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U.S. Textile Industry’s Competitive Edge: Yarn-Forward Rule

Over the last eight months, according to the National Council of Textile Organizations, the U.S. textile industry has enjoyed a deluge of new foreign investment. Many experts are attributing the intense interest in the U.S. market to a singular competitive edge: its use of the “yarn-forward rule.”

The success the U.S. has enjoyed over that period attracting new investment is startling. No fewer than eight foreign companies have pledged $700 million in investment in textile facilities and equipment. Experts estimate the capital inflows could generate as many as 1,900 jobs in the south. And companies in India, Mexico and China have announced intentions to invest in U.S. textiles soon, potentially creating another 2,000 jobs.

The reason for the flood of new investment into the U.S., according to many analysts, is the advantage accrued from the yarn-forward rule. The U.S.-proposed rule stipulates that any garment must be made of either fabric or yarn supplied by the U.S. or any signatory Trans-Pacific Partnership (TPP) nations to be eligible for duty-free benefits when shipped back to the U.S. The rule has bouyed exports of U.S. yarns and fabrics that ultimately get processed into finished apparel products in countries with which the U.S. maintains free trade agreements. As a result of the rule, the U.S. has become the third largest exporter of textile products in the world, topping $17.9 billion in 2013. And those textile exports increased dramatically in the last decade, from $12.7 billion in 2003, a 40.6% jump.

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For obvious reasons, many foreign importers have strenuously objected to the rule. Conversely, many American textile producers declaim that it is absolutely necessary for them to remain competitive in the future. Especially given the prominence of the yarn-forward rule in TPP negotiations, the rule has become a bone of often fervid contention.

Much of the controversy surrounding the yarn-forward rule in TPP discussions has centered on the undue advantages it would bring to Vietnam as well. A letter calling for robust protections of the U.S. textile industry from the potential results of the TPP was sent to U.S. Trade Representative Michael Froman, signed by nearly 170 members of the House of Representatives. This letter specifically cited Vietnam’s potentially unfair advantages. “After sixteen rounds of negotiations, Viet Nam is seeking to replace longstanding textile rules that have been included in previous free trade agreements with a new rule that would allow Viet Nam to source textiles from China and export garments and finished goods to the United States duty free,” the letter warned.

Vietnam projects the new rule would transform its market share in the U.S., which would bloom from 7 percent to 30 percent. The letter from U.S. lawmakers complains that it could lead to the elimination of nearly 500,000 American jobs in the textile industry, potentially erasing another 1.5 million worldwide.

Another letter generated by House legislators, however, defended the yarn-forward rule as essential: “The rule has a proven track record of job creation in the US and our free trade areas, and it is responsible for hundreds of thousands of US manufacturing workers and millions of direct and indirect jobs in countries south of our border and in Africa.”

The letter also cited the yarn-forward rule as a necessary instrument for the protection of fragile emerging economies. “Maintaining provisions such as yarn-forward and strong duty preferences in the TPP will not only help the domestic textile industry keep well-paying and productive jobs in the U.S. but it will also aid the development and emergence of new export markets amongst our important trading partners. While the toll on U.S. manufacturing workers would be high, the social and economic impact on small developing economies south of our border that depend on the textile and apparel supply chain would be devastating,” the letter claimed.

Auggie Tantillo, president of the National Council of Textile Organizations, also vehemently defended the yarn-forward rule:

“I think it’s supercritical that we do maintain the yarn-forward rule for a couple of reasons, not the least of which is that we already have a yarn-forward arrangement with six TPP countries [Mexico, Canada, Australia, Peru, Chile and Singapore, through free-trade pacts]. Some of them, like Mexico, are our largest export markets. If there is a fundamental change in the rule, that could significantly disrupt the current export performance of the U.S. industry to those six countries, Mexico being at the top of the list.”

Some contend hat the U.S. insistence on a yarn-forward rule, rather than aimed at unlocking closed markets, is  motivated by self-interested protectionism. The rule generates preferential treatment for yarn produced in participating nations but, of the lot of them, only the U.S. has a significant textile industry (as distinguished from an apparel manufacturing industry). The result is the virtual elimination of any competition for the U.S., especially damaging since it already produces textiles considerably more expensive than China, India, Korea or any other TPP nation.

Retailers have sometimes weighed in on the significance of the yarn-forward rule, especially as it is now being discussed within the framework of TPP talks. Last October, a consortia of thirty-four retailers sent Froman a letter strongly urging him to advocate for a much more flexible interpretation of the rule. The letter signatories include Walmart Stores Inc., Target Corp., Sears Holdings Corp., J.C. Penney Co., LF USA, Ann Inc., Levi Strauss & Co., Macy’s Inc., Gap Inc., Nike Inc., American Eagle Outfitters and Kohl’s Corp. A key paragraph stated:

“Our experience with yarn forward is that, in most cases, it no longer serves as an effective model to support all the various supply chains on which our companies rely. A flexible rule of origin for apparel products, and immediate and reciprocal duty-free access, are critical for a commercially meaningful agreement, which will help support and grow the three million U.S. jobs created by American retailers, apparel brands, manufacturers and importers, as well as domestic textile and apparel producers.”

Other companies are more enthusiastic about the yarn-forward rule. Gildan Activewear, Inc., a retailer based in Montreal, Canada, plans to invest $250 million over the next two years in the U.S. to build new yarn spinning facilities. Peter Ilipoulos, senior vice president of public and corporate affairs at Gildan, attributed the decision, at least in part, to the yarn-forward rule. “The Yarn-Forward rule was a significant factor in Gildan’s decision, announced in September of 2013, to make an additional investment of approximately $250 million in U.S. yarn spinning operations. We have designed our supply chain in order to most effectively leverage preferential treatment under U.S. trade agreements. Consequently, we want to ensure that our products are always eligible for such preferential treatment.”

Tantillo insists that the recent commitments of investment dollars to U.S. textile projects is evidence enough of the benefits of the yarn-forward rule. “This massive investment surge and the creation of approximately 1,900 much needed manufacturing jobs is a concrete example of how Yarn-Forward has made a major contribution to the U.S. economy and workforce. You need look no further for how sound provisions in trade agreements can make a real difference in our economy.”