How Would the End of NAFTA Affect the LA Apparel Industry?

Ever since the presidential elections ended, people such as Daniel Barcenas have been fielding calls from Mexican apparel companies asking what is going to happen to free trade under a Trump administration.

Donald Trump made no secret that he was not happy with the North American Free Trade Agreement, calling the accord between the United States, Mexico and Canada “the worst trade deal” the United States had ever signed.

During the campaign, he threatened to blow up the trade deal. It could be hyperbole, but it has many in the Los Angeles apparel industry worried about manufacturing clothing south of the border.

“The Mexican companies that keep calling aren’t worried about production right now, but they are worried that if NAFTA is invalidated or restructured, it will hurt them 12 months down the road,” said Barcenas, a bilingual supply-chain management consultant whose Barcenas Sourcing Group has helped many Los Angeles companies set up production in Mexican clothing factories.

He pointed out that if it weren’t for NAFTA there would be no apparel industry in Los Angeles, where clothing is designed and marketed but production is done elsewhere. “Mexico has been an invaluable source for us to continue to deliver a good quality product at a reasonable price. It is not the best price, but it is not the worst price,” Barcenas said.

One example is blue-jeans manufacturing in Mexico, which is being increasingly used by Los Angeles companies such as True Religion, 7 For All Mankind, Hudson and Joe’s Jeans. A mid-tier blue jean costs about $15 to make in Mexico and $35 in Los Angeles.

Under NAFTA, the blue jeans come in duty-free if they are made of regional yarns. If there were no free-trade agreement, the cotton jeans would be subject to a 16.8 percent tariff and a half cotton/half synthetic blue jean would pay a 32 percent tariff.

“If you don’t have a free-trade agreement, you have to go back to your consumer, who is used to paying $30 [retail] for a Mexican pant and ask them to pay $60 for a U.S. pant. There is no advantage to the U.S. consumer,” Barcenas said. “From my standpoint, I am extremely interested to see how they plan to change NAFTA.”

Exit strategy

Free-trade agreements are negotiated by the U.S. Trade Office, but the presidents of each signatory country can withdraw from the accord with six months agreement, said customs and international trade attorney Jonathan Fee of Alston & Bird in Washington, D.C. “This has never been done before,” Fee noted.

What is more likely is that Trump will try to renegotiate the free-trade agreement, which has been in effect since 1994. “I think the worst thing Trump could do is withdraw from NAFTA, but I don’t think he intends to do that. I think it is hype,” Fee said.

What seems more likely is that NAFTA will be renegotiated. Already Canadian Prime Minister Justine Trudeau has said he is ready to talk about the trade deal, and Mexican Foreign Minister Claudia Ruiz Massieu recently said Mexico is willing to “modernize” the 22-year-old trade deal but not renegotiate it.

What that means is anyone’s guess. But Trump has honed in and been particularly critical of U.S. automobile manufacturers and air-conditioner makers for producing in Mexico. Additionally, the United Auto Workers are very keen on seeing more car production return to the United States. “Unless I am mistaken, textiles and apparel are not on Donald Trump’s target list,” Fee said.

That is brought home by the fact that Trump has not criticized the Dominican Republic–Central America Free Trade Agreement, under which many Central American countries are manufacturing large numbers of T-shirts, underwear and clothing for the U.S. market, but there are no automobile manufacturers or heavy industry that are producing for U.S. consumers.

On the apparel and textiles side, these free-trade agreements are set up to benefit U.S. cotton growers, yarn spinners and fabric makers who have found a market for their goods because of the yarn-forward provision in the accords.

“It is well established that CAFTA and NAFTA are critical for the U.S. textile and apparel industry,” said Steve Lamar, executive vice president of the American Apparel & Footwear Association in Washington, D.C. “The things we have continued to argue is how to find ways to make it better. … NAFTA was negotiated when there were no other free-trade agreements and the world was surrounded by quotas and rules of origin that catered to the United States. But the industry has evolved.”

Lamar thinks Trump will renegotiate NAFTA and is only threatening to abrogate the free-trade accord. “Trump likes to build up leverage to get the best possible deal, and he can view trade with that same lens.”

Indeed, Trump is not the only presidential candidate who has talked about reshaping NAFTA. On the campaign trail in 2008, Barack Obama discussed renegotiating NAFTA, but he backed away from that idea after taking office.

Trump points to the 5 million U.S. manufacturing jobs lost since 2000, but automation and technology have filled in for many workers.

Experts point out that manufacturing volume is up in the United States. Today, U.S. factories produce twice as much as they did in 1984 with one-third fewer workers. “Manufacturing in the United States has been driven by efficiency, technology and innovation,” said Matt Priest, a former deputy assistant secretary for textiles and apparel at the U.S. Commerce Department and now president of the Footwear Distributors and Retailers of America. “What is the federal policy against robots?”

Priest said there have been multibillion-dollar investments by U.S. companies in Mexico that support tens of thousands of U.S. jobs that would be impacted if the U.S. leaves NAFTA. “It sounds good to leave,” he said, “but leaving is very complex.”