A hearing on the potential impact of the new US-Mexico Canada Agreement (USMCA) has heard representatives from the US apparel and textile industries voice concerns regarding tariff preference levels (TPLs), with both sides arguing they will make trading more difficult.
Like the original North American Free Trade Agreement (NAFTA) that it replaces, the USMCA operates a “yarn-forward” rule of origin. This means fibres may be produced anywhere, but each component starting with the yarn used to make the garments must be formed within the free trade area – that is, by USMCA members – to qualify for duty-free preferences. Certain yarns and fabrics that go into making apparel items would also need to be sourced from the USMCA region.
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The new USMCA also requires some specific parts of an apparel item need to use inputs made in the USMCA region so that the finished apparel item can qualify for the import duty-free treatment such as pockets, elastic bands and sewing thread.
The TPLs allow for a certain quantity of textile and apparel goods (usually yarns, fabrics and cut pieces) from a third country (that is, a country that is not a party to the agreement) to qualify for the benefits.
The US textile industry has long regarded the TPL as a damaging loophole, with the National Council of Textile Organizations (NCTO) calling for complete elimination of it in the renegotiated NAFTA.
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This has been met with strong opposition from other industry associations such as the American Apparel and Footwear Association (AAFA) and the United States Fashion Industry Association (USFIA), which say elimination of the TPL will disrupt supply chains in the NAFTA region that have been in place for more than two decades.
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By GlobalDataUnder the revamped USMCA the TPL level has been cut – but only to those product categories with a low TPL utilisation rate. It also expands the TPL level for a few product categories with a high TPL utilisation rate.
At the US International Trade Commission (USITC) hearing in Washington last week, the associations seemed largely supportive of the changes, but held steadfast to concerns over the TPL.
Balancing act on US content
“We are discouraged that – with few exceptions – the changes made to the rules of origin were to introduce more restrictive approaches,” asserted Rick Helfbein, CEO of the American Apparel and Footwear Association. “For example, many tariff preference levels (TPLs) were lowered and the USMCA now includes new requirements [for where] sewing thread, elastic strips, and pocketing originate.
“While we understand US negotiators were attempting to legislate more US content into North American textile and apparel supply chains, the result, unfortunately, may be the opposite. Each of these new provisions, individually and collectively, will make it harder to use the agreement, which may lead to less – not more – US content being used in North American supply chains. Such an outcome would come at the expense of the US textile firms these provisions are designed – on paper – to help.
“Likewise, USMCA represented a lost opportunity to bring more flexibility to the footwear and travel goods provisions of NAFTA. The current rules are so restrictive, in an ostensive effort to keep all benefits in North America, that very little travel goods and footwear trade exists under NAFTA. As we argued throughout the talks, the best way to encourage more US content is to weave in more flexibility into the rules. Such flexibilities provide additional opportunities for business to be conducted under the agreement. For example, the USMCA dramatically increases the TPLs that will enable more US apparel and made up goods to be exported to Canada. Even though such articles don’t have to be made with US textiles, the mere presence of their production in the US will mean more customers for US textile firms.
“The USMCA should have included many more similar provisions to increase trade of apparel, footwear, and travel goods under the new USMCA. These new flexibilities, in turn, would have dramatically increased the opportunities for US-made textiles, leather, soles, clothes, shoes, and travel goods to sell their product throughout North America, and beyond.
“In other areas of the agreement, uncertainties over how different provisions will operate make it premature to offer a systematic assessment. For example, we are pleased to see many trade facilitation agreement provisions hardwired into the USMCA, and believe that such provisions if implemented successfully, could reduce the customs paperwork associated with North American trade. This is important for a region that depends on speed to the consumer for its competitive edge.”
More expensive and complicated
For United States Fashion Industry Association (USFIA) president Julia Hughes, the maintenance of the TPLs and the elimination of the “visible linings” requirement for duty-free treatment comes as good news.
However, “we are nonetheless concerned about the continuation of the yarn-forward rule of origin and the addition of new regulatory requirements,” she told the hearing.
“In this time of uncertainty and cost concerns, the addition of regulatory requirements to qualify for duty-free market access will deter the expansion of business. The yarn-forward rule of origin already discourages trade in our sector – and some companies have told us that the don’t claim the duty savings on eligible products from the region because the compliance requirements are simply too onerous and expensive.
“In addition, the USMCA creates new technical requirements – for example, the addition of requirements for originating sewing thread, pocketing and narrow elastic bands – which will result in higher costs for inputs and higher costs for brands and retailers (as well as their suppliers in Mexico and Canada) to administer the agreement.
“We are concerned that there will be some companies who shift operations out of the Western Hemisphere, or decide not to move new orders to Canada or Mexico because of these cost increases.
“The new regulations will make it more expensive and complicated for American brands and retailers to use the agreement. That is not an assumption, that is what companies tell us.”
“Frustrating” outcome
On the other hand, the NCTO supported the new requirement for certain items to originate from USMCA regions.
“NCTO is very supportive of revisions that will require the use of USMCA-origin sewing thread, pocketing, narrow elastics, and coated fabrics in certain end items. While there are transition periods associated with these new requirements, their ultimate inclusion should offer a boost for US producers formerly left out of the origin rules in the original NAFTA. We estimate the USMCA market to be US$250m annually for sewing thread for apparel applications and $70m annually for pocketing, asserted Auggie Tantillo, president and CEO of the association.
But, said Tantillo, there was “disappointment” where the TPL rule was concerned, with the NCTO still calling for it to be binned altogether.
“TPLs allow products to be shipped duty-free among free trade partner countries even though the components within the product are sourced from countries that are not signatories to the agreement.
“While NAFTA TPLs have annual limits that cap their impact to a degree, more than $641m in textile and apparel TPL shipments entered the US last year. As such, eliminating the TPLs was a primary focus of NCTO in the NAFTA renegotiation. While USMCA did reduce the size of some specific TPLs, the reductions will not cut into existing trade levels. This outcome is frustrating given the President’s stated goals of increasing benefits for US manufacturers and eliminating provisions that have helped non-signatory countries, such as China, take advantage of tariff preferences intended for North American producers.”
Last month just-style took a close look at the new USMCA trade pact, and its implications for apparel sourcing: New NAFTA 2.0 – The devil is in the detail
