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:

US Tables Proposal Aimed at Limiting the Yarn-Forward Exceptions in NAFTA Renegotiation

NAFTA-Article-201708251513

According to Inside US Trade, in the third round the NAFTA renegotiation (September 23-27, 2017), the United States has put forward several possible changes to the existing rules related to textile and apparel in the agreement:

  1. USTR proposes to eliminate the tariff preference level (TPL) in NAFTA. The goal of eliminating TPL is to limit the exceptions to the yarn-forward rules of origin and “incentivize” more production in the NAFTA region as advocated by the U.S. textile industry.
  2. As a potential replacement for TPL, USTR also proses to add a short supply list mechanism to NAFTA, but details remain unclear (e.g., whether the list will be temporary or permanent; the application process).
  3. USTR further proposes a new chapter devoted to textile and apparel in NAFTA in line with more recent agreements negotiated by the U.S.. The current NAFTA does not include a textile chapter.

USTR’s proposal to remove TPL in NAFTA has met strong opposition from the U.S. apparel industry, fashion retailers, and brands as well as their partners in Mexico and Canada. According to these industry groups:

  • Eliminating TPLs would disrupt supply chains that have been in place for more than two decades.
  • Eliminating TPLs would not move production back to the U.S. but would instead further incentivize sourcing from outside the NAFTA region and put textile and apparel factories in the region out of business. For example, some apparel factories remain production in the NAFTA region largely because TPL allows them to use third-party textile inputs and the finished goods can still be treated as NAFTA originating.
  • Without the TPL, companies would opt to produce textile and apparel products in the least expensive way possible, likely outside the NAFTA region, and ship items into North America despite being hit with most-favored-nation (MFN) tariffs.
  • A short supply list would not ease the supply chain disruptions that would result from the removal of the TPLs because there is no guarantee products formerly subject to the TPL would make it onto a new NAFTA short supply list.

A potential compromise could involve a reduction in Canadian and Mexican TPLs to the U.S. and an increase in the U.S. TPLs to Mexico and Canada, which could boost the U.S. trade surplus in textiles and apparel with its NAFTA partners and throw a bone to the U.S. textile industry by ostensibly incentivizing domestic production.

Untitled

Fact-check about TPL

TPL was included in NAFTA as a compromise for adopting the yarn-forward rules of origin in the agreement. Before NAFTA, the US-Canada trade agreement adopted the less restrictive fabric-forward rules of origin.

The TPL mechanism has played a critical role in facilitating the textile and apparel (T&A) trade and production collaboration between the United States and Canada, in particular, the export of Canada’s wool suits to the United States and the U.S. cotton or man-made fiber apparel to Canada. Statistics from the Office of Textiles and Apparel (OTEXA) show that in 2016 more than 70% of the value of Canada’s apparel exports to the United States under NAFTA utilized the TPL provision, including almost all wool apparel products. Over the same period, the TPL fulfillment rate for U.S. cotton or man-made fiber apparel exports to Canada reached 100%, suggesting a high utilization of the TPL mechanism by U.S. apparel firms too (Global Affairs Canada, 2017). Several studies argue that without the TPL mechanism, the U.S.-Canada bilateral T&A trade volume could be in much smaller scale (USITC, 2016). Notably, garments assembled in the United States and Canada often contained non-NAFTA originating textile inputs, which failed them to meet the “yarn-forward” rules of origin typically required for the preferential duty treatment under NAFTA.

Related articles: