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.

Sourcing Strategies of U.S. Fashion Brands and Apparel Retailers: Discussion Questions from FASH455

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#1 Assume you are a sourcing manager for a major US fashion brand, how would you rank the followings regarding importance when determining a sourcing destination: 1) Speed to Market; 2) Sourcing Cost; 3) Risk of Compliance; 4) other factors (please specify). Why would you rank them as such?

#2 According to the 2018 US Fashion Industry Benchmarking Study, some apparel retailers report sourcing from more than 10 or even 20 different countries or regions. What are the benefits of adopting such a diversified sourcing base? Is it necessary?

#3 How has President Trump’s trade policy agendas affected U.S. fashion brands and apparel retailers’ sourcing strategy? What could be the long-term effect and why?

#4 U.S. fashion brands and retailers plan to source less from China and move towards other apparel suppliers like Vietnam or Bangladesh. Is this a short-term response or a reflection of companies’ adjustment of its long-term sourcing strategy? Why?

#5 Most U.S. apparel companies have already shifted their businesses to non-manufacturing activities such as design, branding, sourcing and retailing. Why or why not do you think it is still meaningful to give attention to apparel manufacturing in the U.S.?

#6 Based on the 2018 US Fashion Industry Benchmarking study, why or why not do you think U.S. fashion brands and apparel retailers have given enough attention to sustainability and social responsibility issues in their sourcing practices? What could be done further?

#7 Any other topics/questions do you think next year’s US Fashion Industry Benchmarking Study could include and why?

[For FASH455: 1) Please mention the question number in your comments; 2) Please address at least two questions in your comments]

USITC Releases New Study on the State of the U.S. Textile and Apparel Manufacturing Sector

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A recent study released by the U.S. International Trade Commission (USITC) provides a comprehensive review and valuable insights into the state of textile and apparel manufacturing in the United States. According to the study:

First,  data suggests a mixed picture of the recovery of textile manufacturing in the U.S.

  • Total capital expenditures in plants and equipment for the textile sector increased by 36 percent in the 2013–16 period. Interesting enough, much of the new investment is by foreign firms, including new investments by Chinese and Indian firms, as well as by firms from Mexico, Canada, Turkey, and Saudi Arabia.
  • U.S. textile shipments increased in 2017 to $39.6 billion, but remained 3 percent below the 2013 level. The result suggests that rather than simply increasing capacity, some of the new investment is likely replacing existing equipment, as firms upgrade and modernize their manufacturing processes and/or focus their operations on different products. [Note: shipments measure the dollar value of products sold by manufacturing establishments and are based on net selling values, f.o.b. (free on board) plant, after discounts and allowances are excluded]
  • At $10.6 billion, U.S. textile exports in 2017 were also below the five-year high of $12.1 billion in 2014.
  • Employment in the textiles sector declined by 4 percent from 131,000 in 2013 to an estimated 126,000 in 2017. Meanwhile, official data on labor productivity index for yarns and fabrics show steady declines during 2013–16.

Second, some evidence suggests that reshoring has taken place in recent years in the apparel sector, although on a modest scale.

  • For the 2013–16 period, capital expenditures were up 5 percent to $301 million, suggesting capital investment in the apparel sector may be increasing, as the industry begins to adopt more labor-saving technologies.
  • Domestic shipments of apparel showed modest increases in the past two years, reaching $12.0 billion in 2016 and $12.5 billion in 2017, after a record low of $11.5 billion in 2014 and 2015.
  • Employment in the apparel sector steadily declined during 2013–17, down 21 percent from 145,000 workers in 2013 to 120,000 workers in 2017. Official data on labor productivity also showed steady declines during 2013–16.
  • U.S. fashion companies continue to source apparel from the United States, although in a relatively small amount.

Third, the advantages of making textiles and apparel in the United States include:

  • Advantages of producing textiles in the United States include local and state incentives for investment, and the benefits afforded by free trade agreement (FTA) preferences (i.e., the “yarn-forward” rules of origin) that encourage the use of U.S.-produced inputs in downstream production in FTA partner countries, energy cost and the availability and reliability of high-quality cotton. Meanwhile, product innovation and automation are important aspects of the U.S. textile sector’s competitiveness strategy.
  • Advantages of producing apparel in the United States include improved lead times, better quality control, and more flexible production. Many domestically made products also use “Made in USA” branding to capitalize on the buy-American trend and the appeal of “Made in USA.” The adoption of various automation and digital technologies to accelerate the process of product development, improve the fit of the final product and reduce the needs for skilled sewing operators may also help improve the competitiveness.  

BIS Released Assessment Report of the U.S. Textile and Apparel Manufacturing Sector

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The Bureau of Industry and Security (BIS) under the U.S. Department of Commerce recently released its assessment report of the U.S. textile and apparel (T&A) manufacturing sector. The report was based on a survey of 571 U.S. T&A manufacturers in summer 2017. These respondents include 230 textile mills (NAICS 313), 128 textile product mills (NAICS 314), and 213 apparel manufacturers (NAICS 315).

Below are the key findings of the study:

The state of the U.S. textile and apparel (T&A) manufacturing sector

  • U.S. T&A manufacturing has shrunk significantly: the value of T&A shipments (seasonally adjusted) in 2016 ($68 billion) was almost 56% decrease in real terms since 1995 ($153 billion).
  • U.S. T&A manufacturing has undergone substantial structural change: textiles and textile products accounted for 82% of the total shipments of the U.S. T&A industry as of 2016, compared to 57% in 1995. Notably, only 18% of shipments came from apparel manufacturing in 2016, compared to 43% in 1995.
  • U.S. T&A manufacturing sector is hiring less: Between 1990 and 2016, total employment decreased by 79%, from 1.7 million to 352,000 workers; over the same period, over 86% of apparel manufacturing jobs disappeared.
  • U.S. T&A manufacturers are making more capital investments: The overall total Capital Expenditures (CAPEX) of the 571 respondents increased 90 percent from 2012 to 2016 (from $1.6 billion to $3.1 billion). Particularly, the CAPEX of textile mills grew by 80 percent over that period—mostly on “Machinery, Equipment, and Vehicles.”
  • North Carolina hosted the largest number of U.S. T&A facilities (22 percent of the respondents), followed by Georgia (10 percent), and South Carolina (9 percent).
  • China, Mexico, and Canada are the most popular destinations for foreign investments by U.S. T&A manufacturers.

Competition landscape and factors

  • Respondents listed a total of 1,309 U.S. competitors and 552 non-U.S. competitors. Chinese companies were cited as the number one source of foreign competition.
  • “Quality,” “Lead Time,” and “Innovation” were the top three competitive advantages of U.S. T&A manufacturers as they related to foreign competition. “Labor Costs” was regarded as the top disadvantage of U.S. T&A manufacturing.
  • 43 percent of respondents believed that reshoring was occurring in U.S. T&A manufacturing. Almost all of these respondents believed that “Shorter Lead Times” and the “Marketability of the ‘Made in USA’ Label” were the factors driving the trend.
  • The Affordable Care Act (ACA), Minimum Wage regulations (Federal, State, and Local), and U.S. Trade Policy were the top governmental regulations and provisions cited as negatively impacting the competitiveness of U.S. T&A manufacturers.
  • 61 percent of respondents reported that they had difficulties hiring and/or retaining employees for their T&A operations, specifically production line workers such as operators and machine technicians. The skill gaps in the labor market for those positions were by far the biggest ones identified for the industry.
  • 43 percent of respondents believed that reshoring was occurring in T&A manufacturing (i.e., the practice of transferring a business operation that was moved to a non-U.S. location back to the United States.) Textile manufacturers were more likely to be aware of reshoring.

Trade and U.S. textile and apparel manufacturing

  • On average, respondents say 48 percent of their textile and textile products are “100 percent made in the U.S.”, while for apparel it was around 54 percent.
  • U.S. T&A exports dropped 10 percent between 2012 and 2016, from $2.2 billion to $1.98 billion. On average, exports accounted for only 12 percent of respondents’ total sales.
  • 33 percent of respondents considered themselves to be dependent on foreign sources for supplies, which was highest among textile mills.
  • 37 percent of respondents reported that they considered themselves to be dependent on non-U.S. sourcing for their machinery or equipment.

Berry Amendment and U.S. textile and apparel manufacturing

  • For textile mills, an average of 12 percent of U.S. output was Berry Amendment-related; for textile product mills the average was 21 percent, and for apparel production, it averaged 26 percent. 67 percent of respondents believed that the Berry Amendment had a positive impact on their organization’s business.

U.S. and Mexico Reached a Deal to Replace NAFTA

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The Office of U.S. Trade Representative (USTR) announced that the United States and Mexico have “reached a preliminary agreement in principle” to update the 24-year old North American Free Trade Agreement (NAFTA). According to USTR, compared with the existing NAFTA, the new deal will

  • strengthen the labor and environmental protection provisions
  • provide stronger and more effective protection and enforcement of intellectual property right protection
  • reduce various non-tariff barriers facing U.S. agriculture exports
  • include new rules of origin and origin procedures for autos (including requiring 75 percent of auto content be made in the United States and Mexico AND 40-45 percent of auto content be made by workers earning at least $16 per hour.)
  • include new chapters dealing with digital trade and textiles
  • include a 16-year “sunset period” with a review every six years, at which time the parties can renew the deal for another 16 years.

Specifically for the textile and apparel sector, USTR said that “The new provisions on textiles incentivize greater United States and Mexican production in textiles and apparel trade, strengthen customs enforcement, and facilitate broader consultation and cooperation among the Parties on issues related to textiles and apparel trade.” More specifically, the new textile chapter in renegotiated NAFTA will:

1) Promote greater use of Made-in-the-USA fibers, yarns, and fabrics by limiting rules that allow for some use of non-NAFTA inputs in textile and apparel trade; and requiring that sewing thread, pocketing fabric, narrow elastic bands, and coated fabric, when incorporated in apparel and other finished products, be made in the region for those finished products to qualify for trade benefits. “

2) Include textile-specific verification and customs cooperation provisions that provide new tools for strengthening customs enforcement and preventing fraud and circumvention.

Based on USTR’s statement, it is likely, although not confirmed, that the US-Mexico deal will allow more limited tariff preference level (TPL) than the existing NAFTA.

USTR’s statement also said that the new deal would be subject to “finalization and implementation,” and its relationship with NAFTA remain unclear. The statement did not mention anything about Canada, another NAFTA member, either. Interesting enough, when announcing the US-Mexico deal in front of the press, President Trump said I will terminate the existing deal (NAFTA).  When that happens, I can’t quite tell you; it depends on what the timetable is with Congress.  But I’ll be terminating the existing deal and going into this deal.  We’ll start negotiating with Canada relatively soon.”

In a statement released on the same day, the American Apparel and Footwear Association (AAFA) said it welcomed the conclusion of bilateral talks with Mexico on NAFTA and emphasized the need for Canada to be a part of any final agreement: “The conclusion of talks between the U.S. and Mexico is a positive step in the NAFTA negotiations, however, it is essential that the updated agreement remain trilateral. At the same time, we encourage the administration to share the details of the agreement so the business community can inspect the impact on North American supply chains and share feedback with the administration and Congress…Any update to the agreement must continue to support these American jobs, promote trade linkages, and be seamlessly implemented to be considered a success. It is with this in mind that we are deeply concerned to hear any mention of withdrawal or termination of the existing agreement at this late stage.”

According to Inside U.S. Trade, the National Council of Textile Organizations (NCTO) which represents the U.S. textile industry says it is “encouraged by the information released by USTR with respect to strengthening the rules of origin for textiles and apparel in the announced agreement with Mexico. U.S. talks with Canada are still ongoing, however, and NCTO will wait to review the text of any final agreement before issuing a more detailed statement on the negotiation outcome.”

2018 U.S. Fashion Industry Benchmarking Study Released

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The report can be downloaded from HERE

Key findings of this year’s study:

Business challenges facing U.S. fashion companies: Protectionism is the top challenge for the U.S. fashion industry in 2018. More companies worry about increases in production or sourcing cost, too. For the second year in a row, “protectionist trade policy agenda in the United States” ranks the top challenge for U.S. fashion companies in 2018.

Industry outlook: Despite concerns about trade policy and cost, executives are more confident about the five-year outlook for the U.S. fashion industry in 2018 than they were a year ago, although confidence has not fully recovered to the level seen in 2015 and 2016. In addition, 100 percent of respondents say they plan to hire more employees in the next five years, compared with 80-85 percent in previous studies; market analysts, data scientists, sustainability/compliance related specialists or managers, and supply chain specialists are expected to be the most in-demand.

U.S. fashion companies’ sourcing strategy: When it comes to sourcing, diversification is key for many companies.

  • Most respondents continue to maintain a diverse sourcing base, with 60.7 percent currently sourcing from 10+ different countries or regions, up from 57.6 percent in 2017.
  • Larger companies, in general, continue to be more diversified than smaller companies.
  • Reflecting the U.S. fashion industry’s growing global reach, respondents report sourcing from as many as 51 countries or regions in 2018, the same as in 2017. Asia as a whole continues to take the lead as the dominant sourcing region. Meanwhile, with the growing importance of speed-to-market and flexibility, the Western Hemisphere is becoming an indispensable sourcing base.
  • Keeping a relatively diverse sourcing base will remain a key element of U.S. fashion companies’ sourcing strategy. Nearly 80 percent of respondents plan to source from the same number of countries, or more countries, in the next two years. However, respondents are equally divided on whether to increase or decrease the number of suppliers they will work with.
  • China plus Vietnam plus Many” has become an ever more popular sourcing model among respondents. And this model is evolving as companies further diversify their China production. In particular, China now typically accounts for only 11-30 percent of companies’ total sourcing value or volume, compared with 30-50 percent in the past.
  • Although China’s position as the top sourcing destination is unshakable, companies are actively seeking alternatives to “Made in China.” This does not seem to be due to concerns about cost, but rather the worries about the escalating U.S.-China trade tensions.
  • Benefiting from the diversification away from China, Vietnam and Bangladesh are expected to play a bigger role as apparel suppliers for the U.S. market in the near future.

Rules of origin and the utilization of trade agreements for sourcing: Rules of origin, and exceptions to the rules of origin, significantly impact whether companies use free trade agreements (FTAs) and trade preference programs for sourcing.

  • While FTAs and trade preference programs remain largely underutilized by U.S. fashion companies, more companies are using NAFTA (65 percent), CAFTA-DR (58 percent) and AGOA (50 percent) than in the past two years.
  • Still, it’s concerning that companies often do not claim the duty-free benefits when sourcing from countries with FTAs or preference programs. Companies say this is primarily due to the strict rules of origin.
  • Exceptions to the “yarn-forward” rules of origin, including tariff preference levels (TPLs), commercial availability/short supply lists, and cumulation, are priorities for respondents; 48 percent say they currently use these mechanisms for sourcing. These exceptions provide critical flexibilities that make companies more likely to use FTAs and source from FTA regions.

NAFTA: U.S. fashion companies call for a further reduction of trade barriers and urge trade negotiators to “do no harm” to NAFTA, the most-utilized free trade agreement by respondents.

  • Respondents predominantly support initiatives to eliminate trade barriers of all kinds, from high tariffs to overcomplicated documentation requirements, to restrictive rules of origin in NAFTA and future free trade agreements.
  • More than half of respondents explicitly say NAFTA is important to their business—and they have grave concerns about the uncertain future of the agreement.

Sourcing in sustainable and socially compliant ways: Overall, U.S. fashion companies are making more commitments to sustainability and social responsibility.

  • 85 percent of respondents plan to allocate more resources for sustainability and social compliance in the next two years, in areas including providing training to suppliers and internal employees, adding more employees, and working more closely with third-party certification programs on sustainability and social compliance. However, the availability of operational budget remains the primary hurdle for companies that want to do more.
  • 100 percent of respondents map their supply chains (i.e., keep records of name, location, and function of suppliers), up from 90 percent in 2017. Over 80 percent of respondents track not only Tier 1 suppliers (i.e., factory where the final product is assembled), but also Tier 2 suppliers (i.e., subcontractors or major component suppliers, such as fabrics). However, it’s less common for companies to map Tier 3 (i.e., yarn spinners, finding and trimming suppliers) and Tier 4 suppliers (i.e., raw materials suppliers, such as cattle/pig hides, rubber, cotton, wool, goose down, minerals/metals and chemicals).
  • 100 percent of respondents audit their suppliers for issues including building safety, fire safety, and treatment of workers. The vast majority of respondents (96 percent) currently use third-party certification programs to audit, with both announced and unannounced audits.

The US Fashion Industry Benchmarking Study from 2014 to 2017 can be downloaded from HERE

Call for Papers: Textile and Apparel Trade and Trade Policy in the 21st Century Global Economy

Book title: Textile and Apparel Trade and Trade Policy in the 21st Century Global Economy

Editor: Dr. Sheng Lu, Associate Professor, Fashion and Apparel Studies, University of Delaware (shenglu@udel.edu)

Publisher: Springer (https://www.springer.com/)

Subjects: Economics, Business & Management

About the book: This edited book intends to address the following three topics:

1. Global Textile and Apparel Trade: The value of textile and apparel (T&A) trade exceeded US$726 billion in 2016, making T&A one of the world’s most globalized and economically important sectors in the 21st century. Globally, over 120 million people remain directly employed in the T&A industry, a good proportion of whom are females living in poor rural areas. The stakes are high that these LDCs find a way to improve the competitiveness of their T&A industry in the increasingly intense global competition and steadily achieve social and economic upgrading. Quality scholarships can have a significant role to play in the process. Particularly, this book intends to explore how the T&A industry, through international trade, can play a uniquely critical role in creating jobs, promoting economic development, enhancing human development and reducing poverty.

2. Textile and Apparel Trade Policy: T&A might be the only industry other than agriculture that is regulated most heavily by trade policies, because of its global presence and the complex social, economic and political factors associated with the sector. From the debate on the U.S. trade deficits to the renegotiation of the North American Free Trade Agreement (NAFTA), nearly all critical and high-profile trade policy agendas today involve the T&A sector. Trade policy also affects business activities in the T&A industry substantially as well as the destiny of millions of workers directly employed by the sector. Specifically, this book intends to explore the T&A-specific sectoral impact of major mega-free trade agreements and other critical trade policy debates that are closely associated with the T&A sector.

3. Textile and Apparel Sourcing and Supply Chain Strategies: Sourcing and supply chain management are at the core of T&A companies’ business activities today. Research on sourcing and supply chain strategies contributes to the development of firm theory in the T&A industry and explains the pattern of T&A trade at the microeconomic level. Specifically, this book intends to explore fashion brands and apparel retailers’ shifting global sourcing and supply chain strategies in response to the changing business environment in the T&A sector.

Interested researchers may contact the editor with initial ideas or abstracts. The work must be completed by the time of full paper submission and should not be published elsewhere. The followings are potential book chapters to be considered (but not limited to):

Part I Patterns of Textile and Apparel Trade in the 21st Century Global Economy

  • Patterns of world textile and apparel trade in the post-quota era
  • Textile and apparel trade as an economic development tool
  • Social and economic impacts of textile and apparel trade
  • Measuring the economic competitiveness of textile and apparel exports

Part II Textile and Apparel Trade Policy

  • Textile and apparel specific sectoral impacts of free trade agreement and trade preference programs
  • Textile and apparel specific rules of origin and its economic impacts
  • Utilization of free trade agreement in the textile and apparel sector
  • Debate on the second-hand clothing trade ban

Part III Global Sourcing and Supply Chain Strategies of Textile and Apparel Firms

  • Shifting global sourcing strategies of fashion brands and apparel retailers
  • Promote textile and apparel sourcing and trade in socially compliant and sustainable ways
  • Impact of automation and digital technologies on the future landscape of apparel sourcing and trade

Due dates:

  • December 15, 2018: Abstract submission for editor’s review (up to 2 pages outlining background, approach, and outcomes of the proposed research)
  • May 15, 2019: Full paper submission for peer-review
  • August 15, 2019: Revision submission
  • September 15, 2019: Final paper submission to the editor for publication

Manuscript requirements:

  • 6,000–8,000 words including references
  • Up to 3 tables and 2 figures
  • Black and white
  • APA style

You can download the full Call for Papers (CFP) announcement from HERE