8/12/2017 NAFTA renegotiation Key issues for textiles and apparel Update | Apparel Industry Analysis | just-style

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NAFTA renegotiation Key issues for textiles and apparel Update

By Leonie Barrie | 7 August 2017 Font size Email Print

As the United States, Canada and Mexico prepare to begin formal talks to renegotiate the
23-year-old North American Free Trade Agreement (NAFTA) which could be as early as
mid-August we take an in-depth look at key issues for textile and apparel supply chains.
In the latest developments, the US has set out its roadmap for the discussions, and
confirmed the first round of talks will be held from 16-20 August in Washington, DC.

As the three sides square up to renegotiate NAFTA, the Office of the US Trade Representative
(USTR) on Monday (17 July) released a detailed and comprehensive summary of its renegotiating
objectives.

Given Donald Trump's fiery rhetoric against the pact on the campaign trail when he repeatedly
called it a "disaster,"the US stance is not surprisingly aimed at reducing the trade deficit with
Canada and Mexico, and bringing more manufacturing jobs back to the United States.

"Through the renegotiation of NAFTA, the Trump Administration will seek a much better US apparel imports underNAFTA have declined over time, while US
agreement that reduces the US trade deficit and is fair for all Americans by improving market exports of yarns and fabrics have risen sharply
access in Canada and Mexico for US manufacturing, agriculture and services," the Office of the
United States Trade Representative (USTR) says.

The negotiating objectives include updating existing chapters to reflect modern standards, as well as adding new chaptersto cover issues that have emerged since NAFTA
was first implemented at the beginning of 1994. Other issues on the agenda includedigital trade, IPR protection, regulatory practices, state-owned enterprises, services,
customs procedures, Sanitary and Phytosanitary Measures (SPS), small andmedium-sizedenterprises,and strongerlabourand environmental standards.

Key objectives for textiles and apparel

The US also sets out renegotiating objectives that either address textiles and apparel directly or are highly relevant to the sector.

Here it appears to reassure the business community that it will work to preserve existing supply chains and retain existing duty-free treatment, and intends to: "Maintain
existing duty-free access to NAFTA country markets for US textile and apparel products and seek to improve competitive opportunities for exports of US textile and
apparel products while taking into account US import sensitivities."

The renegotiation also will also update the textile and apparel rules of origin to encourage more textile and apparel manufacturing in the NAFTA region.

US objectives relating to textiles and apparel are summarised below:

Trade in Goods:

Improve the US trade balance and reduce the trade deficit with the NAFTA countries.

Maintain existing duty-free access to NAFTA country markets for UStextile and apparelproducts and seek to improve competitive opportunities for exports of UStextile
and apparelproducts while taking into account US import sensitivities.

Rules of Origin:

Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.

Ensure the rules of origin incentivise the sourcing of goods and materials from the United States and North America.

Establish origin procedures that streamline the certification and verification of rules of origin and that promote strong enforcement, including with respect totextiles.

Customs and Trade Facilitation:

Provide for automation of import, export, and transit processes, including through supply chain integration; reduced import, export, and transit forms, documents, and
formalities; enhanced harmonisation of customs data requirements; and advance rulings regarding the treatment that will be provided to a good at the time of
importation.

Deep dive on NAFTAapparel trade issues

Reducing the trade deficitandbringing more manufacturing jobs back to the United States areat the core of the country's NAFTA's renegotiating objectives. These two
goals are also highly consistent with Trump's rhetoric on trade policy.

A dilemma facing the textile and apparel sectoral negotiation is that the US currently runs a robusttrade surplus with Canada and Mexico for textiles. In 2016, the value
of the US trade surplus (exports minus imports) totalled $680m for yarns (up 56.7% from 1994); $4.34bn for fabrics (up 202.9% from 1994); and $1.46bn for made-up
textiles (up 223.5% from 1994).

Meanwhile, although the US has a trade deficit with NAFTA partners for apparel ($1.13bn in 2016),US apparel imports from Canada and Mexico often include textile
inputs "Made in the USA" through the western hemisphere supply chain.So cutting the trade deficit on apparel could inadvertently and ironically have a negative
impact on US textile exports to the NAFTA region.
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Based on the released US objectives, it seems unlikely that the NAFTA renegotiation will liberalise the yarn-forward rules of origin for textile and apparel.On the
contrary, USTR could review the current exceptions to the yarn-forward rules, including the tariff preference levels (TPL) and some special regimes such as the 9802
program related to fabric sourcing to strengthen the manufacturing base and create manufacturing jobs in the US.

Recognising the competing arguments between the US textile industry and the apparel industry (fashion brands and retailers) regarding the necessity and impact of
these exceptions, USTR also needs more input on how companies use exceptions like the TPL in sourcing, and why.

Other than the rules of origin,trade facilitation and customs enforcementwill be another major issue related to the textile and apparel sector in the NAFTA
renegotiation. Elements from the newly enforced Trade Facilitation and Trade Enforcement Act of 2015 could be added to the updated NAFTA.

A positive aspect of the NAFTA textile and apparel sectoral negotiation is that all parties alongside the supply chain, including US cotton growers, textile mills, apparel
retailers and brandsrecognise the value of agreement and no-one is calling for pulling out of the pact.

It is also a consensus view of the US textile and apparel industry that NAFTA renegotiation should "do no harm" that is, strengthening rather than weakening the
current supply chain partnership between NAFTA members.

Additionally, stakeholders in the US textile and apparel industry unanimously support keeping the renegotiation trilateral, but agree to use bilateral provisions to
address some particular concerns.

The NAFTA renegotiation may officially start on 18 August. However, the ambitious renegotiation agenda and the many complex and thorny issues involved mean it will
be extremely challenging to agree a deal before US and Mexican elections kick in next year.

There is also the risk that Trump may pull the United States out of NAFTAshould he lose patience for the renegotiation. Notably, Trump's dislike of NAFTA is real.

BACKGROUND

What is NAFTA?

The North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico came into effect on1 January 1994 with the aim of eliminating
barriers to trade and investment among the three countries.

Since then it has helped encourage aregionaltextile and apparel supply chain among its members.The US typically exports yarns and fabrics to Mexico, where they are
cutand sewn into apparel (taking advantage of the country's lower labour costs); with the finished garments then shipped back to the US and Canada for consumption.

Qualifying textiles and apparel, travel goods and footwear originating from the NAFTA region have duty-free access to the US and Canadian markets. Its"yarn-forward"
rules of origin basically require thateach step of apparel production from the spinning of the yarn onwards must take place in the region must be carried out in the
United States, Canada and/or Mexico.

Less demanding rules of origin also govern certain knitted underwear, bras and shirts made from fabric in short supply in North America, and textile and apparel articles
made from fabric not commonly produced in the NAFTA region. These exceptions give producers flexibility to import materials not widely produced in North America.

The value of US apparel imports from Canada in 2016 totalled US$561m, of which US$543m was under the FTA (97%utilisationrate). Meanwhile, the value of US apparel
imports from Mexico in 2016 totalled US$3,570m, of which US$3,108m was under the FTA (87% FTAutilisationrate). Additionally, Canada imported US$733m and
US$339m in apparel from the US and Mexico respectively.

A recent analysis on just-style confirmsUS apparel imports underNAFTA have declined over time.

US imports of textiles & apparel from NAFTA countries

15k

12.5k

10k
US$m

7.5k

5k

2.5k

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Yarn Fabric Made-ups Apparel

just-style.com

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Yarn 1074 1123 1074 940 820 718 847 862 845 820 730 603 540

Fabric 1525 1594 1541 1554 1285 1061 1217 1342 1336 1330 1357 1327 1306

Made-ups 1346 1329 1307 1332 1126 1055 1137 1236 1327 1331 1419 1435 1542

Apparel 8424 7578 6681 5649 4886 4011 4219 4524 4413 4399 4502 4346 4141

Source: OTEXA, US Dept. of Commerce

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US cotton,textile and apparel ambitions

Groups representing the US textile industry, as well as fashion retailers, brands and importers, both agree on the need to modernise and update NAFTAbut their
priorities are very different.The debate in the US retail and mill industries has focused on rules of origin for qualifying products under NAFTA. To qualify for NAFTA tariff
benefits, companies are required to use fabrics made in the region of yarn from the region the so-called "yarn-forward" rule. Brands and retailers feel the rule is too
restrictive and limits sourcing options, while textile mills prefer rules that encourage the use of their product, particularly in yarn.

US retailers, brands and importers have repeatedly urged a cautious approach to renegotiating NAFTA and a "seamless transition" to any new deal so that it does not
harm existing supply chains. Their priorities include making customs enforcement smarter and more streamlined, facilitating regional value chains, providing for digital
trade, and recognising advancements in trusted trader programmes.

For apparel maker VF Corp, owner of the Timberland, The North Faceand Wrangler brands: "NAFTA supports tens of thousands of VF jobs in the United States as well as
tens of thousands of jobs at our US suppliers who grow the cotton and make the materials that go into our NAFTA-made products. NAFTA has been good for our industry."

Testifying at a NAFTA hearing organised by the USTR, the company explained that a pair ofWranglerbrand jeans assembled in one of VF's Mexican factories uses cotton
from Texas, fabrics and zippers from Georgia, and threads from North Carolina.

The US textile industry, meanwhile, wants NAFTA to incentivise more textile and apparel jobs and production in the US, Canadaand Mexico; review the rules of origin to
increaseNAFTA value add and remove loopholes thatallow yarn and fabric from China and other non-NAFTA countries to get preferential tariff treatment; and devote
more customs enforcement resources to stop illegal third-country trans-shipments.

And US cotton farmers for whom Mexico is one of their top export destinations there is a desire to maintain positive and stable trading relationships. They argue
stronger textile rules of origin can help expand US jobs and exports.

It is also clear thatUS imports from NAFTA have been clearly overwhelmed by China.

US apparel imports from NAFTA compared to US apparel imports from China

35k

30k

25k

20k
US$m

15k

10k

5k

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

NAFTA China
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

NAFTA 8424 7578 6681 5649 4886 4011 4219 4524 4413 4399 4502 4346 4141

China 8928 15143 18518 22745 22923 23503 27975 29392 29060 29783 29794 30541 27922

Source: OTEXA, US Dept. of Commerce

Mexico's position

NAFTA has helped Mexico become an export powerhouse, but the country's textile and apparel industry also appears divided in its stance on NAFTA. As recentlyreported
on just-style, Mexican apparel makers would like to see the yarn-forward rule-of-origin replaced with a less demanding single transformation to improve their
competitiveness against competition from the likes of China, Vietnam and Bangladesh.

This simply requires the fabric is cut and sewn in one or more NAFTA countries, and would give producers flexibility to import materials not widely produced in North
America. However, Mexico's textiles sector is lobbying the government for the yarn or fabric-forward rule to stay in the treaty.

Mexico is also backing views that NAFTA's tariff preference level provisions (which allow specified quantities of yarns and fabrics to be eligible for preferential NAFTA rates
if they are subject to significant processing in one or more NAFTA countries) should be terminated or modified.

NAFTA renegotiation timetable

On 18 May 2017, United States Trade Representative Robert Lighthizer notified Congress that President Trump intends to renegotiate the NAFTA. According to the
Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015), the earliest that NAFTA renegotiation can begin is 90 days after this notification
which would be anytime on or after 18 August 2017.

In fact, the US has confirmed itsnegotiators willmeet with their Canadian and Mexican counterparts for the first round of talks on16-20 August in Washington, DC, with
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seven rounds of talks planned that will rotate between Washington, Mexico City and Ottawa. Expand

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However, time is the enemy of the NAFTA renegotiation.Upcoming elections among the NAFTA members means there is pressure on all parties to conclude the
discussions by the end of 2017.US mid-term elections are set to take place in November 2018, and the Mexican presidential election in 2018. Canada is also scheduled to
hold its federal election on or before 21 October 2019.

Once a NAFTA deal is reached, it must also be ratified by vote in all three countries' respective parliaments. In the US, in particular, there is no guarantee US Congress will
approve what negotiators agree.

With thanks toDr Sheng Lu,assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware, foradditional insight.

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