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USMCA Isn’t a Far Cry From NAFTA At All

“Look! It’s old Mr. Simms.”

These words or something like them are what we can typically expect to hear Shaggy shout at the end of a Scooby Doo episode when the Mystery, Inc. gang pulls off the mask of a supernatural villain revealing a kindly caretaker or some other previously believed harmless character.

A similar thought may be going through the minds of most sourcing executives when they pull the mask off the newly named United-States-Mexico-Canada Agreement (USMCA) to find that it is not much more than the kindly North American Free Trade Agreement (NAFTA).

And this is a good thing.

The apparel industry went into the talks to update and modernize NAFTA with three goals in mind. First, the aim was for the Trump Administration to “do no harm” to NAFTA. Not knowing what to expect from a president who campaigned on his disdain for NAFTA–an agreement that supports more than 200,000 jobs in our industry and millions more throughout the economy–we were mostly worried about withdrawal or big changes that would hurt the supply chains that have been carefully nurtured the last 25 years.

Second, the goal was for any updated agreement to remain trilateral. Again, President Trump has long-stated his preference for bilateral deals and on multiple occasions threatened to eject either Mexico or Canada in a quest for a new agreement. From there, we wanted the new agreement to be implemented in a seamless manner. We know from experience that new trade agreements crafted to replace old ones can disrupt regional and global value chains, especially if complicated rules of origin are changed and there is little time to learn the new requirements.

The USMCA largely delivers on all three goals.

There is no doubt the new agreement will be trialteral. An 11th hour deal with Canada enabled it to be part of a previously-announced pact the U.S. had forged with Mexico, an ironic development given how much affection was directed towards Canada and how much vitriol was directed toward Mexico by the U.S. at the start of the negotiations. Even the new name–when it is not reminding us of the classic “Y.M.C.A.” by the Village People–makes clear the trilateral nature of the deal.

Most observers believe “do no harm” was mostly attained as well, although the full impact of all the provisions remains to be seen. Companies will continue to enjoy duty-free treatment for originating goods. For footwear and travel goods, there are no changes to the rules of origin at all. For textiles and apparel, mostly cosmetic tweaks were made to the yarn forward rules that have governed NAFTA trade for a quarter of a century.

Like all agreements featuring a yarn forward rule of origin, the devil is in the details.

In this case, the devil is already largely understood. In fact, many of these small changes align the USMCA with provisions that exist in other more recently concluded trade pacts in the hemisphere. For example, the apparel product-specific rules of origin now require originating sewing thread, elastic strips, and pocketing, picking up many elements of similar provisions that appear in the free trade agreements (FTAs) we have with Peru, Colombia, and Central America.

The new USMCA also contains flexibilities for sets, and an increased de minimis provision, which allows a small percentage of non-originating input for each garment.  The USMCA raises the NAFTA de minimis level from seven to ten percent. Both changes mimic similar provisions in other FTAs. Creatively, the USMCA also imports a requirement for originating elastomeric materials from those agreements, but applies it only to garments that take advantage of the increased de minimis origination exception. For companies that are used to and continue to rely on the existing NAFTA de minimis level of 7 percent, no elastomeric requirement will apply.

Trade Preference Levels (TPLs) remain largely intact. Some levels were lowered where trade has failed to materialize while others were increased–as in the case of several TPLs governing U.S. exports to Canada–where the case was made that low TPLs are hurting U.S. manufacturing.

Even the Special Regime, a little noticed provision in NAFTA that supports two-way trade between the U.S. and Mexico, is included in the USMCA with a helpful update eliminating a requirement of originating linings. A requirement for originating linings was also dropped from the main product specific rules, representing one of the places where the rules of origin for apparel become less restrictive.

The jury is still out on whether the process has, in fact, been “seamless,” mostly because we don’t know exactly how or when the new agreement will replace the old one. But the textile negotiators did include some important provisions that could protect the industry regardless of when that transition happens.

The new requirements for sewing thread, elastic strips and pocketing do not take effect until between 12 to 30 months after the agreement enters into force. This means the industry has at least a year, and in some cases longer, to learn about the new rules and flush non-compliant materials out of their supply chains. Barring any sudden disruption in the existing NAFTA before the new USMCA comes into force–which is hardly guaranteed in today’s trade policy climate–transitions to the new rules should be manageable.

While the USMCA is built largely on the NAFTA framework, it does contain a few new features as well.

State-of-the-art customs provisions should facilitate trade and support cross border e-commerce transactions in a way that the current NAFTA cannot. USMCA borrows heavily from the original Trans Pacific Partnership (TPP), which also included the U.S., Mexico, and Canada as partners, in a variety of areas like intellectual property, labor and the environment. Negotiators also reached compromises on thorny new issues, like auto rules of origin and a proposed “sunset” of the agreement to prompt periodic reviews. Each of these provisions will require further analysis, but most of the early reviews suggest they should enable North American trade patterns to continue.

Will USMCA lead to huge new trade flows and a rebalanced North American trade partnership? Perhaps, but likely not. Rather, the USMCA represents an opportunity to re-inject certainty and predictability into a trade relationship that has worked and has proven to be enduring. Following the past year of trade policy, such a return to normalcy is a welcome tonic.

And–if Congress can approve it quickly–it may also be worth a Scooby snack.

Stephen Lamar is executive vice president at the American Apparel & Footwear Association (AAFA). Steve is responsible for the design and execution of AAFA lobbying strategies on a series of issues covering trade, supply chains, and brand protection. In these roles, Steve also advises AAFA member companies on legislation and regulatory policies affecting the clothing and footwear industries.

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