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Study Stresses Importance of Origin Rules in CAFTA

A new economic study conducted by Werner International and released Wednesday examines the valuable economic and societal impact of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) and the adverse impact of proposals aimed at weakening the agreement’s rules of origin.

The report highlights the importance of maintaining the current rules of origin in the agreement, which has been credited with supporting more than 1 million jobs in the U.S. and the region and $12.5 billion in two-way trade and has fostered significant investments in manufacturing and apparel production. The study also finds various proposals aimed at softening the agreement’s carefully negotiated and longstanding textile rules of origin would severely harm the region and U.S., and result in substantial job, investment and export losses.

“The Werner report comes at a pivotal time, as the global supply chain crisis and concerns over forced labor in Xinjiang have sparked a shift in sourcing out of Asia and a renewed focus on nearshoring and onshoring jobs back to the Americas,” said Kim Glas, president and CEO of the National Council of Textile Organizations (NCTO), which represents the U.S. textile industry. “As outlined in this report, the U.S-CAFTA-DR agreement is a critically important and deeply economically impactful agreement that has fostered a co-production chain for textiles and apparel supporting over one million jobs in the region and the U.S.”

Glas said this is due to a key element of the agreement called the “yarn forward rule of origin,” an investment-based rule that connects lucrative duty-free access to the U.S. market to investment in yarn, fabric and cut-and-sew production in the region and the U.S.

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“We appreciate the broad bipartisan support, including from the administration, for maintaining the essential yarn forward rule of origin and ensuring those rules are not eroded through harmful changes,” Glas added. “This common support for preserving the provision is vital to the bipartisan efforts focused on ushering in a new era of American manufacturing prowess and economic prosperity. Conversely, the report found that weakening the rules by adding ‘flexibilities’ such as cumulation and short supply changes would exacerbate the migration crisis by devastating our industries and further tether us to our counterparts in Asia, including China.”

Some trade groups and companies, including the American Apparel & Footwear Association (AAFA), have called for reforming the agreement, claiming it curtails production in countries in the pact–Guatemala, El Salvador, Honduras, Costa Rica, Nicaragua and the Dominican Republic–because there isn’t sufficient fabric manufactured among them or the U.S.

“In our examination of the economic and societal impact of the U.S.-CAFTA-DR agreement, we found the current benefits of the agreement support a strong and vertically integrated co-production chain that has contributed significantly to investment and economic stability in the region and the United States,” Jan Urlings, vice chairman of Werner International, said.

“A major aspect of our report examined how various proposals aimed at weakening the rules of origin would impact the region and the U.S.,” Urlings added. “The data overwhelmingly demonstrates that the current co-production chain would be undermined by subsidized Asian/Chinese fabrics and yarns whether directly or indirectly through a third party, would devastate direct and indirect textile employment and investment in the U.S., the region and the entire Western Hemisphere. It would also exacerbate enforcement issues associated with Xinjiang cotton produced with forced labor.”

The study also found that if brands and retailers made a commitment to double exports from CAFTA to the U.S under the current rules, it would result in an additional 180,000 U.S. textile jobs, 2.17 million new jobs in the region and at least $6 billion in new investments in the U.S. and region.

House Textile Caucus co-chairs Rep. Bill Pascrell (D., N.J.) and Rep. Patrick McHenry (R., N.C.) each issued statements on the study’s findings and why the rules of origin should not be weakened.

“Imports from China and other countries that use forced labor and other predatory trade practices have crippled our manufacturing industries and destroyed millions of U.S. jobs,” Pascrell said. “The manufacturing of cotton products and other goods from Xinjiang have tainted our supply chains and helped perpetuate the Chinese Communist Party’s continued human rights atrocities. As global supply chains are recalibrating to nearshore and onshore textile and apparel production chains under the rules of origin in our hemispheric trade agreements, we must strongly reject efforts to erode those essential rules that support textile and apparel jobs in the U.S. We must not allow China backdoor access to these critical markets, which will further hurt our own industries and reward China and other countries with direct and indirect preferential tariff access.”

McHenry noted that the global supply chain crisis triggered by the coronavirus pandemic has exposed “severe over-reliance on China” by the U.S.

“This report showcases that onshoring and nearshoring of this critical production chain is critical for the U.S. textile industry and workers in the CAFTA-DR region,” he said. “The US-CAFTA-DR trade agreement has spurred hundreds of millions of dollars of investment because of the strong rules of origin that support this co-production chain. Any erosion of these rules would harm American producers and exacerbate the immigration crisis.”

The study concluded that if rules of origin were widened to allow for more foreign inputs, it would hurt U.S. and Western Hemisphere textile employment to the tune of a projected loss of more than 307,000 U.S. textile and cotton farming jobs and a loss of 250,000 jobs in Central America’s primary textile industry.

It would also severely undermine defense procurement under the Berry Amendment and the domestic industrial base supplying mission critical items to U.S. armed forces. More than two-thirds of the U.S. textile and apparel industry would be wiped out, the study charged, destabilizing the domestic textile military industrial base and its ability to meet surge production in times of military mobilization. This includes efforts to construct a viable domestic/nearshoring supply chain for personal protective equipment (PPE).

Conversely, proactive steps to help improve the competitive position of the CAFTA-DR region would lead to better coordination among lending agencies of the federal government, such as the U.S. Agency for International Development, Inter-American Development Bank and Export-Import Bank, to ensure targeted, strategic investment in this sector and competitive low or zero interest financing and loan guarantees.

New measures could provide incentives to the Western Hemisphere co-production chain for carbon emission reductions and sustainable products, and ensure trade stability in the region by maintaining maximum pressure on China, including enforcing the U.S. ban on cotton and cotton products made with forced labor in Xinjiang.

In addition, to improve the pact’s competitiveness, calls for granting duty-free access and other benefits through an expansion of the Generalized System of Preferences (GSP) program to apparel and textiles and negotiating free trade agreements with major Asian suppliers should be opposed, as should closing the de minimis loophole for imports from China that allow goods valued at $800 or less to enter duty free if imported by one person on one day.