NAFTA and Textile and Apparel Rules of Origin
#1 How do rules of origin (RoO) and free trade agreement (FTA) regulations affect speed to market in apparel sourcing? Do countries who are part of an FTA find it to be easier to get to market in a shorter amount of time if they are working with other FTA members? Or could RoO slow down the production process because producers have to be more careful about compliance with the complicated RoO?
#2 Why or why not the “yarn forward” rules of origin remains an effective way to promote textile and apparel production in the Western-Hemisphere? What other options are available to improve the competitiveness of the Western-Hemisphere textile and apparel supply chain?
#3 What would happen to the Western-Hemisphere textile and apparel supply chain should NAFTA no longer exist?
#4 Should NAFTA be responsible for the loss of US apparel manufacturing jobs? Any hard evidence?
#5 If you were U.S. trade negotiators, what would you do with TPL in NAFTA given the competing views from the U.S. textile industry and U.S. fashion brands and retailers?
The Outlook of “Factory-Asia”
#6 From the perspective of the U.S. textile and apparel industry, is it a good idea for the United States to reach free trade agreement (FTA) with Asian countries? If so, what countries should be included in the new FTA? If not, why?
#7 How can U.S. companies get involved in the Asia-based textile and apparel supply chain?
#8 Why or why not is the “Flying geese model” unique to Asia? Can the model be replicated in America too?
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The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed on March 8, 2018, is a new free trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Once the CPTPP enters into force, it will be one of the largest free trade agreements in the world and will provide enhanced market access to key Asian markets. Below is the detailed tariff phaseout schedule for textile and apparel products by CPTPP members:
by Sheng Lu
(Photo credit: Steve Lamar, AAFA)
#1 The US textile industry and the fashion retailers/brands/importers have very different priorities regarding modernizing and updating NAFTA. Do you believe that a compromise acceptable to both sides can be found? If so, what do you believe that compromise can be?
#2 Overall, why or why not do you think the U.S. textile and apparel industry is a beneficiary of NAFTA over the past decade? From the perspective of the U.S. textile and apparel industry, should or should not reducing the U.S. trade deficit be a prioritized objective in the NAFTA renegotiation?
#3 What will happen to the U.S. textile and apparel industry if NAFTA is gone? How should U.S.-based textile and apparel companies respond to NAFTA’s termination?
#4 In your view, why or why not the “yarn-forward” rules of origin are outdated in today’s global-based textile and apparel supply chain?
#5 Why do you think the “yarn-forward” rules of origin vary from free trade agreement (FTA) to FTA? Do you think there’s a way to make a universal “yarn-forward” rule for all U.S. FTAs?
#6 Why are the textile-specific rules of origin under free trade agreements so complex? What potential issues do you think can arise because of the complexity of these rules?
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At an event hosted by the Center for Strategic and International Studies (CSIS) on September 18, U.S. Trade Representative Robert Lighthizer addressed the U.S. trade policy in the Trump Administration, particularly Trump’s beliefs on trade:
Philosophy 1: The reason why some Americans oppose free trade is NOT that they were “ill-informed.” Rather, it is because the U.S. trade policy for decades has failed to create a “level playing field.” The Trump Administration will proactively use all instruments to “make it expensive” for U.S. trading partners to engage in the non-economic behavior, convince U.S. trading partners to treat U.S. workers, farmers, and ranchers fairly and demand “reciprocity” both in the home and international markets.
Philosophy2: Trade deficits matter. Although trade policy is not the only cause for the trade deficit, it can be a major contributor, such as high tariffs that deny the market access for U.S. products, not imposing the border adjustment tax and currency manipulation.
Philosophy 3: China is the top challenge. According to Lighthizer, “the sheer scale of China’s coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.”
Philosophy 4: The Trump Administrations will exam all existing trade agreements to make sure they provide “roughly equivalent” measured by trade deficits. “Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.”
During the Q&A session, Lighthizer further shared his views on some cutting-edge trade issues:
- Regarding the NAFTA renegotiation, Lightlizher said that the negotiation is “moving at warp speed, but we don’t know whether we’re going to get to a conclusion, that’s the problem.” The consultation process with U.S. Congress is complicated and time-consuming, but it is unavoidable.
- The Trump Administration prefers bilateral trade deal over regional and multilateral ones. Given the size of the U.S. economy, Lighthizer believes that bilateral trade agreement will provide more negotiation leverages and ensure better enforcement.
- The Trump Administration will still stay very much engaged in Asia.
- The WTO Dispute-Settlement mechanism doesn’t work well—it has both imposed new obligations for the U.S. and reduced a lot of U.S. benefits.
- Regarding the outlook for the Trans-Atlantic Trade and Investment Partnership (T-TIP) negotiation, Lighthizer stressed the importance of the US-EU trade relations. He said that the series of elections in EU is a reason why the negotiation of the agreement hasn’t moved forward.
- Regarding TISA (Trade in services agreement), the U.S. objective is to open markets and eliminate market access barriers for U.S. companies.
The EU-Vietnam Free Trade Agreement was concluded in December 2015. The agreement is EU’s second free trade agreement with a Southeast Asian country (after Singapore) and is the most ambitious and comprehensive FTA that the EU has ever concluded with a middle-income developing country.
Statistics from the Eurostat show that Vietnam was EU’s sixth largest extra-region apparel supplier in 2015 (after China, Bangladesh, Turkey, India and Cambodia), accounting for 3.5% of imports in value (or €28.0 billion) and 2.8% in volume.
The EU-Vietnam free trade agreement is expected to substantially expand Vietnam’s textile and apparel exports to the EU market. On the one hand, EU’s import duties on textile and apparel from Vietnam will be eliminated through a seven-year phaseout period once the agreement comes into force (see below). On the other hand, a garment made in Vietnam which contains fabrics made in South Korea or other ASEAN countries with which the EU has a free trade agreement in force will still be qualified for duty-free treatment under the agreement.
Complied based on the EU-Vietnam Free Trade Agreement: Agreed text as of January 2016.
The legal review of the negotiated text is currently on-going and will be followed by translation into the EU’s official languages and Vietnamese. The EU Commission will then present a proposal to the Council of Ministers for approval of the agreement and ratification by the European Parliament. The agreement is expected to come into force in 2018.
Free trade agreements (FTAs) are arrangement among two or more countries under which they agree to eliminate tariffs and non-tariff (NTB) barriers on trade among themselves (Cooper, 2014). Theoretically, companies shall be interested in increasing imports from FTA regions because of the duty-free treatment (i.e., the trade creation effect). Particularly, not paying import tariff duty can be a great cost advantage for textile and apparel (T&A) companies given the fact that the average US import tariff rate was still as high as 8% for textiles and 11.6% for apparel in 2016 (WTO, 2017).
Despite the potential benefit of using FTAs, data from the Office of Textiles and Apparel show that 85.7% of US T&A imports came from non-FTA regions in 2016. Interesting enough, although more FTAs have taken effect in the United States, T&A imported under FTA as a percent of total T&A imports dropped from 15.1% in 2008 to 14.3% in 2016.
Among the FTAs in force, the North American Free Trade Agreement (NAFTA) and the Dominican-Republic-Central America Free Trade Agreement (CAFTA-DR) altogether accounted for 75.9% of the value of total U.S. T&A imports under FTAs in 2016.
Statistics further reveal that sometimes companies did not claim duty free benefits of FTAs even though they imported T&A from the FTA region. For example, in 2016 about 29.9% of U.S. T&A imports from South Korea, 24.3% from CAFTA-DR and 16.3% from NAFTA and 12.9% from Columbia did not enjoy the duty free treatment granted by the respective FTAs.
Some industry experts say the complex T&A rules of origin is a major factor why US T&A companies are not using FTAs enough. According to the Office of Textiles and Apparel (OTEXA), there are more than 20 different tariff lines dealing with various T&A rule of origin situations under respective FTAs.
Additionally, U.S. T&A importers seem to use the “short supply list” mechanism–an exception to the yarn forward rules of origin under FTAs, more actively. For example, in 2016 around 2.4% of US T&A imports under FTAs took advantage of the “short supply list” mechanism, increased from only 1.2% in 2008. Similarly, a record high of 6.2% of U.S. T&A imports under the CAFTA-DR used the short supply list in 2016.