New CRS Report: Textile and Apparel Sectors Disagree on Certain Provisions of the Proposed U.S.-Mexico-Canada (USMCA) Agreement

The study is available HERE

Key findings:

While U.S. textile manufacturers and the apparel and retail industries have expressed overall support for the newly reached US-Mexico-Canada Free Trade Agreement (USMCA or NAFTA2.0), textile producers and the apparel sector still hold divergent views on certain provisions:

Textile “Yarn-Forward” Rule of Origin

USMCA vs. NAFTA1.0: The USMCA will continue to adopt the “yarn-forward” rules of origin. The USMCA will also newly require sewing thread, coated fabric, narrow elastic strips, and pocketing fabric used in apparel and other finished products to be made in a USMCA country to qualify for duty-free access to the United States.

U.S. textile industry: U.S. textile manufacturers almost always support a strict “yarn-forward” rules of origin in U.S free trade agreements and they support eliminating exceptions to the “yarn forward” rule as well. The National Council of Textile Organization (NCTO) estimates that a yearly USMCA market for sewing thread and pocketing fabric of more than $300 million.

U.S. apparel and retail industries: The U.S. apparel industry opposes “yarn forward” and argues that apparel should be considered of North American origin under a more flexible regional “cut and sew” standard, which would provide maximum flexibility for sourcing, including the use of foreign-made yarns and fabrics.

Tariff Preference Levels (TPL) for Textiles and Apparel

USMCA vs. NAFTA1.0: With some adjustments, the USMCA would continue a program that allows duty-free access for limited quantities of wool, cotton, and man-made fiber apparel made with yarn or fabric produced or obtained from outside the NAFTA region, including yarns and fabrics from China and other Asian suppliers.

U.S. textile industry: The textile industry contends China is a major beneficiary of the current NAFTA TPL mechanism, and it strongly pushed for its complete elimination in the USMCA.

U.S. apparel and retail industries: U.S. imports of textiles and apparel covered by the tariff preference level mechanism supply 13% of total U.S. textile and apparel imports from Canada and Mexico. Apparel producers assert that these exceptions give regional producers flexibility to use materials not widely produced in North America.

Viewpoints on other Provisions in USMCA

U.S. textile industry: The U.S. textile industry also opposes the USMCA newly allows visible lining fabric for tailored clothing could be sourced from China or other foreign suppliers, and it would permit up to 10% of a garment’s content, by weight, to come from outside the USMCA region (up from 7% in NAFTA1.0). The U.S. textile industry also welcomes that the USMCA would add specific textile verification and customs procedures aimed at preventing fraud and transshipment. Additionally, the U.S. textile industry is also pleased that the USMCA would end the Kissell Amendment. The Kissell Amendment is an exception in NAFTA that allows manufacturers from Canada and Mexico to qualify as “American” sources when Department of Homeland Security (DHS) buys textiles, clothing, and footwear using appropriated funds (about $30 million markets for textiles, clothing, and shoes altogether).

U.S. apparel and retail industries: Apparel importers are of concern that the USMCA continue to incorporate the existing NAFTA short supply procedure, which is extremely difficult to get a new item approved and added to the list, limiting their flexibility to source apparel with inputs from outside North America.

Finally, the report argues that “Regardless of whether the USMCA takes effect, the global competitiveness of U.S. textile producers and U.S.-headquartered apparel firms may depend more on their ability to compete against Asian producers than on the USMCA trade rules.

Related reading:

Regional Supply Chain Remains an Import Feature of World Textile and Apparel Trade

The full article is available HERE

Key findings:

The deepening of the regional production and trade network(RPTN) is a critical factor behind the increasing concentration of world textile and apparel exports. RPTN refers to the phenomenon that geographically proximate countries form a regional supply chain.

In general, three primary textile and apparel regional supply chains are operating in the world today:

Asia: within this regional supply chain, more economically advanced Asian countries (such asJapan, South Korea, and China) supply textile raw material to the less economically developed countries in the region (such as Bangladesh, Cambodia, and Vietnam). Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets around the world.

Europe: within this regional supply chain, developed countries in Southern and Western Europe such as Italy, France, and Germany, serve as the primary textile suppliers. Regarding apparel manufacturing in EU, products for the mass markets are typically produced by developing countries in Southern and Eastern Europe such as Poland and Romania, whereas high-end luxury products are mostly produced by Southern and Western European countries such as Italy and France. Furthermore, a high portion of finished apparel is shipped to developed EU members such as UK, Germany, France, and Italy for consumption.

Western-Hemisphere(WH): within this regional supply chain, the United States serves as the leading textile supplier, whereas developing countries in North, Central andSouth America (such as Mexico and countries in the Caribbean region) assemble imported textiles from the United States or elsewhere into apparel. The majority of clothing produced in the area is eventually exported to the UnitedStates or Canada for consumption.

Associated with these regional production and trade networks, three particular trade flows are important to watch:

First, Asian countries are increasingly sourcing textile inputs from within the region. In2017, close to 80 percent of Asian countries’ textile imports came from other Asian countries, up from around 70 percent in the 2000s.

Second, the pattern of EU intra-region trade for textile and apparel stays strong and stable. Intra-region trade refers to trade flows between EU members. In 2017, 55 percent of EU countries’ textile imports and 47 percent of EU countries’ apparel imports came from within the EU region. Over the same period, 68 percent of EU countries’ textile exports and 75 percent of their apparel exports also went to other EU countries.

Third, trade flows under the Western-Hemisphere textile and apparel supply chain are becoming more unbalanced. On the one hand, textile and apparel exporters in the Western-Hemisphere still rely heavily on the region. In 2017, respectively as much as 80 percent of textiles and 89 percent of apparel exports from countries in the Western Hemisphere went to the same region.  However, on the other hand, the operation of the Western-Hemisphere supply chain is facing growing competition from Asian suppliers. For example,  in 2017, only 24.8 percent of North, South and Central American countries’ textile imports and 15.7 percent of their apparel imports came from within the region, a record low in the past ten years.

Look ahead, it will be interesting to see how will the reaching and implementation of several new free trade agreements, such as CPTPP, RCEP, EU-Vietnam FTA, and the potential US-EU and US-Japan FTAs,  affect the regional pattern of world textile and apparel trade.

Recommended citation: Lu,S. (2018). How regional supply chains are shaping world textile and apparel trade. Just-Style. Retrieved from https://www.just-style.com/analysis/how-regional-supply-chains-are-shaping-world-textile-and-apparel-trade_id135021.aspx

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.

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.”

Regional Textile and Apparel Supply Chains–Questions from FASH455

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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?

(Welcome to join our online discussion. Please mention the question number in your reply)

Outlook 2018: Apparel Industry Issues in the Year Ahead

Outlook 2019: Apparel Industry Issues in the Year Ahead is available 

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In January 2018, Just-Style consulted a panel of industry leaders and scholars in its Outlook 2018–Apparel Industry Issues in the Year Ahead management briefing. Below is my contribution to the report. All suggestions and comments are most welcome!

1. What do you see as the biggest challenges – and opportunities – facing the apparel industry in 2018, and why?

One of the biggest opportunities facing the apparel industry in 2018 could be the faster growth of the world economy. According to the International Monetary Fund (IMF), the global growth forecast for 2018 is expected to reach 3.7 percent, about 0.1 percent points higher than 2017 and 0.6 percent points higher than 2016. Notably, the upward economic growth will be broad-based, including the United States, the Euro area, Japan, China, emerging Europe and Russia. Hopefully, the improved growth of the world economy will translate into increased consumer demand for clothing in 2018.

Nevertheless, from the macroeconomic perspective, oversupply will remain a significant challenge facing the apparel industry in 2018. Data from the World Bank and the World Trade Organization (WTO) shows that, while the world population increased by 21.6 percent between 2000 and 2016, the value of clothing exports (inflation-adjusted) surged by 123.5 percent over the same period. Similarly, between 2000 and 2016, the total U.S. population increased by 14.5 percent and the GDP per capita increased by 22.2 percent, but the supply of apparel to the U.S. retail market surged by over 67.8 percent during the same time frame. The problem of oversupply is the root of many challenges faced by apparel companies today, from the intense market competition, pressure of controlling production and sourcing cost, struggling with excessive inventory and deep discounts to balancing sustainability and business growth.

2: What’s happening with sourcing? How is the sourcing landscape likely to shift in 2018, and what can apparel firms and their suppliers do to stay ahead?

The 2017 US Fashion Industry Benchmarking Study, which I conducted in collaboration with the US Fashion Industry Association (USFIA) earlier this year, provides some interesting insights into companies’ latest sourcing strategies and trends. Based on a survey of 34 executives at the leading U.S. fashion companies, we find that:

First, most surveyed companies continue to maintain a relatively diversified sourcing base, with 57.6 percent currently sourcing from 10+ different countries or regions, up from 51.8 percent last year. Larger companies, in general, continue to have a more diversified sourcing base than smaller companies. Further, around 54 percent of respondents expect their sourcing base will become more diversified in the next two years, up from 44 percent in 2016; over 60 percent of those expecting to diversify currently source from more than 10 different countries or regions already. Given the uncertainties in the market and the regulatory environment (such as the Trump Administration’s trade policy agenda), companies may use diversification to mitigate potential market risks and supply chain disruptions due to protectionism.

Second, although U.S. fashion companies continue to seek alternatives to “Made in China” actively, China’s position as top sourcing destination remains unshakable. Many respondents attribute China’s competitiveness to its enormous manufacturing capacity and overall supply chain efficiency. Meanwhile, it is interesting to note that the most common sourcing model is shifting from “China Plus Many” to “China Plus Vietnam Plus Many” (i.e. China typically accounts for 30-50 percent of total sourcing value or volume, 11-30 percent for Vietnam and less than 10 percent for other sourcing destinations). I think this sourcing model will likely to continue in 2018.

Third, social responsibility and sustainability continue to grow in importance in sourcing decisions. In the study, we find that nearly 90 percent of respondents give more weight to sustainability when choosing where to source now than in the past. Around 90 percent of respondents also say they map their supply chains, i.e., keeping records of name, location, and function of suppliers. Notably, more than half of respondents track not only Tier 1 suppliers, suppliers they contract with directly, but also Tier 2 suppliers, i.e., supplier’s suppliers. However, the result also suggests that a more diversified sourcing base makes it more difficult to monitor supply chains closely. Making the apparel supply chain more socially responsible, sustainable and transparent will continue to be a hot topic in 2018.

3: What should apparel firms and their suppliers be doing now if they want to remain competitive further into the future? What will separate the winners from the losers?

I assume many experts will suggest what apparel firms should change to stay competitive into the future. However, the question in my mind is what should companies keep doing regardless of the external business environment? First, I think companies should always strive to understand and impress consumers and control their supply chains. Despite the growing popularity of e-commerce and the adoption of transformative new technologies, the fundamental nature of apparel as a buyer-driven business will remain the same. Second, companies should always leverage their resources and stay “unique,” no matter it means offering differentiated products or value-added services, maintaining exclusive distribution channels or keeping the leadership position in a particular niche market. Third, apparel firms should always follow the principle of “comparative advantage” and smartly define the scope of their core business functions instead of trying to do everything. Additionally, winners will always be those companies that can take advantage of the mega-development trends of the industry and be willing to make long-term and visionary investments, both physical and intangible (such as human talents).

4: What keeps you awake at night? Is there anything else you think the apparel industry should be keeping a close eye on in the year ahead? Do you expect 2018 to be better than 2017, and why?

I think the apparel industry should keep a close eye on the following issues in 2018:

  • The destiny of the North American Free Trade Agreement (NAFTA): The potential policy change to NAFTA means so much to the U.S. textile and apparel industry as well as suppliers in other parts of the world. Notably, through a regional textile and apparel supply chain facilitated by the agreement over the past 23 years, the NAFTA region has grown into the single largest export market for U.S. textile and apparel products as well as a major apparel sourcing base for U.S. fashion brands and retailers. In 2016, as much as half of U.S. textile and apparel exports went to the NAFTA region, totaling US$11billion, and U.S. apparel imports from Mexico and Canada exceeded US$3.9billion. Understandably, if NAFTA no longer exists, sweeping changes in the trade rules, such as import duties, could significantly affect the sourcing and manufacturing behaviors of U.S. textile and apparel companies and consequentially alter the current textile and apparel trade patterns in the NAFTA region. For example, Mexico’s focus on basic apparel items suggests that U.S. importers could quickly source from elsewhere if duty savings under NAFTA are eliminated.
  • The possible reaching of the Regional Comprehensive Economic Partnership (RCEP): Even though RCEP is less well-known than the Trans-Pacific Partnership (TPP), we should not ignore the potential impact of the agreement on the future landscape of textile and apparel supply chain in the Asia-Pacific region. One recent study of mine shows that the RCEP will lead to a more integrated textile and apparel supply chain among its members but make it even harder for non-RCEP members to get involved in the regional T&A supply chain in the Asia-Pacific. This conclusion is backed by the latest data from the World Trade Organization (WTO): In 2016, around 91 percent of Asian countries’ textile imports came from other Asian countries, up from 86 percent in 2006. The more efficient regional supply chain as a result of RCEP will further help improve the price competitiveness of apparel made by “factory Asia” in the world marketplace. Particularly in the past few years, textile and apparel exports from Asia have already posted substantial pressures on the operation of the textile and apparel regional supply chain in the Western Hemisphere.
  • Automation of apparel manufacturing and its impact on the job market: Recall my observations at the MAGIC this August, several vendors showcased their latest technologies which have the potential to automate the cut and sew process entirely or substantially reduce the labor inputs in garment making. The impact of automation on the future of jobs is not a new topic, but the apparel industry presents a unique situation. Globally, over 120 million people remain directly employed in the textile and apparel industries today, a good proportion of whom are females living in poor rural areas. According to the World Trade Organization (WTO), for quite a few low-income and lower-middle income countries such as Bangladesh, Gambia, Pakistan, Madagascar, Sri Lanka, and Cambodia, as much as over 70 percent of their total merchandise exports were textile and apparel products in 2016. Should these labor-intensive garment sewing jobs in the developing countries were replaced by machines, the social and economic impacts will be consequential. I think it is the time to start thinking about the possible scenarios and the appropriate policy responses.