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January 26, 2022updated 08 Feb 2022 10:43am

Weakening CAFTA origin rules will leave US apparel supply chain exposed

The National Council of Textile Organizations (NCTO) has warned of the “significant adverse impact” of proposals aimed at weakening the rules of origin clause of the CAFTA trade agreement.

By Hannah Abdulla

The NCTO cites research by Werner International which says the current rules of origin in the CAFTA-DR supports more than one million US jobs and US$12.5bn in two-way trade as well as fostering significant and impactful investments in manufacturing and apparel production.

The study also finds various proposals aimed at weakening the CAFTA-DR agreement’s “carefully negotiated and longstanding” textile rules of origin would severely harm the region and US and result in massive job, investment, and export losses, the NCTO says.

“The Werner report comes at a pivotal time, as the global supply chain crisis and concerns over forced labour in Xinjiang have sparked a shift in sourcing out of Asia and a renewed focus on nearshoring and onshoring jobs back to the Americas. As outlined in this report, the US-CAFTA-DR agreement is a critically important and deeply economically impactful agreement that has fostered a co-production chain for textiles and apparel supporting over one million jobs in the region and the US,” says NCTO president and CEO Kim Glas. “This is due to a key element of the agreement called the ‘yarn forward rule of origin,’ a unique investment-based rule that ties lucrative duty-free access to the US market to investment in yarn, fabric, and cut-and-sew production in the region and the US.”

“We appreciate the broad bipartisan support, including from the administration, for maintaining the essential yarn forward rule of origin and ensuring those rules are not eroded through harmful changes. This common support for preserving the provision is vital to the bipartisan efforts focused on ushering in a new era of American manufacturing prowess and economic prosperity. Conversely, the report found that weakening the rules by adding ‘flexibilities’ such as cumulation and short supply changes would exacerbate the migration crisis by devastating our industries and further tether us to our counterparts in Asia, including China.”

Key Findings from Werner report:

  1. Adverse consequences to adding flexibilities to/weakening the yarn forward rule:
  • Destroys US and Western Hemisphere textile employment, with a total projected loss of more than 307,000 US textile and cotton farming jobs and a loss of 250,000 jobs in Central America’s primary textile industry.
  • Devastates US cotton farmers, currently employing 115,000 people in 18 states. Projected sales drop of 30% for US and Western Hemisphere cotton growers.
  • Provides direct and indirect backdoor access to Chinese textile inputs, further perpetuating Xinjiang forced labor.
  • Chills future investment and destabilises current investment in region. Over $1bn in capital investments have been made in CAFTA-DR countries since 2005, which have helped create a vertical regional production chain. Weakened rules place major future and long-term US investments at risk.
  • Cripples efforts to construct a viable domestic/nearshoring supply chain for personal protective equipment (PPE).
  • Exponentially increases greenhouse carbon emissions through transpacific shipping and Asian coal-fired energy.

Jan Urlings, vice chairman of Werner International, notes: The data overwhelmingly demonstrates that the current co-production chain would be undermined by subsidised Asian/Chinese fabrics and yarns whether directly or indirectly through a third party, would devastate direct and indirect textile employment and investment in the US, the region and the entire Western Hemisphere.  It would also exacerbate enforcement issues associated with Xinjiang cotton produced with forced labour.”

Patrick McHenry, Textile Caucus co-Chair, adds: “The global supply chain crisis triggered by the coronavirus pandemic has exposed our severe overreliance on China.  This report showcases that onshoring and nearshoring of this critical production chain is critical for the US textile industry and workers in the CAFTA-DR region.  The US-CAFTA-DR trade agreement has spurred hundreds of millions of dollars of investment because of the strong rules of origin that support this co-production chain.  Any erosion of these rules would harm American producers and exacerbate the immigration crisis.  As supply chains are pivoting, we must seize on the opportunity for growth in good paying jobs in both the US and the region and end our overreliance on China.”

The report makes a series of recommendations to help improve the competitive position of the CAFTA-DR region:

  • Better coordination among lending agencies of the federal government, such as the US Agency for International Development, Inter-American Development Bank, and Export-Import Bank, to ensure targeted, strategic investment in this sector and competitive low or zero interest financing and loan guarantees.
  • Support for a comprehensive infrastructure plan with targeted, high-impact investments and competitive loans to upgrade regional power grids, roads, and local ports would pay immediate dividends.
  • Provide incentives to the Western Hemisphere co-production chain for carbon emission reductions and sustainable products.
  • Ensure trade stability in the region by maintaining maximum pressure on China, including enforcing the US ban on cotton and cotton products made with forced labor in Xinjiang.
  • Refrain from changing cumulation and short supply process, which would lead to a surge of third-country yarns and fabrics and displace hundreds of thousands of jobs in the region and US.
  • Oppose granting duty-free access and other benefits through an expansion of the Generalized System of Preferences (GSP) programme to apparel and textiles and negotiating free trade agreements with major Asian suppliers.
  • Close the de minimis loophole for imports from China that allow goods valued at $800 or less to enter duty free if imported by one person on one day.

Previously, the apparel and textile trade body for the Dominican Republic launched a call to action in order to increase trade, investment, and employment in the CAFTA-DR region.

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