Three major U.S. apparel and textile industry associations, speaking at a U.S. International Trade Commission hearing this week as part of its investigation of the economic impact of the U.S.-Mexico-Canada Agreement (USMCA), generally expressed favor for the recently negotiated pact, but with several key caveats.
For the most part, the associations’ executives all agreed the North American Free Trade Agreement (NAFTA), which USMCA aims to replace, has been a positive for companies in the supply chain, from domestic yarn producers to garment importers. And as NAFTA is so ingrained in the fabric of that supply chain and many companies’ sourcing strategies, to substantially change it or get rid of it altogether would have been harmful.
“NAFTA serves as an important anchor for the U.S. textile, apparel and footwear industry. Much of the textile manufacturing in the United States is tied directly to NAFTA through U.S. exports to NAFTA partners,” Rick Helfenbein, president and CEO of the American Apparel & Footwear Association (AAFA) said during testimony. “Many of the fabrics and yarns we export to Mexico end up in garments that are imported back into the United States. Without the tariff preferences afforded by NAFTA, many of these garments would be made in other locations that do not use U.S. textiles.”
Helfenbein said AAFA also welcomed the opportunity to modernize the 25-year-old NAFTA pact, while noting that any effort to examine the USMCA needs to be looked at in relation to the underlying NAFTA. The three lenses AAFA used to guide its advice to the Trump administration as it pursued NAFTA modernization negotiations were, “do no harm, keep it trilateral and make it seamless.”
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In the do no harm realm, Helfenbein said, “The USMCA appears to have largely met this goal. USMCA retains market access schedules and makes no changes to the travel goods or footwear rules-of-origin provisions. While it does make some changes to the rules of origin for textiles and apparel, these appear to be largely cosmetic and we are hopeful the industry will be able to quickly adjust to the changes that have been made.”
TPLs and Rules of Origin
When it comes to rules of origin however, the changes struck a less positive chord, as according to Helfenbein, “the changes made to the rules of origin were to introduce more restrictive approaches.”
For one, he said, several tariff preference levels (TPLs) were lowered, and the new USMCA now includes a requirement that sewing thread, elastic strips and pocketing originate in the U.S., Mexico or Canada.
“While we understand U.S. negotiators were attempting to legislate more U.S. content into North American textile and apparel supply chains, the result unfortunately may be the opposite,” Helfenbein said. “Each of these new provisions, individually and collectively, will make it harder to use the agreement, which may lead to less—not more—U.S. content being used in North American supply chains. Such an outcome would come at the expense of the U.S. textile firms these provisions are designed, on paper, to help.”
Auggie Tantillo, president and CEO of the National Council of Textile Organizations (NCTO), said the group has not yet adopted a formal position on the USMCA, but is pleased that the textile origin rules originally adopted in NAFTA were basically reaffirmed in the updated agreement.
NCTO is supportive of revisions that will require the use of USMCA-origin sewing thread, pocketing, narrow elastics and coated fabrics, which, he said, “will offer a boost for U.S. producers formerly left out of the origin rules in the original NAFTA.” However, Tantillo said there is one key area of disappointment with USMCA, and that’s pertaining to the major exemption to the yarn-forward origin requirement through the TPLs.
“While NAFTA TPLs have annual limits that cap their impact to a degree, more than $641 million in textile and apparel TPL shipments entered the U.S. last year,” Tantillo explained. “While USMCA did reduce the size of some specific TPLs, the reductions will not cut into existing trade levels. This outcome is frustrating given the president’s stated goals of increasing benefits for U.S. manufacturers and eliminating provisions that have helped non-signatory countries, such as China, take advantage of tariff preferences intended for North American producers.”
Julia K. Hughes, president of the U.S. Fashion Industry Association (USFIA), said in her testimony, that trade with Mexico and Canada is critically important for sourcing and retail, and NAFTA “has been one of the most important trade agreements for the fashion industry.” She said USFIA reviewed the details of the USMCA and that the organization was “pleased to find much we can support in it.”
Hughes said USFIA’s take on maintaining the TPLs for apparel to and from all three countries is based on it being among the key elements of the agreement for the industry and, according to some of USFIA’s members, it’s the only way they can source textiles and apparel with these trading partners.
“We also applaud the elimination of the requirement that visible linings for tailored clothing come from the NAFTA region. This was a barrier to more trade in our sector under NAFTA,” she added. “Both of these provisions—the maintenance of the TPLs and the elimination of the visible linings requirement—will help companies continue and expand business with our trading partners Canada and Mexico.”
However, Hughes said USFIA is concerned the addition of more regulatory requirements to qualify for duty-free market access could hold back the ability of some companies to expand their sourcing with Mexico and Canada.
“In this time of uncertainty and cost concerns, the addition of regulatory requirements to qualify for duty-free market access will deter this expansion of business,” Hughes said. “The yarn-forward rule of origin already discourages trade in our sector, and some companies have told us that they don’t claim the duty savings on eligible products from the region because the compliance requirements are simply too onerous and expensive. In addition, the USMCA creates new technical requirements, for example, the addition of requirements for originating sewing thread, pocketing and narrow elastic bands, which will result in higher costs for inputs and higher costs for brands and retailers to administer the agreement.”
This could also lead to some companies to shift operations out of the Western Hemisphere or decide not to move new orders to Canada or Mexico because of these cost increases, Hughes said. “The new regulations will make it more expensive and complicated for American brands and retailers to use the agreement,” she added. “Let’s be honest, if the administration wants to encourage companies to move their sourcing out of China, it would make sense to make it easier to do business with America’s closest neighbors.”
Footwear and Travel Goods
On another point, Helfenbein said the USMCA represented a “lost opportunity” to bring more flexibility to the footwear and travel goods provisions outlined in NAFTA. The current rules, he said, “are so restrictive, in an ostensive effort to keep all benefits in North America, that very little travel goods and footwear trade exists under NAFTA.”
And they’re might have been another way to go about it.
“The best way to encourage more U.S. content is to weave in more flexibility into the rules,” Helfenbein said, noting that, for example, the USMCA dramatically increases the TPLs that will allow more U.S. apparel and made up goods to be exported to Canada. While such articles don’t have to be made with U.S. textiles, “the mere presence of their production in the U.S. will mean more customers for U.S. textile firms,” Helfenbein explained.