The newly devised United States-Mexico-Canada Agreement (USMCA)—which this month replaced NAFTA, the North American Free Trade Agreement in place since 1994—represents one of the largest changes to the North American textile trade in recent memory.
Created with the hope of spurring the growth of domestic textile production, the trilateral agreement sets forth new regulations for the export of textile products and outlines new protocols to enforce USMCA policies.
Primarily, for a textile product to be considered “favored” and included in the free trade agreement, it will need to be composed of a greater amount of North American content than before. The specific amount of material that must originate from USMCA parties varies from product to product, however, and is laid out in explicit detail within the text of the agreement.
The USMCA’s biggest impact to textiles likely will be provisions limiting the inclusion of finishing fabric in the form of “sewing thread, pocketing fabric, narrow elastic bands and coated fabric” that originates from regions outside of the free trade zone. Previous NAFTA provisions did not take into account the inclusion of non-NAFTA fabrics that could be imported and added to finished products without incurring non-preferential duties—a practice USMCA language aims to limit.
This is a major change from NAFTA’s prior approach to textiles. Previously, textiles were regulated similarly to most other products, and the sector was not given special treatment as far as origin or manufacturing was concerned. However, the USMCA dedicates an entire chapter solely to the newly created regulations governing the textile trade, specifically the widespread changes to rules of origin.
Although it is a topic that doesn’t often receive heavy scrutiny, rules of origin can manipulate trade to a degree that is only rivaled by the implementation of tariffs. Rules of origin are one of the strongest tools free trade agreements can use to bolster and incentivize trade in a free trade zone. For example, textiles and apparel will have more restrictive Tariff Preference Levels (TPL) for non-originating fabric. Yet, for products that are wholly originated in a USMCA region with no outside material or manipulation, these rules are mostly irrelevant.
Meanwhile, in order for apparel or fabric to originate in the U.S. and still contain non-USMCA materials, it must meet the requirements of origination for its specific “Harmonized System” designation, as well as limit non-originating fibers to “not more than 10 percent of the total weight of that component, of which the total weight of elastomeric content may not exceed 7 percent.” Identical rules also are in place for sewing thread and yarn.
Additionally, a committee on textile and apparel trade matters will be created to continuously update the textile chapter of the USMCA. Once the agreement is ratified, the committee would meet at least once, annually, and consist of chosen representatives from each country. One of the committee’s first tasks will be to review the impact free trade would have on the sale of worn apparel in USMCA countries, as outlined in the agreement. The committee also will rule on “textile-specific verification and customs cooperation provisions” to strengthen customs infrastructure in light of the new regulations.
The stated goal of the new provisions for textiles and apparel is to “promote greater use of Made-in-the-USA fibers, yarns and fabrics” by limiting the use of non-USMCA materials. As such, new enforcement regulations have been added to the agreement, along with new verification protocols, that will make it more difficult for rule-breakers to procure preferential duties.
Among the new verification powers is an increased ability for a USMCA party to conduct a verification through its customs administration. The USMCA’s textile chapter includes an additional article regarding verification that allows importing parties to both conduct visits and collect records to facilities believed to be involved in skirting origin regulations. However, the importing party does not have to detail which exporters or producers it may visit under the new rules. For non-textile products, rules for visits are much more vague and likely to be determined by the exporting country—eliminating any element of surprise an inspection might have.
Along with specific details describing verification procedures, USMCA language also details a new process for determining rules of origin for textiles without the need to relitigate the agreement as a whole. Under the USMCA, a party can request a meeting to determine “whether goods should be subject to different rules of origin to address issues of availability of supply of fibers, yarns or fabrics in the free trade area.”
Within the language of the deal are a number of smaller changes that may have greater importance if and when the USMCA is ratified and the industry begins to transition. The U.S. Congress must first ratify the agreement, and the vote is tentatively scheduled to take place in January 2019.
Among the more notable new regulations pertaining to textiles:
The United States cannot apply duties to textiles or apparel that are “assembled in Mexico from fabrics wholly formed and cut in the United States and exported from and reimported into the United States … if, after such assembly, those goods have been subject to bleaching, garment dyeing, stonewashing, acid-washing or perma-pressing.”
A quantitative restriction specific to each textile product will be placed on preferential tariff treatment for apparel goods that are “both cut (or knit to shape) and sewn or otherwise assembled in the territory of a party from fabric or yarn produced or obtained outside the free trade area” but that otherwise meet all origin specifications. Specific quantities will be laid out within the USMCA.
Textile or apparel will be considered originating despite the inclusion of rayon filament or rayon fiber other than lyocell or acetate.
A USMCA provision provides duty-free tariff treatment for “indigenous handicraft goods” produced within the USMCA region. The agreement also stipulates that each party may ignore the terms of the agreement in order to stay true to previous agreements to indigenous people from each nation. Indigenous people groups will be given the authority to determine the certification of indigenous handicrafts as they pertain to the USMCA.