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USMCA Could Bring Mexican Factories Under Scrutiny

In many ways, the U.S.-Mexico-Canada Agreement (USMCA) is like NAFTA 2.0, but its subtle differences could make the pact stand out as a model for others to come, according to Joshua Teitelbaum, senior counsel at Akin Gump.

The agreement, which goes into effect on July 1, is on a fast track after the three countries ratified it as of Jan. 1, but as Suzanne Kane, partner at international law firm Akin Gump, noted, many fine points of USMCA for fashion brands and retailers, haven’t been officially published by Customs & Border Patrol (CBP), so some documents and filing that importers need to prepare can’t be completed.

“They have less than a month to publish those, so keep a close eye out for them,” Kane, a former Customs official, said on a recent United States Fashion Industry Association (USFIA) webinar.

While the adjustments to the agreement haven’t been sweeping, Teitelbaum, a former deputy assistant U.S. Trade Representative (USTR) for textiles in the Obama administration, laid out the key changes, particularly concerning rules of origin, new provisions covering e-commerce and changes that will affect compliance and enforcement.

“Importantly, there is no change in market access, as duties remain at zero for textiles, apparel and footwear,” he said.

In rules of origin, there are some “modest changes” from NAFTA, he noted, mostly restrictions on third-party input. USMCA requires regional sourcing of sewing thread, with a 12-month transition; pocketing fabric, with a 30-month transition for denim jeans and an 18-month transition for other items, and narrow elastic bands and coated fabrics, with 18-month transitions.

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The pact does allow non-regional sourcing of visible or decorative linings, and rayon fibers, which is a “new flexibility compared to NAFTA,” Teitelbaum said.

In the area of tariff preference levels, USMCA lowers the caps for incoming apparel, but not to the extent that it would affect current trade “so the impact should be minimal,” according to Teitelbaum, and it increases the cap for outgoing apparel to Canada “so USTR could think they are supporting an increase in exports there.”

Another important change in the trilateral agreement is in “de minimis” shipments, usually for express shipments to consumers or samples shipped between the countries. USMCA raises the thresholds for duty-free treatment of goods shipped from Mexico to $117 (from $50), and for goods from Canada, the thresholds have been raised to $150 (from $20).

Where labor issues are concerned, The House Ways & Means Committee has added a staffer dedicated to the enforcement of USMCA.

“So whether [labor enforcement] will be a priority of the administration, it will be a priority of House Ways & Means Democrats…who will be very closely watching and monitoring the enforcement of the labor provisions of the USMCA,” Teitelbaum said. “We’re going to have a far more active enforcement regime in place here and USMCA instigated some pretty far-reaching changes to Mexican labor law that are truly transformational. Democrats view that as a crowning achievement of USMCA and were willing to give the President a win because of that.”

The protocol Democrats negotiated allows for outside stakeholders to essentially petition for an investigation into certain labor practices.

“So, we should expect that there will be more activity in Mexican factories across sectors, and textiles is often one of the high-risk areas that CBP and USTR will look to,” Teitelbaum said. “That’s been the case in other parts of the world, and I think that magnifying glass will be coming to Mexico, as well.”

What remains to be seen is whether USMCA becomes “a model” for other upcoming trade negotiations.

“U.S.-Kenya is up next, along with U.S.-U.K.,” Teltelbaum said. “They both present some very different questions for textile negotiation and we’ll see if USMA has any sort of precedential value in those negotiations.”