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Potential Elimination of Certain NAFTA Flexibilities Could Negatively Affect Mainland China’s Textile Exports to Mexico

Ten trade associations from the United States, Canada and Mexico representing “all parts of the North American textile, apparel and retail supply chains” wrote to the North American Free Trade Agreement trade ministers on 20 September to express their strong support for a modernised agreement and stress the importance of preserving, at a minimum in their current form, the tariff preference levels that allow limited amounts of non-NAFTA-originating textile and apparel goods to benefit from duty-free treatment across the region.

However, the United States has reportedly put forward a proposal in the on-going NAFTA modernisation talks that would, among other things, eliminate the TPLs and ostensibly create a new short supply mechanism similar to that in place under the U.S.-Dominican Republic-Central America Free Trade Agreement. On the other hand, press reports indicate that Mexico is putting together a proposal of its own to expand the current TPL mechanism.

The apparel and retail associations noted in their letter that the TPLs are “a key flexibility that maximizes the ability to use North American content in our members’ global supply chains.” The associations believe this flexibility is “especially important given how quickly changes manifest themselves in the fashion industry,” adding that “TPLs help keep NAFTA operations competitive.” They stated that many North American supply chains rely on these TPLs to complement purchases of NAFTA-originating inputs, support manufacturing operations in NAFTA countries, and continue using NAFTA despite the proliferation of sourcing options worldwide. Their letter asserted that retaining, at a minimum, the existing size and scope of the TPLs is essential to providing the predictability that will allow businesses to make long-term investments in sourcing and manufacturing in the NAFTA region.

On the other hand, U.S. manufacturers of fibres, yarns and fabrics are urging the U.S. government to eliminate the TPLs as part of the NAFTA renegotiation. Specifically, the National Council of Textile Organizations is pushing for a thorough review of the NAFTA rules of origin “to ensure that lucrative tariff benefits are appropriately reserved for manufacturers within the region.” One of the cornerstones of NCTO’s position is the dismantling of the TPL regime because it ostensibly undermines the benefits of NAFTA for regional textile manufacturers, transferring them to non-NAFTA parties such as mainland China. Indeed, U.S. textile manufacturers believe the TPLs are “an ill-conceived mechanism” that has cost the United States thousands of jobs and hundreds of millions of dollars in annual sales to Canada and Mexico. Instead, they argue that the TPLs benefit textile components from Asia that are often artificially priced due to substandard labour and environmental practices, intellectual property violations and state-sponsored subsidies.

According to a recent letter to the leaders of the Senate Finance and House Ways and Means committees from eight associations representing “the overwhelming majority of textile manufacturing in the United States,” the TPLs allow Mexico and Canada to export to the United States duty-free each year (i) more than 235 million square metre equivalents of fabric and apparel made with specified third-party inputs and (ii) 13 million kilogrammes of yarn made from third-party fibre. The U.S. textile industry also favours the elimination of single transformation (cut-and-sew) origin rules for certain garments, an improvement in NAFTA customs enforcement, and the review of certain Buy American concessions that were granted to Canada and Mexico.

The outcome of the TPL discussions is likely to impact, either positively or negatively, mainland China’s yarn and fabric exports to Mexico. In the case of cotton and man-made fibre apparel, for example, the TPL mechanism allows Mexico to export a total of 45 million SME in garments to the United States each year made with non-NAFTA yarns and fabrics, as long as such apparel is both cut and assembled in Mexico. This TPL invariably fills to capacity every year and it is believed that most of the yarns and fabrics used to make this apparel originate in mainland China.

Should the TPL mechanism be dismantled, Mexican textile and apparel manufacturers would have to replace any mainland Chinese textile raw materials with NAFTA originating inputs in order to continue to benefit from duty-free treatment in the United States and Canada. At the same time, it is possible that a significant amount of textile and apparel production that currently takes place in Mexico could migrate to lower-cost locations in Central America and Asia, including mainland China and Vietnam. On the other hand, mainland Chinese yarn and fabric exports to Mexico could increase if Mexico’s proposal to expand the TPL mechanism gains traction in the negotiations and makes it to a final deal.

Content provided by Picture: HKTDC Research
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