Apparel Specific Rules of Origin in NAFTA 2.0 (US-Mexico-Canada Free Trade Agreement)

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The full article is available HERE

Key findings:

First, in general, USMCA still adopts the so-called “yarn-forward” rules of origin. This means that fibers 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. 

Second, other than the source of yarns and fabrics, USMCA now requires that some specific parts of an apparel item (such as pocket bag fabric) need to use inputs made in the USMCA region so that the finished apparel item can qualify for the import duty-free treatment.

Third, USMCA allows a relatively more generous De minimis than NAFTA 1.0.

Fourth, USMCA seems to be a “balanced deal” that has accommodated the arguments from all sides regarding the tariff preference level (TPL) mechanism:

  • 1) Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
  • 2) Compared with NAFTA, USMCA will expand the TPL level for a few product categories with a high TPL utilization rate.

Fifth, USMCA will make no change to the Commercial availability/short supply list mechanism in NAFTA 1.0.

Sixth, it remains to be seen whether USMCA will boost Made-in-the-USA fibers, yarns and fabrics by limiting the use of non-USMCA textile inputs. For example, while the new agreement expands the TPL level for U.S. cotton/man-made fiber apparel exports to Canada (currently with a 100 percent utilization rate), these apparel products are NOT required to use U.S.-made yarns and fabrics. The utilization rate of USMCA will also be important to watch in the future.

About USMCA

On 30 September 2018, The United States reached an agreement with Canada, alongside Mexico on the updated North American Free Trade Agreement (NAFTA), now called the United States-Mexico-Canada Agreement (USMCA)

Before taking into effect, USMCA still needs to be ratified by all member countries. In the United States, the earliest that President Trump can sign the agreement will be 11/29/2018 (i.e., 90 days after notifying the Congress). The U.S. International Trade Commission has until 3/14/2019 (i.e., 150 days after President signing the agreement) to release an assessment of the new trade agreement. Afterward, the Trump Administration will need to work with the Congress to develop legislation to approve and implement the agreement.

Author: Sheng Lu

Professor @ University of Delaware

14 thoughts on “Apparel Specific Rules of Origin in NAFTA 2.0 (US-Mexico-Canada Free Trade Agreement)”

  1. Again, I am very surprised that
    a) apparel companies are able to produce apparel that still fulfil a triple transformation in our globalized textiles and apparel world
    b) apparel companies really understand these complex rules (especially TPL) and are being able to integrate them in their daily operations in a compliant way.
    Respect – the US companies must be far better organized that their EU competitors (-:)

  2. Under this circumstances, I stand by US retail brands’ side which opposes eliminating TPL level. Like what both sides are arguing, employment in the US is their main concern. From my view, it is true that TPL takes away a certain amount of US jobs in yarn and the textile industry. However, trade with a third party actually brings in other job opportunities which they would not have without the trade.

  3. It will be interesting to see how much these little changes in the TPL levels affect retailers and the textile industry. I am also surprised that there was no change to the short supply list considering specific the items are on that list and how many items that the apparel industry was asking to be added to the short supply list before negotiations.

    1. Good thinking! I hope after our lecture, students can understand the “fight” behind these “little changes.” There is also a reason why nobody wants to touch the “short supply list.”— The US textile industry doesn’t like “short supply list” for the same reason as TPL. For U.S. fashion brands and retailers, “short supply list” is less convenient to use than TPL (e.g.: not always the yarns and fabrics you want to source from outside the FTA region are on the short supply list). Therefore, US fashion brands and retailers are unwilling to sacrifice TPL for more products on the “short supply list” either.

  4. I am looking forward to the changes that will result from the fluctuations in TPL levels and how they will overall have an impact in the fashion industry, regarding retailers and consumers. It is comforting to see that apparel companies are coming together to recognize what they do and do not need when it comes to TPL levels. Going into the future, I am curious to see what happens with the utilization rate of USMCA.

  5. It will be interesting to see what changes will be made in terms of the TPL levels and how they will affect the U.S. in the textile industry. Apparel companies have shown a great understanding in the TPL and seeing them being able to work with them in their companies is a successful pro to the U.S. and shows their view of not eliminating it. In the future the TPL could be more of an advantage for U.S. apparel companies in comparison to their worldly competitors.

  6. I am looking forward to see the changes and results of the NAFTA 2.0 in the future. Also, I am interested to see the impact to fashion brands and retailers if USMCA will limit the use of non-USMCA textile inputs. As we know the US textile industry already have lots of protection under the NAFTA because it can be said that other regions do not have the choice to input textile products. If they boost the Made-in-the-USA fibers, apparel industry might have some voice about that. However, I think they are very clever to balance the requirement of specific parts of apparel item need to use inputs made in the USMCA region and the change of TPL in the NAFTA 2.0.

  7. I do not agree with the elimination of TPL. Some fabrics and yarns needed to make apparel are not always available in the FTA region so there must be exceptions. Other countries will start sourcing elsewhere if the U.S. decides to complicate things by eliminating the TPL. Not only would this decrease profits, but it would also decrease the employment rate in the U.S. Regarding the NAFTA renegotiation. The fashion industry is global… countries depend on each other for all different components in both the manufacturing and selling process. The TPL is a necessity for the fashion industry to run smoothly in the U.S. I also believe the elimination of the TPL would harm the U.S.’s relationships with countries outside of the FTA region which is very harmful since we all depend on one another.

    1. I disagree about hurting the relationship with other countries if we eliminated TPLs. I would think that our relationship with other countries would strengthen because if TPLs were eliminated a lot of sourcing would go completely outside of the US, instead of staying strictly inside the FTA region.

  8. 1) Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
    2) Compared with NAFTA, USMCA will expand the TPL level for a few product categories with a high TPL utilization rate.

    I find these two changes to NAFTA the most interesting, and I look forward to seeing if these changes will have effects on our economy. These changes are similar to the ones that I proposed in my essay assignment. It’s interesting that TPLs are being both cut and expanded, depending on the product category and level of the TPL utilization rate.

  9. Although the changes to the TPL seem little, they will have a great effect on how Canada, US, and Mexico trade apparel. US fashion brands are reluctant to give up TPL for what seems like more products. Now that fashion brands and companies recognize the importance of government enforced tariffs and agreements, such as NAFTA and TPL, they are beginning to use the rules to their advantage in order to better their everyday operations. I think its surprising that they are completely getting rid of TPL and creating a whole new NAFTA agreement. I am interested to see the impact of the TPL before and after elimination.

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