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USTR Hearing Reveals Core Sourcing Concerns Surrounding NAFTA’s Fate

Public hearings on what’s to become of the North American Free Trade Agreement once negotiations kick off began Tuesday, and those speaking on behalf of retail held little back.

At the core of their messages was: don’t make it any harder to source in North America.

“A well-functioning Western Hemisphere supply chain is vital to maintain American jobs at home, as well as employment in the region,” David M. Spooner, Washington Trade Counsel for the United States Fashion Industry Association (USFIA) and former chief textile and apparel negotiator for USTR, said during his testimony at the USTR hearing on NAFTA held Tuesday at the U.S. International Trade Commission. “Any efforts to make it more difficult to source apparel from both Mexico and Canada will encourage sourcing from other parts of the world, and will reduce employment in the North American apparel supply chain.”

(Read more about what might happen with NAFTA: NAFTA Could be Repurposed to Stop Cheap Asian Imports)

Ahead of the hearings, the National Retail Federation sent a letter to United States Trade Representative Robert Lighthizer earlier this month, making the point of agreeing that NAFTA could benefit from some modernization but negotiating objectives should follow four key guidelines: do no harm to the current agreement, keep the agreement trilateral, get the negotiations done quickly and make sure any transitions to new elements can be done seamlessly.

For one, as the letter addressed, no new duties or taxes should be imposed on imports from Canada or Mexico at all, and any changes to rules of origin can’t make things any more burdensome than they presently are.

“While NAFTA needs updating, the agreement has become an integral part of many supply chains, and uncertainty about the future of the agreement hurts American companies. Especially considering the major challenges in the retail sector today, this is not the time to disrupt trade for these companies,” Spooner continued. “This means that, while the NAFTA rules of origin have been onerous, we ask that you do not make any major revisions to the current regulations. The Rules of Origin, and the limited exceptions to those rules, especially the Tariff Preference Levels (TPLs), are linked and are important parts of USFIA member companies’ supply chains.”

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In his own testimony on the rules of origin, National Council of Textile Organizations (NCTO) president and CEO Auggie Tantillo, said tariff preference levels have been among the most damaging loopholes in the agreement’s rules of origin.

“Tariff preference levels (TPLs) allow for products to be shipped duty free despite their components, representing the bulk of the value, being sourced from outside countries,” Tantillo explained. “For example, a cotton top, made from Chinese yarn and fabric, can be cut and sewn in Mexico and shipped duty free to the United States. Consequently, TPLs undermine benefits for NAFTA textile manufacturers, transferring them to non-signatories, such as China, who often use predatory trading practices and have made no market-opening concessions themselves.”

Continuing, Tantillo said Mexico and Canada ship nearly 236 million square meter equivalents of apparel, made-ups and fabric, and 12.8 million kilograms of yarn with third-party inputs under the TPLs. “It is our strong recommendation that the NAFTA TPL regime be eliminated,” he said.

Tantillo also took the opportunity to remind the USTR of the high level of supply chain integration and “robust trade flows” that NAFTA has afforded.

“The U.S. textile sector has a demonstrated capability of developing export markets within the NAFTA region,” Tantillo said. “In fact, Mexico and Canada are our two largest export markets, where U.S. textile and apparel exports topped $11 billion in 2016. Furthermore, we maintain a positive trade balance in the sector with our NAFTA partners, achieving a $3.5 billion surplus last year.”

What NAFTA needs in any negotiation, according to Spooner, is updated compliance and enforcement mechanisms, improved cooperation between the partner countries’ customs services and room for larger negotiations, including cumulation, with other Western Hemisphere FTAs.

“Currently, there is no ability for companies to develop hemisphere-wide global value chains because the rules of each free trade agreement are ‘siloed.’ Moving forward, we recommend the Administration open talks among Western Hemisphere FTA partners, as well as our NAFTA partners, to discuss how we can improve the supply chain to link production, which would expand U.S. exports of yarn and fabrics that could be made into fabric in one country, made into apparel in another country, and sold throughout the region,” Spooner said.

The USTR will be holding public hearings through Thursday this week, and testimonies are expected to be factored into decision making on negotiations.