Fans of Sesame Street will fondly remember the song “One of These Things is Not Like The Other.” Typically, a Muppet or human actor would present four images showing one that was clearly different than the other three. It was a great exercise to help kids learn how to recognize and analyze similarities and differences.
U.S. trade policy makers can use the skills they learned on Sesame Street to address a key trade issue arising from the U.S./Central American-Dominican Republic Free Trade Agreements (CAFTA-DR).
On December 31, 2014–just 100 days from today–a key provision in the CAFTA-DR will expire. Known as the Nicaragua Tariff Preference Level (TPL), this valuable program allows a limited number of Nicaraguan-made garments to enter the United States duty free without regard to the source of the fabrics. An innovative feature encourages the use of U.S. fabrics through a one-for-one matching program for certain kinds of bottom weight fabrics (i.e., heavier fabrics, such as denim, typically used for trousers).
Because Nicaragua is able to export garments to the United States using a state-of-the-art rule of origin, it has a powerful tool that enables it to stay competitive vis-à-vis global competitors, while its CAFTA-DR partners have been largely forced to use the antiquated and restrictive yarn forward rule of origin. At the same time, the U.S. fabric matching program has incentivized U.S. fabric exports to Nicaragua.
Working in tandem, these two features have been wildly successful in generating trade between, and in supporting trade-based jobs in, the United States and Nicaragua. The program enables companies to employ cost-averaging–combining more expensive U.S. inputs with less expensive inputs from other countries–to expand production and create a market for U.S. exports. While not every garment exported from Nicaragua contains 100 percent U.S. content, which is the impossible goal of the yarn forward model, Nicaragua has emerged as an important source of CAFTA-DR garments and one of the fastest growing markets for U.S. fabric manufacturers in the world.
And the comparison to the other CAFTA-DR countries, which do not have this program, is stunning.
As the chart below shows, from 2005 to 2013, U.S. fabric exports to Nicaragua increased 61 percent while those to every other CAFTA-DR countries all dropped precipitously (in all cases by double digit declines). During that same period, U.S. imports of apparel from Nicaragua increased more than 131 percent, while U.S. apparel imports from every other CAFTA-DR country also fell.
One of these things is not like the other. Can you guess which one?
YE July 2014 = 12 Month Period Ending July 31, 2014 (most current data available)
Incredibly, despite this success, the Nicaragua TPL is scheduled for termination. Unless Congress acts, and the window for such action has now shrunk to a brief period between the November elections and Christmas, the program will expire.
If that happens, one of the best success stories of the CAFTA-DR will cease to exist. Expiration will undermine an economic model that has supported jobs, exports, and investment in both Nicaragua and the United States. In fact, a Duke University study earlier this year warned that 1,000 U.S. textile jobs (about one percent of U.S. textile mill jobs) will be lost if the Nicaragua program expires. The adverse effect will be far greater since apparel production in Nicaragua supports more textile jobs in Central American and the United States (since Nicaragua also consumes Central American fabrics made with U.S. yarns). Of course, with the Nicaragua TPL being a key anchor of total apparel production in Nicaragua– representing about 30 percent of total shipments–the loss of this program will displace thousands of Nicaraguan apparel workers. Sadly, the impact has already begun as apparel and retail buyers have started to cut their orders with Nicaraguan factories and, instead, place new orders elsewhere.
At the end of the song, the Sesame Street audience was invited to make their guess with the lyrics “Now it’s time to play our game.” Unfortunately, for the U.S. and Central American textile workers whose livelihoods depend upon Congress properly understanding the outcome, this is hardly a game.