USTR Factsheet: Textiles and Apparel and the US-Mexico-Canada Free Trade Agreement (USMCA)

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The factsheet is available in PDF

Background

On December 10, 2019, the United States, Mexico and Canada reached an updated U.S.-Mexico-Canada Free Trade Agreement (USMCA). USMCA officially enters into force on 1 July 2020. Compared with the version signed in September 2018, the new USMCA includes even higher labor and environmental standards and stronger enforcement mechanisms for these rules. According to the released protocol of amendment, no change has been made to the Textiles Chapter, however.

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Textiles and Apparel and USMCA

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:

  • Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
  • 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.

(Additional reading: Apparel-specific rules of origin in USMCA)

Economic Impacts of USMCA on the Textile and Apparel Sector

According to an independent assessment by the U.S. International Trade Commission (USITC) released on April 19, 2019:

First, USMCA overall is a balanced deal for the textile and apparel sector, particularly regarding the rules of origin (RoO) debate. As USITC noted, USMCA eases the requirements for duty-free treatment for certain textile and apparel products, but tighten the requirements for other products.

Second, the USMCA changes to the Tariff Preference Level (TPLs) would not have much effect on related trade flows. As USITC noted in its report, where USMCA would cut the TPL level on particular U.S. imports from Canada or Mexico, the quantitative limit for these product categories was not fully utilized in the past.  Meanwhile, the TPL level for product categories typically fully used would remain unchanged under USMCA. The only trade flow that might enjoy a notable increase is the U.S. cotton and man-made fiber (MMF) apparel exports to Canada—the TPL is increased to 20million SME annually under USMCA from 9 million under NAFTA.

Third, USITC suggested that in aggregate, the changes under USMCA for the textile and apparel sector will more or less balance each other out and USMCA would NOT affect the overall utilization of USMCA’s duty-free provisions significantly. Notably, the under-utilization of free trade agreements (FTAs) by U.S. companies in apparel sourcing has been a long-time issue. Data from the Office of Textiles and Apparel (OTEXA) shows that of the total $4,163 million U.S. apparel imports from the NAFTA region in 2019, around $3,742 million (or 89.9%) claimed the preferential duty benefits under the agreement. As noted in the U.S. Fashion Industry Benchmarking Study, some U.S. fashion companies do not claim the duty savings largely because of the restrictive RoO and the onerous documentation requirements.

Author: Sheng Lu

Professor @ University of Delaware

11 thoughts on “USTR Factsheet: Textiles and Apparel and the US-Mexico-Canada Free Trade Agreement (USMCA)”

  1. This was a very interesting read! I am very happy to hear that the updated USMCA includes higher labor and environmental standards, as this has been a major industry issue for many years. As stated at the end of this article, The U.S textile and apparel industry does not utilize NAFTA benefits as often as they should, because of restrictive rules and documentation requirements. Do you think this means that NAFTA will slowly disappear in the future? Why or why not?

  2. I found it interesting that after learning about so many exceptions to free trade agreements, such as NAFTA, that many U.S. fashion companies “do not claim the duty savings largely because of the restrictive RoO and the onerous documentation requirements.” This seems odd to me as the exceptions were put in place to help companies both by saving money and increasing U.S. production. Why would the process to qualify for the exceptions be so long and tedious? Wouldn’t the lawmakers who created these exceptions actually want companies to benefit from them and receive the rewards?

  3. I really enjoyed reading this article.It provides a great insight into the current standings of the US-Mexico-Canada supply chain. I am hopeful that mechanisms that the USMCA will use to enforce their the labor and environmental standards will be successful. It seems evident that the USMCA will aid with some of the problems that NAFTA did not. Do you think the USMCA will fully replace NAFTA over time? How would the supply chains be effected if this occurs?

  4. After reading this article, I would like to see how the USMCA agreement has been working for the last week while it has been in effect. This article gave me more insight on what changes the USMCA is making and I think that it seems to be a fair agreement that balances the textile and apparel sector in terms of TPL’s but didn’t change anything too significant to cause any shifts in trading between Mexico and Canada. How do you think Covid-19 has changed the way that this trade agreement has performed vs how it was thought to perform given normal circumstances?

  5. When previously asked in essay assignment 2 what I would if I were a trade negotiator for the controversial TPL exception to NAFTA I said I would lower the allowed quantity of textile and apparel goods from non-NAFTA regions. This way, there may be a happy medium between the major arguments. The USMCA actually went and did this. Specifically, they cut the TPL level on particular U.S. imports from Canada or Mexico. The part that confuses me is how exactly this fixes the problems previously voiced regarding the TPL. If the limit was never fully utilized in the past and the categories typically fully used remain unchanged under USMCA— how much did this change actually help the textile industry? From the outside it looks as if the TPL was lowered, but it really does not do much. There may be a notable increase in the U.S. cotton and MMF apparel exports to Canada, but I feel there will be future complaints from textile manufacturers that too many countries within NAFTA are still outsourcing— taking away customers from the U.S. textile market. The U.S. textile industry wanted the TPL to be FULLY eliminated, not just reduced.

  6. When learning about the yarn-forward rules of origin in NAFTA, we also learned about exceptions to the rules, including the Tariff Preference Level. The TPL was a highly controversial loophole, as the U.S. apparel industry supported the TPL, while the U.S. textile industry resented it. I found it interesting to learn that the new USMCA worked toward easing the controversy of the TPL, and created more balanced regulations. These new regulations state the the TPL on certain imports from Canada and Mexico will be cut. Since the textile industry and apparel industry differ in nature, it is inevitable that the two industries will experience disagreements regarding trade policies. Therefore, I find it admirable that the new and improved free trade agreement is considering both sides of the argument and creating balanced regulations.

  7. I find it surprising that USMCA did not try to accommodate apparel exporters more, as it is keeping the yarn-forward rules of origin that were used in NAFTA in place. As stated in this article, the USITC found that USMCA is not anticipated to alter the use of duty-free trade drastically, as in 2019 about 90% of apparel imports in the region chose to forgo the benefit of non-tariff imports due to the RoO. However, TPL increased to 20 million SME under USMCA as opposed to the 9 million SME under NAFTA. Therefore, it will be curious to see if there are increases in the use of USMCA for this reason. Do you think Canada, Mexico and the U.S. will see an increase in the use of USMCA trade within this region, or will it stay in a low usage range as it was under NAFTA?

  8. 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. After reading this I was intrigued because when learning about the yarn forward rule I found it to be outdated and I felt some of it needed to be changed. When learning about TPL and how the United States uses it ti ensure that countries will go through this yarn rule seems unfair. However from this article TPL level for U.S. cotton/man-made fiber apparel exports to Canada these apparel products are NOT required to use U.S.-made yarns and fabrics. The utilization rate of USMCA seems to be something that alot of countries will want to utilize in the future to make sure they don’t have to go through the United States as much as they do currently and will have to keep an eye out for this change.

  9. The updated version of USMCA that started on July 1 has many beneficial changes that should make all sides happy enough. When it comes to the economic impacts, it now has an overall balanced deal for both textile and apparel sectors starting with the rules of origin debate. Also, the changes to the TPLs is not going to have much effect on trade flows with the biggest change coming from the US cotton and man made fiber exports to Canada. This update is also important because it is going to help balance out the textile and apparel escort and their duty free provisions.

  10. I found this article interesting. I liked the new revisions of the USMCA trade, it incorporates modern times. A lot of other trading regulations like WTO are referred to as outdated. So seeing new regulations such as the environment protection really intrigues me to see how it plays out. As a sustainability minor I am very interested on the topic. Over the past decade trade agreements along with contracts between vendors and sellers have introduced sustainable clauses, and regulations that must be met. I feel as including this in the USMCA is a step in the right direction and I am eager to see more trade agreements adapt similar rules.
    Also I am curious to see how the new TPL restrictions play out. As retailers and brand highly support the exceptions made from TPL. Will this hurt business? Oppositely, this helps textile manufactures in this trade agreement, will this give the manufacturers an opportunity to employee more or will they rely on more automation and machinery instead of physical labor?

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