US textile exports and do little to curb apparel imports, according to an analysis by Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware.

During his presidential election campaign, Donald Trump called the North American Free Trade Agreement (NAFTA) "the worst trade deal in history," and blamed the pact for the loss of US manufacturing jobs in sectors such as textiles and apparel.

Because NAFTA contains a provision (Article 2205) that allows any party to withdraw the agreement with six months' notice, it is not unlikely that Trump will keep his pledge to renegotiate or even end the deal.

But what would happen to the US textile and apparel industry if NAFTA were indeed gone?

If NAFTA no longer existed, the immediate impact would be an increase in tariff rate for products traded between the United States, Canada and Mexico.

For example, as shown in Table 1, after losing their duty-free treatment under NAFTA, US textile exports to Canada and Mexico – currently the two largest export markets – would incur an average tariff rate of 2.3% and 16.5% respectively.

Similarly, without NAFTA, US importers would also have to pay an average tariff rate of up to 11.6% on apparel from Mexico and Canada.

Table 1: Average applied tariff rate for textiles and apparel in 2015

TextileApparel
United States7.911.6
Canada2.316.5
Mexico9.720

Source: World Tariff Profile 2016

Further analysis shows the loss of duty-saving benefits under NAFTA would result in a significant impact on the US textile and apparel industry and related trade flows – although not quite as envisaged by Trump.

1: Ending NAFTA would significantly hurt US textile exports

Specifically, after losing NAFTA, annual US textile exports to Mexico and Canada would sharply decline by $2.08bn (down 47.7%) and $351m (down 14%) respectively compared to the base year level in 2015.

Although US textile exports to other members of the Dominican Republic - Central America Free Trade Agreement (DR-CAFTA), would slightly increase by $42m (up 1.5%), the potential gains would be far less than the loss of exports to the NAFTA region (Figure 1).     

Figure 1: Volume change of US textile exports if NAFTA ended

Source: just-style

2: Ending NAFTA would do little to curb total US apparel imports

This is largely because US companies would simply switch to importing more apparel from elsewhere. As shown in Figure 2, after losing NAFTA, annual US apparel imports from Mexico and Canada would sharply decrease by $1.61bn (down 45.3%) and $916m (down 154.2%) respectively compared to the base year level in 2015.

Meanwhile, results suggest that US apparel imports from other countries and regions would rise quickly, such as members of DR-CAFTA, China, Vietnam and other Asian suppliers. 

Figure 2: Volume change of US apparel imports if NAFTA ended

Source: just-style

3: Ending NAFTA would further undercut textile and apparel manufacturing in the United States rather than bring back 'Made in USA'

As shown in Figure 3, after losing NAFTA, annual US textile and apparel manufacturing would decline by $1.92bn (down 12.8%) and $308m (down 3.0%) respectively compared to the base year level in 2011.

Ironically, ending NAFTA would boost textile and apparel manufacturing in other countries, such as China (up $1.757bn for textiles and up $667m for apparel annually) and Vietnam (up $95m for textiles and up $190m for apparel annually), thanks to their expanded exports to the NAFTA region.

Figure 3: Volume change of textile and apparel manufacturing if NAFTA ended

Source: just-style

Although the results present a very different picture of the world without NAFTA than most anti-trade rhetoric suggests, they are not at all surprising.

First and foremost, free trade agreements not only offer preferential duty treatment, but also shape supply chains. NAFTA has created a so-called 'western hemisphere supply chain' in the region, within which Mexico typically imports textiles (such as yarns and fabrics) from the United States, cuts and sews them into apparel, and then exports finished apparel back to the United States or Canada.

Interestingly though, when the US imports more apparel from Mexico, the US will also be able to export more textiles to Mexico. However, the opposite is also true: without NAFTA, there will be fewer incentives for US importers to import apparel from Mexico. Consequently, Mexico's demand for US-made textiles would slip as well.

In other words, ending NAFTA would put the western hemisphere supply chain in jeopardy and make the US textile industry lose its single largest and guaranteed export market: Mexico. 

On the other hand, in a highly competitive market like apparel, raising the tariff rate is bound to result in trade diversion.

US fashion brands and retailers import apparel not only from the NAFTA region, but also from another 150+ countries. Results from the 2016 US Fashion Industry Benchmarking Study released this June by the US Fashion Industry Association (USFIA) reiterate this: among the survey respondents, those US fashion brands and retailers with 1,000+ employees typically source from more than 20 different countries or regions; whereas those with <1,000 employees typically use 6-10 countries as their sourcing bases.

With so many alternative suppliers out there, ending NAFTA would NOT increase demand for textile and apparel 'Made in USA,' nor create US textile and apparel manufacturing jobs. Rather, Asian textile and apparel suppliers such as China and Vietnam would take away market share from Mexico and benefit most from NAFTA's dismantling.

Fortunately, we still have the opportunity to avoid the chaos that ending NAFTA would bring to the US textile and apparel industry.

A clear message the industry should take to the Trump administration is that mercantilist mentalities like "export is good and import is bad" no longer hold in the 21st century global economy.

On the contrary, international trade – BOTH export and import – supports textile and apparel manufacturing and job creation in the US through ever more integrated global or regional supply chains.

Likewise, to truly support textile and apparel manufacturing and job creation in the United States, making trade policy more supply chain friendly rather than restricting imports is the right direction. 

This analysis is based on the Global Trade Analysis Project (GTAP) computable general equilibrium (CGE) model by using the latest GTAP9 database.