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Industry Group Attempts to Debunk CAFTA-DR ‘Myths’

A collective of U.S. companies and manufacturers is attempting to debunk “myths” about the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) and its efficacy in promoting apparel and textile sourcing in the Americas.

The Coalition for Economic Partnerships in the Americas (CEPA) released a paper last week addressing current trends in sourcing—namely, shifts away from Asia—and the opportunities these conditions present for Central American sourcing and investment. Research led by Dr. Sheng Lu, associate professor of Fashion and Apparel Studies at the University of Delaware, highlights what CEPA believes are misconceptions about the trade agreement, which includes Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua, along with the Dominican Republic. The paper also provides recommendations for lawmakers on how to create greater opportunities for U.S. brands and retailers.

CAFTA-DR has proven beneficial not just for U.S. textile and apparel makers, but for economic development in Central America, which now supports more than 500,000 jobs in the sector. Between 2015 and 2022, Lu reported that apparel products consistently accounted for almost one-quarter of CAFTA-DR members’ total exports globally—a value of $6 billion. As the U.S. continues to look to Central America as an avenue for diversifying sourcing, Lu estimated that an additional $1 billion in apparel exports to the U.S. could create between 75,000 and 84,000 more sewing jobs in CAFTA-DR countries.

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Trade partners are aligned in their aspirations to increase cross-border cooperation and investment, but lawmakers are divided on the best approach to achieve that goal. “While some proposals, such as improving infrastructure and customs facilitation, have broad support, there is a lack of consensus on how to leverage the existing CAFTA-DR rules of origin provisions to boost textile and apparel production and encourage regional investment,” Lu wrote.

The paper specifically calls upon the government to “improve CAFTA-DR members’ access to new and varied fibers, yarns, and fabrics and support the efforts to make CAFTA-DR’s apparel exports more competitive in the global marketplace.”

In its current form, the law is designed to bolster business in member countries and protect their industries from foreign dependency or influence, but certain CAFTA-DR provisions, like the yarn-forward rule of origin, are actually working against nearshore producers, the group’s research posits. “The yarn-forward rules alone are insufficient and have resulted in issues such as the low utilization of CAFTA-DR in U.S. apparel sourcing,” Lu wrote. Last year, the CAFTA-DR utilization rate fell to 66.6 percent, down from 74 percent in 2021 and a peak of 87 percent in 2011.

The rule stipulates that clothing qualified for preferential duty benefits must generally be made from yarns and fabrics made by CAFTA-DR members. Over the years, the yarn-forward rule has evolved into “a patchwork of individual product-specific rules” that include some allowances for non-originating yarns and fabrics that are difficult to develop in CAFTA-DR countries. Some U.S. yarn and fabric makers have been able to navigate the rule by providing yarns and fabrics produced domestically, but “the predominant sourcing model involves partnering with independent vendors that provide different inputs needed to create a finished garment”—and that precludes products from taking advantage of duty-saving benefits. This “discourages fashion companies from expanding sourcing from CAFTA-DR members and could lead to sourcing orders being potentially shifted to other regions in the long term,” Lu wrote.

The “short supply mechanism,” often described as a “loophole” in the law, is in fact “a legitimate flexibility negotiated in the original CAFTA-DR that has not reached its full potential,” he added. The short-supply rule permits the use of textile inputs that are not available to be sourced from CAFTA-DR countries in commercial quantities in a timely manner. It has the potential to “become a powerful transitional mechanism to jumpstart more U.S. apparel sourcing from CAFTA-DR and textile investment in the region,” Lu’s research showed.

However, the mechanism is drastically underutilized. As of this February, there are only 155 items on CAFTA-DR’s short supply list, with just seven added since 2014. Meanwhile, about 30 million types of clothing items are available for sale in the U.S. “In other words, although new fashion trends have emerged in the last decade, leading to a transformation of the fashion industry and an increased demand for novel yarns and fabrics, the short supply list has remained virtually unchanged since its inception 15 years ago,” Lu wrote. Having a product, like a yarn or fabric, added to the short supply list is an “exhaustive” process, which explains its underutilization, he added.

Meanwhile, expecting CAFTA-DR members to import textiles from the U.S. alone is unrealistic, Lu said. U.S. suppliers cannot accommodate all the demands of a global apparel export market, and the law should be more nuanced, the researcher believes. While it is generally assumed that textile exports to CAFTA-DR nations originate primarily in Asia, the reality is that Mexico owns much more of that market share.

Between 2015 and 2021, CAFTA-DR members increasingly imported textiles from within the CAFTA-DR region, jumping 12.5 percent to 21 percent. Meanwhile, China gained just 4.5 percentage points during the same period. Mexico’s cotton exports to the region surged by 308 percent throughout the same six years, resulting in the country’s market share of CAFTA-DR imports jumping from about 8 percent to nearly 29 percent. Mexico is not included in CAFTA-DR, and despite the fact that the country’s cotton fabric exports to the region contain a substantial amount of U.S.-grown cotton, items made with the input are excluded from CAFTA-DR duty benefits.

“By focusing on maximizing the opportunities that already exist in CAFTA-DR, not only can we grow U.S. apparel sourcing from the region, which, in turn grows the market for U.S. textiles, but it also fulfills the Vice President’s Call to Action to bring more economic opportunity to the region and to help stem the flow of migration,” CEPA spokesperson and American Apparel and Footwear Association (AAFA) vice president of trade and customs policy Beth Hughes said.

“Utilizing the flexibilities already embedded within CAFTA-DR will allow for a greater diversity of U.S. apparel imports from CAFTA-DR and will be a more effective way to support U.S. textile exports to the region, grow jobs and increase investment,” she added.

“We’re encouraged to see all facets of the industry meeting to discuss the real needs and challenges so we can take advantage of this opportunity in front of us,” Hughes said. “We have the same goal in the end.”