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Op-Ed: Time to Take Trade Policy Back to the Future

The cliché is timeless. A time traveler emerges from a smoking phone booth shaped contraption (or a DeLorean), looks with puzzlement and fear at his surroundings, and asks the first person he sees, “What Year Is It?”

A sourcing executive from the future emerging from such a time machine now would expect to hear “2014” in response to that question. But they shouldn’t be too surprised if the answer comes back “1992.”

After all, the current political talk is over the possible Clinton/Bush match up for the White House. The U.S. national security apparatus is focused on Iraq. And the United States is negotiating a free trade agreement (FTA) that includes Mexico and Canada.

Sadly, the parallel between 1992 and 2014 doesn’t end there. It’s looking increasingly likely that the 2014 trade agreement – the Trans-Pacific Partnership (TPP) – will include the yarn forward rules of origin developed for the 1992 trade agreement – the North American Free Trade Agreement (NAFTA).

Borrowing provisions from older agreements is not necessarily bad policy. It happens all the time because trade negotiators like to rely on what works – both economically and politically – when they fashion agreements. But borrowing bad provisions like the outdated yarn forward rule, which requires that all the yarns and fabrics for a garment to originate in a narrow group of countries, doesn’t make a whole lot of sense.

From an economic perspective, yarn forward comes up short because the global supply chains that make the apparel industry hum are no longer configured to meet the narrow yarn forward rules. What was a trade-promoting concept back in 1992 is now a trade-depressing one, especially when applied to a geographically diverse area like the TPP. From a political perspective, there is a real question whether yarn forward provisions attract tangible political support for the FTAs that contain such provisions. While a number of Members of Congress are quick to express support for these concepts, the vast majority of those supporters often end up voting against the FTAs that contain those provisions.

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Trade negotiators often like to talk about “future proofing” an agreement so that it will evolve and endure. The static yarn forward approach is especially ill-suited to help here. Look at NAFTA. When it entered into force, apparel imports form NAFTA countries accounted for 4 percent of the U.S. market. That share peaked at 18 percent in 2000. But as global quotas came off, other trade programs proliferated and apparel supply chains changed, NAFTA stayed the same. Its market share steadily dropped over the last decade so it is now back to – no surprise – 4 percent.

Fortunately, we do have precedent in trade policy that can give the apparel industry room to evolve. The best examples come from the U.S./Israel and U.S./Jordan FTAs, which contain flexible rules to accommodate an almost infinite variety of supply chains. One of the more interesting Israel FTA provisions was created to foster a partnership between Egypt and Israel. It lay dormant for years, and was not turned on until 2004. It has become so popular that it now accounts for about 85 percent of all U.S. apparel imports from Egypt (and has the added benefit of cementing commercial ties between those two one-time foes).

Likewise, an innovative component of the Haiti trade preference program approved in 2006 – to allow input from future FTAs – took on added meaning when U.S./Korea FTA entered into force about six years later. That provision came as Haiti was beginning to rebuild (in part with Korean investment) from a devastating 2010 earthquake. What worked so well about that provision was that it took effect automatically.

But these provisions are often the exception; not the rule.

Other precedents for future trade policy abound, but we need to understand what they are telling us. For example, two fabric matching programs that allow a mixture of originating and foreign fabrics have a mixed record of success. U.S. fabric exports under a 2:1 program with the Dominican Republic have declined by 65 percent. A somewhat different 1:1 approach with Nicaragua has seen U.S. fabric exports soar 61 percent during the same time. Unfortunately, the wildly successful Nicaragua program is programmed to expire while the failed Dominican version is scheduled to persist unchanged indefinitely.

Many time travel plots end when the hero learns that the past can’t be changed after all. As long as U.S. trade policies seem stuck in a time warp, or if we persist in not learning the lessons of history, we won’t be able to change our future either.