IMPORT & EXPORT
How a New Free-Trade Agreement Would Affect U.S. Textile and Clothing Makers
One of the biggest free-trade agreements ever negotiated by the United States could be a done deal by the end of this year. But it is still unclear how the Trans-Pacific Partnership will affect textile and apparel makers that manufacture in the United States.
One of the key items in the new free-trade agreement with 11 other countries is whether there will be a yarn-forward rule. Under the North American Free Trade Agreement and the Dominican Republic–Central America Free Trade Agreement, there are yarn-forward provisions. That means everything from the yarn on up must come from the free-trade area for goods to receive duty-free access.
Yet there has been much pushing and shoving by the American Apparel & Footwear Association, the trade group in Arlington, Va., representing some of the largest U.S. clothing importers—such as VF Corp., Gap Inc. and Levi Strauss & Co.—to make this new free-trade agreement a non-yarn-forward accord. If that happened, Vietnam, part of the TPP group, could import fabric from China, which is not part of the TPP group. That fabric could then be cut and sewn into dresses, pants and tops and shipped to the United States duty free, shifting the way people source their clothes.
This kind of arrangement would hammer U.S. apparel and textile companies that are manufacturing their goods in the United States because it would be so much cheaper to source apparel overseas in the other TPP-member countries, which are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The average U.S. duty on clothing is 12 percent.
“If you are selling to department stores, the trade pact has no advantage to you at all,” said Lonnie Kane, president of Vernon, Calif., womenswear company Karen Kane, which sells to big department stores such as Macy’s, Nordstrom and Dillard’s. The company, with revenues of more than $80 million, manufactures about 85 percent of its inventory in the Los Angeles area. “In fact, if you are competing with a company that imports their goods, they will have an additional advantage because they will have better prices. Department stores are very price sensitive.”
Kane noted it is only getting more expensive to make clothing in Los Angeles, with the city’s minimum wage set to rise from $9 an hour to $15 an hour by 2020. "Yarn forward is going to be a big part of the deal."
For Los Angeles apparel makers who sell to mostly specialty stores, the threat of competition isn’t quite as acute. Dimitri Komarov, president of Los Angeles womenswear company Komarov, said the company sells to about 500 specialty stores as well as Nordstrom with dresses that are heavy on details and lace. Dresses range in price from $150 up to $438 at retail stores.
“For us, there is not much concern. We are such a niche product that we stand in our own world,” he said. “Pricing has never been an issue for us. Our product is so unique that our customer base is not going to switch to something else because it is 10 percent cheaper.”
He said the free-trade agreement would be an advantage for U.S. apparel exporters who have been grappling with a strong dollar, which makes goods more expensive for overseas clients. “We have had a little bit of a hard time selling overseas. To be price competitive, overseas clients want us to discount the price because of the strong dollar. It is becoming more of an issue,” he noted.
Steve Barraza, who has operated the Tianello clothing company and factory south of downtown Los Angeles for more than 20 years, believes the TPP free-trade agreement will only hasten the departure of apparel manufacturers from the area. “It is going to take more business offshore,” he said. “I hate to say it, but with what they are doing now with the minimum wage, it opens up a few more options for us. … I would definitely look at the possibility of moving offshore.”
Barraza employs about 100 workers at his factory on south Broadway, where his workers cut and sew primarily silk and Tencel tops, dresses, skirts and jackets that are sold at hundreds of specialty stores in the United States and Canada. Wholesale prices range from $49 to $89.
But Barraza notes it is increasingly harder to manufacture in Los Angeles. “Four or five years down the road, minimum wage changes everything. Anytime a minimum wage goes up, everybody wants a raise, too,” he said.
As the textile world turns
More in harm’s way are domestic textile manufacturers. Much of the U.S. textile industry has grown due to NAFTA and DR-CAFTA and the yarn-forward provision in those pacts. “These rules have served as a catalyst for the record-breaking exports of U.S. yarns and fabrics that we are seeing today,” said Auggie Tantillo, president and chief executive of the National Council of Textile Organizations, the textile trade group headquartered in Washington, D.C., in a previous interview.
He noted that textile exports have grown 40 percent in the 10-year period between 2003 and 2013—from $12.7 billion to $17.9 billion. “Nearly two-thirds of U.S. textile exports during 2013 went to our Western Hemisphere free-trade partners,” he noted.
But no yarn-forward rules in TPP would devastate American textile makers. “That would speed up the potential loss of business for us in this region,” said Keith Dartley, president of Swisstex Direct, the marketing side of Los Angeles–based Swisstex, which has a textile factory in El Salvador and a dyeing and finishing facility in South Los Angeles.
He said business has been very strong in the Central American region because of the yarn-forward provision, particularly for companies such as Swisstex that are making synthetic performance fabrics that are in demand and carry a 32 percent tariff if they are not made in a duty-free region.
The Central American Free Trade Agreement has helped the company continue to grow. Last year the company had 140 workers and 55 knitting machines at its El Salvador factory. This year, that changed to 165 employees and 70 knitting machines this year.
But competition from Asia is stiff. Dartley noted that Asian synthetic filament yarns cost about 60 percent less than U.S. yarns.
If there were no yarn-forward rule in the new trade pact, David Sasso, vice president of international sales for Buhler Quality Yarns in Jefferson, Ga., said, “U.S. textile manufacturers would be completely cut out.”
About 35 percent to 40 percent of the Supima cotton, Modal and Tencel yarns Buhler exports from the United States goes to Central America with another 5 percent to Mexico.
Now that the Obama administration has gotten Congress to approve fast-tracking approval for free-trade agreements under Trade Promotion Authority, the race is on to have some kind of Trans-Pacific Partnership agreement locked up by the end of the year.
Negotiators have been hammering out a deal for years, ever since George W. Bush was president, but the accord has begun gathering more momentum with the Obama administration having less than two years left in office.
The last major meeting between negotiators was in Guam in May. “The rules of origin have still not been resolved,” said Julie Hughes, president of the U.S. Fashion Industry Association, formerly known as the US Association of Importers of Textiles & Apparel, which is pushing for a non-yarn-forward agreement. “There are bilateral meetings going on right now, and we will see a lot of activity in July with the goal to conclude.”
Once introduced to Congress, the legislative body may take no more than 90 days to approve the accord. If it were introduced sometime in August, it could be a done deal by November.